Goodbye Greenspan/Bernanke Put, Welcome Bernanke/Yellen Collar
"Remember the Greenspan/Bernanke put?" BNP's Julia Coronoado asks, well "welcome to the Bernanke/Yellen collar." As some expected, Coronada notes that there was substantial discussion in the December FOMC minutes about concerns about financial stability stemming from QE, and the role it plays alongside progress on their dual mandates in making monetary policy decisions.
As we noted, a number of participants stated concerns over small-cap multiples and cov-lite loans - and that shift to comprehending the costs of QE - as opposed to simply the 'apparent' benefits implies a regime change in the reaction function from a put under the market to a collar around the market - capping what was, until this point, thought an endless upside by many.
Via BNP's Julia Coronado,
The staff conducted a survey of the 17 FOMC participants over the inter-meeting period on the marginal costs and benefits of QE. The results suggested that "a majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue."
Among their financial market concerns, "several participants commented on the rise in forward price-to earnings ratios for some small-cap stocks, the increased level of equity repurchases, or the rise in margin credit."
In general "participants were most concerned about the marginal costs of additional asset purchases...pointing out that a highly accommodative stance of monetary policy could provide an incentive for excessive risk taking" and that "the risks to financial stability could be somewhat larger in the case of asset purchases than in the case of interest rate policy".
The Committee is not so concerned that they are not patient and data dependent, but in December the data were going in the right direction and "many commented that progress [in the labor market] to date has been meaningful, and some expressed the view that the criterion of substantial improvement in the outlook was...likely to be met in the coming year if the economy evolved as expected."
The baseline case seems to be tapering in measured steps completing QE around year-end if growth is in the vicinity of 3%, hiring continues or accelerates, inflation doesn't decline further, and financial markets stay reasonably well behaved.
Simply put - the Fed will react to falling asset values that destabilize economy, "and" asset values that rise too far and too fast or are fueled by leverage that may put economy at risk.
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