Fed Admits Another $4 Trillion In QE Will Be Needed To Offset An "Economic Shock"

Tyler Durden's picture

In a Fed Staff working paper released over the weekend titled "Gauging the Ability of the FOMC to Respond to Future Recessions" and penned by deputy director of the division of research and statistics at the Fed, the author concludes that "simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited [ability] to cut short-term interest rates in most, but probably not all, circumstances."

So far so good, however, there are some notable problems with the paper's assumptions, as Citi head of G10 FX, Steven Englander, observes.

He writes that the paper’s basic framework is to take the standard US economic model used by the Fed, give it a negative shock big enough to push the unemployment rate up by 5 percentage points (big but not unprecedented over the last 50 years) and deploying the Fed’s policy rate, QE and forward guidance tools to see if they are adequate to get the economy back on track. Negative rates and helicopter money are not used.

The two simulations assume:

  1. the economy is in equilibrium initially with inflation at 2%, r* at 1%, so equilibrium nominal fed funds is 3%
  2. the economy is in equilibrium initially with inflation at 2%, r* at zero (secular stagnation) and equilibrium nominal fed funds at 2%

He compares three policy approaches. The first assumes a linear world where fed funds can go into negative territory but there is no breakdown in the structure of economic relationships. It is probably not a realistic view of policy ineffectiveness at negative rates, but it is mean to be a baseline. The second just takes fed funds down to zero and keeps it there long enough for unemployment to return to baseline.

The third takes fed funds down to zero and augments it with additional USD2trn of QE and forward guidance. A variation on the third policy response function doubles the amount of QE in the second simulation.

In other words, the Fed is already factoring in a scenario in which a shock to the economy leads to additional QE of either $2 trillion, or in a worst case scenario, $4 trillion, effectively doubling the current size of the Fed's balance sheet.

He continues his critique of the Fed's argument as follows:

In the simulations. QE and forward guidance take 10yr yields down 225-300 bps depending on the starting point for fed funds and whether you do $2 trillion or $4 trillion for QE. But that is not going to work very well if by design fed funds and 10yr yields can’t go below zero. And if expected rates are already low then forward guidance does not have much room. Fed official will gave to keep a straight face while saying they we will keep rates at zero … forever.


What makes it work is that QE and committing to low rates for longer gets the long rate down quickly and this compensates for the inability to take short rates down as far as you would want. In the unconstrained model, the maximum drop in short rates is almost 9 percentage points, almost twice as much as in the constrained model, but the QE/forward guidance  lower takes (and keeps) long rates 75bps lower than when the Fed takes rates to zero and stops. When the Fed is starting from 3% fed funds, the combo can almost entirely offset the zero constraint, but only if the full $4 trillion QE is brought to bear. Starting from 2%, QE of $2 trillion is not enough to get long rates down far or fast enough to offset the shock.

All of which brings Englander to the following stunning conclusion:

I would have rewritten the conclusion as: "large-scale asset purchases and forward guidance about the future path of the federal funds rate have almost no ability to offset a shock in current circumstances, but down the road may be able to provide enough additional accommodation to fully compensate for a more limited [ability] to cut short-term interest rates in some, but not all and maybe even not most, circumstances." The italics and colors show my changes.

Just as troubling, Englander admits that the nuanced read of the Fed paper admits it is effectively powerless to withstand a sharp recession: "The key policy issues and what drives the paper’s conclusions and my variant is the starting point. Were we to have a recession today or a year (or even two years) from now, it is very unlikely that the Fed weapons have anywhere near the potency that the paper describes. The FOMC had an end-2018 median fed funds rate of 2.4% at the June meeting and my guess is that it is lower now. Markets don’t price in even 100bps in fed funds till the end of 2019 (taking Eurodollar rates and subtracting 40bs or so.) That said, a 5% shock to the unemployment rate is pretty extreme, if the Fed is not stepping on the brakes hard or world not falling apart for other reasons."

How much room does the Fed have? Very little:

In the simulation is looks as if it takes about 160-180bps of fed funds reductions (peak response) to offset an 1% UR shock, so right now they could offset maybe an 0.20% shock to the UR with the rates room that they have.

But most troubling of all, is just how critical starting conditions are for further easing; considering monetary conditions right now are unprecedented, it means the Fed has its work cut out for it:

The problem the paper outs in relief is that the effectiveness of rate cuts/QE/rate guidance goes up with the starting point of rates – so the combined policy tools are much more effective if the fed funds rate is 3% than if it is 2% and certainly a lot more than if it is 40bps. There is a good reason the paper does not examine the options for fighting recessions under current conditions. The drop in fed funds also takes 10 year yields down, and roughly 30-40bps in 10s for every 100 bps in fed funds,  so if you are starting with fed funds at 40bps and 10yr yields at 160bps, rates policy/QE/forward guidance are not going to do much. Short rates, long rates and rate expectations have nowhere to go, unless you bring negative rates into the discussion, which does not occur.

And, as noted above, not less than $4 trillion in QE would be enough to "get long rates down far or fast enough to offset the shock."

What are the implications for the Fed, and thus to the market, as a result of the paper? It depends on whetyher one is a hawk or a dove:

To the doves fast growth and higher inflation inoculates the Fed and the economy from policy ineffectiveness at the zero bound so it is a very dovish outcome. Insofar as having 2.5% or 3% inflation makes policy more effective in a downturn there is a case for loosening the target, or not admitting to loosen but reacting to an overshoot anyway.


Hawks may argue that there is a case for raising rates faster, not slower, but the argument has to be made carefully. Assume that the next recession comes in a year from a source not related to Fed policy – the EU falling apart or a major geopolitical event. If fed funds is at 100bps, for example, they may have a meeting or two to stimulate by taking policy rates down while laying the ground for the much bigger stimulus from fiscal or helicopter money that would  be needed. If fed funds are very low, investors, households and firms may lose confidence when they recognize that policy has nowhere to go. But this logic depends crucially on this confidence effect which may or may not exist. Hawks can at any point argue that the risks of the zero bound are overstated or that easy Fed policy makes the next recession more likely by making a financial crisis more likely at some point, but that is outside the scope of the paper.

Incidentally, all of the above is a long-winded way of saying the Fed hiked rates, only to be forced it will have to not only cut them, as Japan did 7 months after its ill-fated August 2000 rate hike as we cautioned last August...


... but that when the US economy slides into the next sharp recession, no less than $4 trillion in QE will be needed to stabilize the economy, bringing the Fed's total holdings of government bonds to well over 30%. And with that in mind, we look forward to what "upside rate hike surprises" Yellen has in store for the market this coming Friday, especially if the politically-tasked Bureau of Labor Services continues to surprise to the upside with fresh record numbers of minimum-wage restaurant workers and bartenders.

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khakuda's picture

If they really had any intention of stimulating the economy short term, they could announce that there would be no income tax this year, costing roughly $1.5 trillion and they economy would boom.  But, they have no intention of doing that because the half that pay nothing get no benefit and they would rather juice asset values for the wealthy anyway.

moonmac's picture

Chinese steel mills continue to increase monthly surcharges on raw material as the market for finished domestic industrial commodity products keeps dropping like a rock! Our factory owners are going ballistic!! Get your popcorn ready this should get interesting!!!

FrankieGoesToHollywood's picture

If the past results is any guage of the future, triple it.

Bear's picture

"simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited [ability] to cut short-term interest rates in most, but probably not all, circumstances."

Translation ... We're going print like hell and hope something good happens


Bear's picture

P.S. and in the meantime we'll end up owing a huge percent of 'public' corporations. What could be bad about that?

Nobodys Home's picture

Janet sits w/ head resting in her hands, leaning on her desk daydreaming:

What can we do to justify raising inflation so we can siphon more from the prols?

Hmmmm...How can we place the entire world on our balance sheet?

I love my job!

rejected's picture

Gee, Boys and Girls, now theres a whole bunch of bullshit everyone can enjoy!

Tachyon5321's picture

The choice is to give another $4 trillion to the banksters or cut taxes on the working classes.  


Clealy the 1% need the $4 trillion more than the wokers.



shutterbug's picture

Ok, enough is enough ... all FED directors deserve a good hanging, until their bones fall off ...

UnschooledAustrianEconomist's picture

You're completely mistaken. They all deserve a big, fat bonus fresh from the printing machine.

shutterbug's picture

The one which prints a golden coin? that is some pressure in 1 bonus stamp.

Professorlocknload's picture

Cool. Another $4 trillion should push this pig on up to 36,000 Dow. Party on.

nakki's picture

I said 8 trillion, with an added bonus of 2 trillion "no questions asked" bailout for whichever counter party TBTF bank is on the other side of all those OTC derivatives that are marked to fantasy.

Maybe they're not adjusting for real inflation?

ChemtrailPilot's picture

Clearly if $4 trillion is good, then $40 trillion is 10 times as good. Let's see those slugs at the ECB top THAT!

knotjammin2's picture

Can we start hanging these fucktard bankers now?

Citizen_x's picture


Today's articles...

4 % inflation target.

4 Trill in stimulus.

Any help ?
Occult numbers folks ?

Ghostdog's picture

Coincidence that on Xmas eve 2010 Obama signed in to law a bill that allows and emergency bail out fund to the tune of.. 4 Trillion (go figure) without having to go to congress... Must be a coincidence

1stepcloser's picture

Ben was never good with order of magnitues.   He is missing a zero

Sudden Debt's picture

Here in Belgium, official savings interests are now 0% on saving accounts.

Also, you can now lend money at 0%


it's all normal I guess... and they do it with money that isn't theirs...

Now why would banks want to loan YOU money at 0%?

It's a question people should ask!!


adr's picture

Can you lend me $180k? I'll pay you 1% interest over 30 years. Be a lot better than my 4% mortgage.

adr's picture

Why not just print the $4 trillion and hand it to Blankfien, Soros, and the gang of Jews. It's going to their pockets anyway, bypass the middle man.

Oh, a direct payment might just breed antisemitism and hatred. Guess what guys, the goys are on to you.

Vlad the Inhaler's picture

At the end of their model maybe they include the part where we finally pay off the debt.  I mean hyperinflate...

Dark Daze's picture
Dark Daze (not verified) Vlad the Inhaler Aug 22, 2016 7:26 PM

Oh, it's in their sights. The just have a little more fencing to build first.

the grateful unemployed's picture

30% of government bonds is nothing, Japan has about 60%. this is why the fed doesnt bother to reduce its balance sheet incrementally, its like paying $10 on a mortgage payment of $1000. seriously folks the fed can double the number of government bonds it holds and not be out of working range of other industrial nations, so lets do it! sorry i was channeling janet

harleyjohn45's picture

As long as interest rates are at zero,  now if interest rates go negative, then the sky is the limit on printing money.

Break_the_Bank's picture

Ms Yellen expressed concern about being able to unwind the Feds balance sheet when it was less than half of what it is now. I guess no one is worried about unwinding anything today. The only worry is how much more winding up of the debt needs to be done going forward to prevent (forestall) the collapse. 

No matter how much think tank effort goes into manipulating things, it is impossible to control all of the variables. In fact, I doubt that ALL the variables have even been identified. 

The geniuses at LTM thought they had it all figured out. That didn't work out so well now did it?

Jane Sheppard's picture

Why are we not up in the quintillions yet!? What's a few orders of magnitude between frauds?

bid the soldiers shoot's picture


We have to go into the quadrillions first, silly.

harleyjohn45's picture

Another 4 Trillion for their friends, If you are not in the 1%, then you don't get shit.

East Indian's picture

and their friends will buy real, tangible assets with these zeroes and ones.

by the time this ends, the "friends" would have bought all the assets in the world.

and we, the sellers who sold them these assets, would have zeroes and ones in our digital accounts.

our assets also in their hands, our "wealth" also in their banks.

serfdom. this is the true road to serfdom.

Aussiekiwi's picture


which a shock to the economy leads to additional QE of either $2 trillion, or in a worst case scenario, $4 trillion


I miss the good old days when we used to talk about fixing things with Billions not Trillions, I still have difficulty wrapping my head around how much a Trillion dollars actually is.

Pieter Bruegel the Elder's picture

Ha,ha, why even use the word trillions?

A word like that means nothing. They can print up any quantity they like. With fiat, the mentoin of the term "money" itself is suspect.

Aussiekiwi's picture

which a shock to the economy leads to additional QE of either $2 trillion, or in a worst case scenario, $4 trillion

Forever printing money to cover up the Fraud.

JBPeebles's picture

So the clown brigade has anted up for another round for their friends at the money trough! Gee, a surprise here.
The central bank is buying at least for their friends, you know, the people in the club.
The joke is on the suckers who will have to pay more for everything due to the monetary inflation bubble they've created.
For an idea of what's going on, I'd refer to the definition of a liquidity trap on this zerohedge article, just below the first graph:
It's a nasty bit of actuarial reality that sets in when you figure out what this means: a never-ending cycle into a fantasy Keynesian wonderland where reality is defined by synthetic purchases of debt. Driven to infinity, the model yields the need for evermore quantities of debt to be bought by central banks.
The Keynesian model is the impetus for spending in a slow economy. The Quantitative Easing is the method by which ever growing pools of capital can be generated on behalf of government deficits. As long as financial intermediaries can profit from the exchange of debt they will encourage more government borrowing.
Rather than make more interest on a smaller pool of higher yielding debt, buyers compensate for for low yields by owning vast quantities. The more the debt, the less the issuance of new debt will do. Simultaneously, the currency is debased through monetization, the over-issuance of debt resulting in inflation, or a devaluation of that currency.
The Fed thinks it'll never have to sell its holding but Congress will no doubt seize Fed's holdings to cover their friends at the bar, so this pool of debt is by no means secure--the borrowers could steal back their IOUs at any time.

dusty88's picture
dusty88 (not verified) Aug 22, 2016 4:41 PM

How much more obvious could the criminal theft be?  Only 1 politician has really highlighted this and it falls on deaf ears.  Zombie banks and zombie citizens, apparently. 

yogibear's picture

Janet, you mean another $19 trillion. Double the debt again.


Next QE4 will have to be $200 billion/month.


The deficit will soar to $38 trillion.


Dark Daze's picture
Dark Daze (not verified) yogibear Aug 22, 2016 7:23 PM

Hyperinflationary collapse. And they are all praying they have alternatives in place when it finally blows.

Father ¢hristmas's picture

Economic shock = collapse of Deutsche Bank.

Followed by Homeland Security ordering 100,000 phased plasma rifles in the 40 watt range.

Personally, I think they're going about this thing all wrong.  Just stop by Fort Detrick and get a jar of that shit that kills chickens and cows, on the shelf next to the AIDS and crack cocaine.

Hike up the price of eggs and milk 10,000%, cause a hyperinflationary domino effect in no time flat.  Bullish for stawks.

Also: Somebody tried to hit Assange recently lol.

didthatreallyhappen's picture

so 4 trillion, huh?  there are about 200 million of us left who work and are not part of the FSA, maybe less.  well, me and Mrs. didthatreallyhappen (we have a hetero marriage, have to mention it now-a-days) would (should) receive about 40k.  

some humans would go out and buy a car, some would pay off debt.  Me?  I'm going to buy an M-16 and become the master of my own domain!  Money left over is for filet mignon

Jethro's picture

You can pick up an AR for around $600 or so.  I have no idea what a select fire M-16 runs for anymore.  Way north of $10 K I'd imagine....and a complete waste of money IMHO.  Get yourself and the wife an AR each, a Glock 19 each, and a carbine/pistol course.  That would be money well spent, and you'd still have about $35 K left over (or more).

didthatreallyhappen's picture

I upvoted you for your kind response.  I already have all that, actually, I lost track!  additional training is always a plus... and the M-16 is 20k+ these days, meant it as a bit of a joke, yes full auto is good against a civil war charge, not much else...

Catullus's picture

Unemployement will go down when Hillary raises the minimum wage to $15/hr and no one gets 40 hours, so they have to get multiple jobs. Those jobs will be double-counted per Usual

JailBanksters's picture

It was only 8 years ago when .......

People were saying each following QE will have to be bigger than the Previous one.

Did that prediction come true ?

People also said there would QE2, QE3, QE4, QE10, QE20 to Infinity

After 8 years of QE'ing is that prediction coming true ?

People also said QE will become normal Banking Operating Procedure

After 8 years of QE'ing is that prediction coming true ?


But these weren't actually predictions when you make it happen,

it becomes destiny.



Dark Daze's picture
Dark Daze (not verified) JailBanksters Aug 22, 2016 7:20 PM

destiny? Manipulation is more like it. Do they really think they can fashion an artificial economy? For whom? 

JailBanksters's picture

Sure, after 8 years I'd have to say it's working

Banks no longer need depositors, because they can print their own money to loan it out.

Governments no longer need working class of people to pay tax, because they can simple create it.

Companies no longer have to increase sales to increase profits, just Increase the share prices.


It's working so well, that breaking this cycle anywhere, will bring the entire system down.

The crazy thing about this model is, for it to succeed, less people have to work and more QE has to be created out of thin air. And the more QE that is created the more wealthy the Rothschilds get, and the poorer the unworking class get.



VW Nerd's picture

About 30 years ago in the '80's, I would see bumper stickers proclaiming "No trillion dollar debt!".  Little did I know.....