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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Duc888's picture



Shrub debt= 4T

The Muslim usurper's debt = 21T

Let that sink in.

Junior senator on the senate banking committee, indeed.

Duc888's picture



Peter Schiff was right.  Again.

That's the  Fed's only tool.  Debt.  Devalue the dollar....and peddle debt.  The fed is a scam backed up by the MIC.

VW Nerd's picture

Trillion here, trillion there and pretty soon we're talking about PLAY MONEY.....


restelle's picture

All this NEVER ending SHIT about the FED is pointless.  It's DONE, PERIOD.  Why keep mentioning this RUBBISH?



innertrader's picture

Yep, I once used the phrase, "Hope is for little girls and virgin brides", and here I am.... HOPING! 

Last of the Middle Class's picture

4 trillion more in QE and you'll collapse the sysem. Milk $10 a gallon, pink slime burgers $15 each. You'll have roving bands of thugs killing for sport. Mad Max here we come!

innertrader's picture

We've created 12 TRILLION DEBT in the last 8 years, why can't we create another 12 Trillion in the next 4 years?  No one seems to care and I guess the stock market would go up another 200%.  Isn't that the idea, to destroy America?  TRUMP is our only hope whatsoever, forever!

HopefulCynic's picture

More BTFDing!!!

Yeah!! Wooohooo!!

As traders we should all be happy, no?

Tylers will spend anohter half decade with their bears, and ZH readers waiting for the big bear, that will not come, yet! Meanwhile a few of us will jump on the crazy train and BTFD all the way singing merrily as cash pours in. 

The real awesomeness of this is going to be increasing interest rates while QEing the consequences, which will work for a while, another 5 years.

Objectively WHAT DO YOU THINk?

Dark Daze's picture
Dark Daze (not verified) HopefulCynic Aug 22, 2016 7:18 PM

Objectively, I think they are insane. And you too.

HopefulCynic's picture

So I suppose you don't want to make any money and are just going to wait for the crash. Ok! But If I am getting fucked, I want something to show for it. Yes i am a whore, I know may will do it, why not me?

Hey I get double rewards, I watch the US burn like never before while sipping piña coladas by my pool side, of course I will diversify and put some in to physical PM's, and other currencies and store up on supplies, which when shit hits the fan i will sell for a fortune? How much do you think a roll of toilet paper will be worth?

highwaytoserfdom's picture

What a wast of time.. the really sad thing is the data was so abused in this FOMC ASS U Me employment pce inflation nothing short of outright fucking Lies.


I have to trade for a living but here is the reporting links to the workers that are going to be left to straighten this thing out.

I don't have a rabbit out of the hat solution but Brenton reboot is needed. an open Mar-a-Lago is a lot better than a closed jekyll island these monetarist making deals and TBTF really Zirp we get SBC theft and complete obliteration of competition and wealth asset theft of top 5 banks.


We need a change and a hundred Chainsaw Al Dunlap's to be obsessed with financial abuses in government and contractors. Including Citi Goldman BOA JPM.. straight line to internment camps would be my feeling of fair but then the SCOTUS let the loopholes fly.... http://www.reuters.com/investigates/special-report/scotus/

SirBarksAlot's picture

Let's not be naieve and ass-u-me that they don't have an exit strategy.

There are lots of rumors abounding that there will be no election.  Analyze that!

slightlyskeptical's picture

,000 can fix everything

AuEagleNest's picture

I want helicopter bankers. Load 'em up and kick 'em out at 1000 ft.

Who was that masked man's picture

Make that 3000 ft.  Give 'em more time to think about it.

silverer's picture

Get that wind a-whislin' past their ears, eh? LMAO.

Lost in translation's picture

I prefer a C-130.

Shove the bankers out the back over the open cargo ramp at 10,000 feet.

Youri Carma's picture

'Now finally the Ape shows it’s ugly head from the sleeve' ;Dutch Proverb


ali-ali-al-qomfri's picture

long ink suppliers....

Who was that masked man's picture

Because as everyone knows, you can never print too much money.

innertrader's picture

I once used the term "print" too!  Now they simply type it!  Unless obama is suporting Iran, THEN IT'S CASH!!!  He really likes supporting Muslim countries with our assets!  Assets that our grandkids are going to have to pay off!!!  We're really doing a good job for our grand kids, aren't we?

silverer's picture

Little Bo Peep has lost her sheep
And doesn't know where to find them.

That's about how far the Fed's gotten in the last 5 years.

SirBarksAlot's picture

I just have to say how impressively Janet's staff has used the "rule of 3 syllables" in the headline. 

Having spent many years in the corporate world myself, it is the true moniker of someone who has progressed well beyond their level of comprehension, by using their contacts.

This technique also loses you after about halfway into the sentence and you then have to shift your brain into second gear, which most people won't bother to do.  Effective cover for a bullshitter, indeed.

God bless America!

silverer's picture

It's really pretty simple the difference between paper dollars and gold or silver. If you have an ounce of gold, and you want twenty times the value, you need twenty times more weight in gold. If you have a dollar bill, and you want twenty times the value, they just print it differently. You still have one single bill. There's something very wrong with that. My argument is that you can wipe your ass once with a dollar bill. But would you try to use a twenty dollar bill to wipe your ass twenty times? C'mon, folks!

VWAndy's picture

 I hate craclheads and junkies. Does that make me racist?

BabaLooey's picture

Fuck it.

Digitize 2,000,000,000 trillion....

Then have 4,500 C-130's crop dust the entire country with it....

I'll just sit here on this stack...of PM's

Cabreado's picture

The appropriate focus would be on a thoroughly corrupt and defunct Congress, the only neatly, expertly designed organization that could (can) shut down the Fed in a relative instant.

America is in the latter-stage process of deserving what it gets.

Within the hallowed walls of a snarky ZH commentariat...
you lose, too.


Dear Mr. Yellen Federal Reserve Chairman,


You will need a Hell of a lot more money than another $4 trillion you stupid cunt. If you could actually add, subtract, multiply, and divide, you would know that you are already BANKRUPT trillions of times over you dumb fucking dingbat simpleton.


NOTE: Mr. Yellen was hired because she has the requisite atrophied brain to take over from where Alan Greenspan left off.

lakecity55's picture

Alan: "All we have to do is add some extra zeros."

fightapathy's picture

Or rather,

ALAN: "Move that decimal point THREE places, you fucking bitchhhh!!"

Atomizer's picture

Samsung will become the wheelhouse to cover money laundering. 

Mr Moose and Bunny told you last night, do you remember Captain Kangaroo? More ping pong balls. 

Galaxy Note 7 PARODY 

Atomizer's picture

I hope you fucks at the Central Bank endure a mental breakdown. The jig is up. 

Atomizer's picture

Next up, breaking down the Bank of International Settlements. Secondly, IMF. It has to be undone. Was never the original charter. 

Clean up your act or we'll clean you of existence. This corruption needs to stop. 

mary mary's picture

The latest FED study suggests that 4 trillion angels could dance on the head of a pin.

Atomizer's picture

Good humor. I'm still rather pissed on what's going on. Thanks for post. Need a bit of comedy. 

DYS's picture

I was reading some pages on Facebook and the Economist was calling for turning the fed over to the public domain. Mark my words, they are going to pump that bitch full of debt and then pass it on to the US taxpayer. Then the IMF will bring in a new economic "system" based on SDRs and Joe Sixpack and the next 3 generations are going to be paying interest on all that helicopter money that got floated to Wall Street insiders.

Mark my fucking words.

Atomizer's picture

We are trying to avoid that scenario. What needs to be understood is the players in Washington covertly pulling this plan off. Go after the motherfuckers. It's easy pray to turn this country around. 

That simple. That's why I posted MF Global link today. We care about the United States of America. We'll do whatever it takes to protect the Constitutional Laws. 

HopefulCynic's picture

My intention is not to change your perspective, or to kill your hope, but to show your naiveness. The corruption is systemic, and i am not talking only about the US political corruption in the GOP and Democratic Party, I am talking about everything, Academia, Science, Media, Religious entities, Public Institutions, Corporations, NGO's, and Society in general among others. When society has been systematically brainwashed, that they can not differentiate between fact and fiction and will swear they are truth holders, when they are not, and they are so profoundly deluded, that things like Common Sense escapes them, there is no way to brake the spell, they must fall. A corrupt system will defend itself from all attacks, from all sides, because it is about it's survival, even though it is killing itself, much like a virus killing it's host and defending itself in the meanwhile. US Americans have a completely debauched mindset, or process, they lack the basic common sense, the brainwashing has succeeded. Even individuals that see themselves as AWOKEN, can not realise they are still a sleep but in another dream and fell for another trap door. The best I can do is what i have been doing hoping someone will truly break free, harass them, insult them, talk to them, show them, etc... just in case ONE succeeds, but it is always up to the individual. 

This is not a Washington thing it is an International thing, the ones in the inside have boasted about it and they have zero allegiances, for them the destruction of the US and the pillaging of it's resources is just a means to an end, they will jump ship if they have not accomplished what they need by the time the US is in rubble, they will go somewhere else and do the same until they have completed their plans, but like I wrote, I think this is the last country in their stop, or maybe it is Russia who knows, Putin might very well be another illusion, another "saviour" and member of the same Cabal. It is not paranoia, it is the realisation that they have been working for this for centuries. 

Shit is coming and faster than anyone of us realised, so be prepared. 

Redheart's picture

By all means, if it doesn't work, keep doing it, the definition of insanity.

innertrader's picture

TRUE STORY: In the early 80s our men's group at my local church had our Senator as the guest speaker. In a nut shell, he frankly said we should all go to D.C. and kill every congressman there and start all over, with only one 4 year term!!! He even said not to worry about the good ones, that they were less than 10% anyway, plus you've never heard of the good ones... and never will.

I told myself after that meeting that it's always worse than I think it is and I'm still saying that today!

To me, TRUMP is truly our last hope, period!

HopefulCynic's picture

Then you are dead, beause you are your last hope. Go arm yourself, organize, etc... because the time will come, Trump is no saviour, he does not have the ability, no one has except for maybe Putin and Assad to bring a ountry back from the brink of annihilation, and that is betting that Trump wins and is in reality an outsider which I doubt, since he would have never gotten a GOP ticket in the first place. 

onmail1's picture

<-- Titanic ; sink now

Yes the satanic Titanic feeding on ppl's souls

the deathlord ; Now face the retribution

Earlier it was 1 trillion per year QE

but now greed & circumstances  has inflated it to 4 trillion

hah ha ; thats the blowback for surviving on QE 

America ur days are over 

Embrace peace , reduce & remove overseas war fleets & military bases


face complete economic collapse, disintegration of america

civil war and what not

The End

conraddobler's picture

It's the Trump plus strategy.

Trump is a good idea because a lot of the right, aka "wrong" people hate him so it would be better if he won and yet that won't do it at all but it's a start.


xyzcracker's picture

I love that stupid look on Yellin's rat face. The whole world in her feeble hands.

Lost in translation's picture

Hang the bitch. Use piano wire. Let her bloated carcass rot in the summer sun.

Father ¢hristmas's picture

You guys talk shit, but back in the day Janet, Miss Yellen if you nasty, was a tasty little number.

In the 60's, boy I would've let my schvartzer sausage squirt in her little errr, I mean, death to the fucking moneychangers!*chuckle*

lakecity55's picture

I need to buy some smokes, Leonard.
Shit, Jim, pick up a few bills lying on the street and let's get back to the ship.

Sizzurp's picture

The Fed keeps buying the debt, so the gov. can keep paying them, along with the rest of the corrupt goblins in DC. Then there's that perpetual bull market in bonds so their buddies, the bond specs, stay fat and happy, and who could forget the crooked Fed dividend to the owner banks.  This arrangement is starting to look like feudalism, and we are all debt serfs.  Our debt chains grow heavier every year.  The formula is simple, create an obscene federal budget, squeeze the citizenry for all you can, and the Fed prints the remainder, payable with interest. It works until it doesn't.

Sandmann's picture

Time to send rocketloads of iPhones to Mars. Louis Blanc suggested in 19th Century France getting people to pass buckets of water from one side of the Seine to another, 21st Century is for Exports Into Outer Space to sustain demand for BIG GOVERNMENT