Did Ben Unleash The "New" QE? Not So Fast Says JP Morgan
Earlier we presented the view by one of the TBAC's co-chairmen, Goldman Sachs, former employer of such NY Fed presidents as Bull Dudley. Now we present the only other view that matters - that of Fed boss (recall the JPM dividend announcement and how Jamie Dimon pushed Ben B around like a windsock) JP Morgan, and specifically chief economist Michael Feroli who is a little less sanguine than the market about interpreting Bernanke's promise to always support stocks, using the traditional stock vs flow obfuscations which is about as irrelevant as they come. To wit " How one views the word "continued" in this context depends in part on whether it is the stock (or total announced amount) of asset purchases that matter for financial conditions, or whether it is the monthly or weekly flow of those purchases.... according to the stock effect view the end of Twist purchases in June does not amount to a tightening, but rather is a continuation of the current accommodative stance of monetary policy. Thus, "continued accommodative policies" for a stock effect adherent would not necessarily imply an extension of asset purchases beyond June." That said, all of this is semantics. Recall that the US has $1.4 trillion in debt issuance each and every year. Unless the Fed steps in to buy at least a material portion, this debt will never be parked, rendering all other plot lines, narratives and justifications for QE moot.
This morning Fed Chair Bernanke delivered his most in-depth remarks on the labor market in quite some time. The main upshot seemed to be that while there has been a lot of enthusiasm recently about the improving job market, Bernanke remains unimpressed with the recent labor market data, and is unconvinced that we can confidently project ongoing improvement in the unemployment situation. The policy implication was dovish, as Bernanke diagnosed weak aggregate demand as the cause for the problems in the job market, and thus continued accommodative monetary policy has a role to play in supporting further reductions in unemployment. We do not judge the speech as so dovish as to now expect QE3, but we do think it serves as a reminder that it probably wouldn't take much of a deterioration in the labor market -- i.e. a rise in the unemployment rate -- to induce the Fed to initiate another round of asset purchases. We think the more relevant policy message from today's speech is that it is premature to believe that Fed leadership is even considering tinkering with the late 2014 rate guidance. In the past few years the Fed was sometimes quicker to embrace improving data. This time, however, Bernanke seems to view labor market normalization as a marathon rather than a sprint, and is taking a more patient view in processing signs of an improving job market.
Regarding the labor market, the Fed Chair began his talk with a review of the recent data, while reminding the listener how far from normal many job indicators remain. In viewing the recent improvement in job growth, Bernanke cautioned that the flows data indicate that the recent advance owes more to a decline in layoffs rather than to a pickup in hiring, and that to achieve more rapid job gains we'll need to see hiring accelerate. Bernanke then addressed the issue of the unemployment rate undershoot relative to what Okun's law predicts (a topic we have addressed at several points, see "Okun is broken," and "What's Okun been smokin'?"). Bernanke was not enthusiastic about the view that the puzzle is best explained by either declining participation rates or mismeasured output. Instead, he saw the most persuasive explanation as "catch up" for the period in '08 and '09 when the rise in the unemployment rate was greater than what would be expected, and we are now seeing "the flip side of the fear-driven layoffs that occurred during the worst part of the recession." Bernanke concluded from this that we are now back to a normal GDP-unemployment configuration, and so going forward faster growth will be required to see further declines in the unemployment rate. Finally, Bernanke addressed the issue of long-term and structural unemployment and reiterated the conclusion of the center of the FOMC: "at most, a modest portion of the recent sharp increase in long-term unemployment is due to persistent structural factors."
Given that unemployment is more due to cyclical rather than structural factors, there remains a role for countercyclical policy in supporting the job market. In particular, strong final demand growth "can be supported by continued accommodative policies." How one views the word "continued" in this context depends in part on whether it is the stock (or total announced amount) of asset purchases that matter for financial conditions, or whether it is the monthly or weekly flow of those purchases. Most at the Fed ascribe to the stock effect view, and thus the last easing -- at least from a balance sheet perspective -- took place last September when Twist was announced. In addition, according to the stock effect view the end of Twist purchases in June does not amount to a tightening, but rather is a continuation of the current accommodative stance of monetary policy. Thus, "continued accommodative policies" for a stock effect adherent would not necessarily imply an extension of asset purchases beyond June.