Perhaps it was inevitable. After all, the term “QEfinity” entered the financial lexicon long ago and there were already quite a few commentators out there suggesting that it may now be too late to remove the punchbowl, meaning an “exit” will not only prove difficult, but may well be impossible.
Take Makoto Utsumi, who oversaw foreign-exchange policy at the Japanese Ministry of Finance from 1989-1991, for example. Utsumi recently said [5] a BoJ QE exit was out of the question “for the foreseeable future” and went on to note that “even the thought of an exit is a nightmare.” Meanwhile, it’s virtually impossible to say what effect Fed tightening will have in both the Treasury and corporate bond markets given the lack of liquidity in both and then there’s EM where carnage unfolded in 2013 after a certain bearded bureaucrat said the wrong thing about the direction of Fed policy.
Given all of this, we’re not surprised to learn that in a new paper entitled “Let’s Talk About It: What Policy Tools Should The Fed ‘Normally’ Use? [6]”, the Boston Fed is now suggesting that QE become a permanent tool at the disposal of the Fed. After all, “financial stability” depends on it…
During the onset of a very severe financial and economic crisis in 2008, the federal funds rate reached the zero lower bound (ZLB). With this primary monetary policy tool therefore rendered ineffective, in November 2008 the Federal Reserve started to use its balance sheet as an alternative policy tool when it began the large-scale asset purchases. Now attention is turning to how the Fed should transition back to a more conventional monetary policy stance. Largely missing from these discussions about the Fed's "exit strategy" is a consideration that perhaps it should retain, not discard, the balance sheet tools.
Yes, oddly missing from the Fed’s exit strategy is the idea that there should be no exit.
Of course the idea that what was previously “unconventional” policy should now become “conventional” is supported by Fed mission creep because now, the dual mandate has apparently become a “tri” mandate:
Since the Dodd-Frank Act (DFA) has added maintaining financial stability to the Fed's existing dual mandate to achieve maximum sustainable employment in the context of price stability, it might be beneficial to have several tools to achieve multiple policy objectives. An additional consideration is that some of these tools may be needed to stem future crises as a result of the DFA's new limitations on how the Fed can provide liquidity under such adverse circumstances.
The particularly amusing thing here is that if the Fed’s third mandate is promoting financial stability then they’re doing a rather poor job of it so far and asset purchases are the primary reason why. A lack of Treasury market liquidity [7] contributed to last October’s Treasury flash crash and as we’ve pointed out on so many occasions that it now borders on the comical, nothing good can come from sucking every piece of high quality collateral out of the system. Meanwhile, keeping rates low has triggered a bonanza of corporate debt issuance just as the new regulatory regime has ensured that secondary corporate credit markets are just as illiquid as the Treasury market.
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So yes, please retain QE as a permanent policy tool (as we always knew [8] you would). It’s done wonders for demand [9] and financial stability thus far.
