Last month, the vice president of the St. Louis Fed Stephen D. Williamson did a funny thing [11]: he released a white paper which dared to suggest that Ben Bernanke was wrong about QE and that not only was there no demonstrable link between trillions in asset purchases and positive economic outcomes, inflation expectations have actually declined across markets where central bank asset purchases are largest in terms of GDP. Here’s the excerpt:
There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation. For example, in spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2% inflation target. Further, Switzerland and Japan, which have balance sheets that are much larger than that of the U.S., relative to GDP, have been experiencing very low inflation or deflation.
But Williamson - bless his heart - wasn’t done. He went on to note that central bankers who adhere, in a perpetual state of Einsteinian insanity, to the Taylor principle, will never be able to raise rates. To wit:
A Taylor-rule central banker may be convinced that lowering the central bank's nominal interest rate target will increase inflation. This can lead to a situation in which the central banker becomes permanently trapped in ZIRP. With the nominal interest rate at zero for a long period of time, inflation is low, and the central banker reasons that maintaining ZIRP will eventually increase the inflation rate. But this never happens and, as long as the central banker adheres to a sufficiently aggressive Taylor rule, ZIRP will continue forever, and the central bank will fall short of its inflation target indefinitely. This idea seems to fit nicely with the recent observed behavior of the worldís central banks.
Well as it turns out, Williamson isn’t the only one who thinks the Fed may have superglued itself to the effective lower bound because as Reuters reports [12], PIMCO’s Andrew Balls let it all hang out in the firm’s quarterly Cyclical Forum outlook report.
Here’s more:
"In contrast to robust consumption and housing, business investment confronts the headwinds from low oil prices and cutbacks in drilling and exploration, while exports will be challenged by the delayed effects of a stronger dollar and slower growth in emerging economies. There is a chance that the Fed, like a number of central banks in recent years, may find it impossible to escape the effective lower bound to which policy rates were cut during the dark days of the crisis some seven years ago."
So there you have it Ms. Yellen, straight from PIMCO's Balls: try as you may, there will be no escape from what Bernanke hath wrought.
