Jackson Hole and QE

At a Fed Conference, Views Differ Sharply on Stimulus’s Effect by Binyamin Appelbaum

JACKSON HOLE, Wyo. — There is still plenty of skepticism about the stimulus campaigns of the Federal Reserve and other central banks, and there is plenty of concern about the consequences. But for the first time in several years, there was also a general sense of optimism among the policy makers gathered here for an annual meeting at the foot of the Grand Tetons that things are going reasonably well. 

Unconventional monetary policy “has been a significant success altogether,” Christine Lagarde, managing director of the International Monetary Fund, said in a lunchtime address. She said the efforts continued to yield benefits and should not be unwound too quickly. 

Even for developing countries, which have sometimes criticized the efforts, the effects are “still positive,” she said. “Marginally, but still positive. 

But the conference, convened by the Federal Reserve Bank of Kansas City, underscored again the striking divide between academics, where skepticism is widespread about the benefits of the Fed’s asset purchases, and policy makers, where confidence is equally widespread. 

The Fed has accumulated more than $3 trillion in Treasury securities and mortgage-backed securities, and since last December it has been expanding those holdings by $85 billion a month in an effort to drive down unemployment and promote growth. 

The day began with a series of academic presentations criticizing the power of that approach. The most supportive said that the Fed’s purchases of Treasuries had little value, but that its purchases of mortgage-backed securities “likely have had beneficial macroeconomic effects.”
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Policy makers tend to view these critiques as triumphs of theory over reality. They point to events in June as a kind of perverse evidence, noting that a wide range of interest rates jumped after the Fed’s chairman, Ben S. Bernanke, announced that the Fed intended to reduce its monthly asset purchases by the end of the year. The implication, they said, is that the purchases had been suppressing those rates. 

“The paper doesn’t comport very well with the experience of the last couple of months,” said Donald L. Kohn, a fellow at the Brookings Institution and a former Fed vice chairman. “We’ve had a very broad set of asset price changes.”
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 and via DeLong

The other big question at Jackson Hole by Pedro da Costa

There are a number of possible explanations, and the reality likely combines some element of each. One, sadly, is politics. As much as the central bank likes to tout its independence, policymakers were clearly caught off guard by the blowback, both in Congress and among the public, to unconventional monetary policy. The perception that the Fed was acting recklessly, even if erroneous, was relatively widespread, even among some respected voices in the economics community. 

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Which brings us to the issue of timing. When Bernanke laid out this-market-spooking roadmap to tapering at his June press conference, sending Treasury yields sharply higher and emerging markets steeply lower, it was hard not to wonder whether the chairman didn’t feel a sense of responsibility in wrapping up his unconventional policies at the end of his second term. Still, given Bernanke’s repeated warning about the dangers of a premature policy tightening, it is hard to imagine that the chairman would not change his mind if the second half rebound the Fed has been banking on fails to materialize.