DeLong on Rowe and QE, monetary policy

THE TAPER, NICK ROWE, QUANTITATIVE EASING, AND INTELLECTUAL COORDINATION FAILURES: OVER AT EQUITABLE GROWTH: WEDNESDAY FOCUS FOR AUGUST 27, 2014/THE (NOT SO) HONEST BROKER FOR THE WEEK OF AUGUST 30, 2014 by DeLong

monetary policy

1. Gavyn Davies: The separation principle drives the Fed towards tapering: “A new ‘separation principle’ seems to be emerging, and it explains why the FOMC seems eager to begin winding down its asset purchases in the near future, while relying even more heavily than before on ‘lower for longer’ guidance on forward short rates. This could have important ramifications for markets…. The separation principle was spelled out more clearly than ever before in Ben Bernanke’s speech on communications policy…. Bernanke’s core point is that the Fed’s reading of monetary conditions now distinguishes sharply between two distinct factors, which are the expected forward path for short rates, and the term premium built into long term bond yields. Asset purchases by the central bank are intended to affect the second of these factors, the term premium, but are not intended to give any signal to the markets about the Fed’s willingness to keep short rates at zero for a prolonged period ahead…”
   
   (via DeLong)

Evan Soltas Says That Swiss Monetary Policy Is in Need of More Attention: Monday Focus (December 30, 2013) by DeLong

ways to ease while tapering

The Fed Tapered Perfectly—Here's What It Needs To Do Next by Matt O'Brien

Since then, the Fed has tried to explain that less bond-buying doesn't mean rates will rise faster. The opposite, actually. The Fed will try to counteract its reduced bond-buying by raising rates even slower than it planned before. So it's taking monetary stimulus out with the right hand, and putting it back with the left. And there's still plenty more it can put back. After all, the Fed hasn't explicitly lowered its unemployment threshold, nor added an inflation floor. It's just suggested it will do both—and that was enough for now. That the taper didn't make stocks fall or expected rates rise shows that it was.

But there's still work to do. Unemployment is still above target, and inflation is still below. In fact, the Fed expects inflation to stay below target all the way through 2016. As Robin Harding of the Financial Times points out, that's the Fed admitting that it plans to fall short of what it says the best policy is right now. That best policy—what Janet Yellen calls "optimal control"—calls for above-target inflation the next few years to bring down unemployment faster. You can see what that looks like in the chart below from a speech she gave last year. 

In other words, the Fed doesn't need to figure out how to keep monetary stimulus constant even as it tapers. It needs to figure out how to increase monetary stimulus even as it tapers. Or stop tapering.

taper / forward guidance twist

Bernanke Takes Away the M&Ms, but Leaves the Snickers Bars by John Cassidy

But what will have most pleased Bernanke is the reaction in the bond markets, where the yield on ten-year Treasuries barely moved at all. Most mortgage rates are tied to these yields. If they had jumped sharply—as they did earlier this year when Bernanke first raised the prospect of a taper—the recovery in the housing market, a key element of the broader recovery, could have been threatened. As things turned out, the bond market had already anticipated the taper, and, at least for now, the housing market is safe.

In fact, things are going pretty much as the Fed chairman had hoped. The markets are calm, and growth and hiring are finally picking up, a development for which the Fed deserves some credit. As Bernanke pointed out, fiscal policy—set by Congress and the White House—has been working in the opposite direction to monetary policy, knocking perhaps one and a half percentage points off G.D.P. growth this year. But we’ve still managed to struggle through with growth of about two per cent. That’s far from great. But without the Fed’s offsetting policy moves, the economy would have been much weaker.

Krugman on taper/forward guidance and microfoundations

Tardy Taper Thoughts by Krugman

Microfoundations and the Parting of the Waters by Krugman

QE taper / forward guidance

The Fed Tapered Perfectly—Here's What It Needs To Do Next by Matt O'Brien

Ben Bernanke: Alchemist…Does More with Less!  by Jared Bernstein

QE tapering / forward guidance

QE, finitely by Greg Ip

...  

But then the tide, almost miraculously, began to turn. The pace of job growth increased, the unemployment rate declined (albeit in part due to a shrinking labour force), retail sales and manufacturing activity picked up. Congress declared a truce and passed a budget agreement that for the first time loosens the fiscal vise, albeit modestly, and foreign economies showed signs of momentum. Even housing, which wavered as mortgage rates shot up in anticipation of tapering, did not crumble, and indeed housing starts in November hit a post-recession high.
...
More important, tapered QE was coupled with a stronger commitment to keep the short-term interest rate target at zero. The Federal Open Market Committee (FOMC) had previously said it would stay at zero at least until unemployment had fallen below 6.5%. On Wednesday it said it would stay there “well past the time” that unemployment drops below 6.5%, “especially if projected inflation continues to run below” its 2% target. That, according to FOMC members’ projections, means until 2015 or later.
... 

Mr. Bernanke indicated he thought the drop in inflation was due to transitory factors, such as a slowing rise in health costs, and that it would drift back to 2%. Whether a failure to do so would cause QE to be ramped up again is unclear, but it would certainly result in a much longer period of zero interest rates. The bottom line is that an improving path for growth figured more prominently in the Fed’s thinking than the declining path of inflation.
...

QE taper / forward guidance

He called it.

The Beginning of the End for Quantitative Easing by Tim Duy

Lessons learned by Scott Sumner

Forward guidance is powerful!

taper talk

Rentiers, Entitlement, and Monetary Policy by Krugman

What is the role of interest in this world? Interest, classically (and I do mean classically, as in Mr. Keynes and the), is the reward for waiting: there’s supposedly a social function to interest because it rewards people for saving rather than spending. But right now we’re awash in excess savings with nowhere to go, and the marginal social value of a dollar of savings is negative. So real interest rates should be negative too, if they’re supposed to reflect social payoffs.

This really isn’t at all exotic — but obviously it’s a point wealth-owners don’t want to hear. Hence the constant agitation for monetary tightening.

And this agitation does real harm. Think about the Fed’s taper talk: ultimately, I think it’s clear that it was an attempt to throw a bone to the tight-money crowd, in a way the Fed hoped wouldn’t do real harm. But it did do harm: long-term rates popped up, and are a significant factor in slowing our economy.

Taper talk

The Taper and Its Shadow: Central Bankers Need to Explain the Risks of Further Quantitative Easing by DeLong

They are not saying that they will break their promises not to prematurely raise interest rates. But they are saying that their tolerance for continuing to enlarge their balance sheets by purchasing long-term bonds for cash is very limited[.] Indeed--the so-called "taper". The problem is that financial markets simply do not believe the central bankers when they say that a present desire to "taper" is completely unconnected with any future desire to raise short-term interest rates. Financial markets thing, not unreasonably, [t]he same central bankers grasp for excuses to cut off quantitative easing now will also grasp for excuses in the future to say that things have changed and that forward guidance promises should not be kept. And financial markets will think this unless and until central bankers come up with reasons for believing that further extensions of quantitative easing do in fact run substantial risks.

So let us try to help central bankers explain why the [t]aper now is unconnected with future forward-guidance promise breaking. Let us listen for the reasons that further enlargement of North Atlantic central bank balance sheets carries substantial risks:

[Silence...]

The Key To Power At The Federal Reserve? Running The Meetings by Joe Gagnon (sort of)

(via DeLong)