Fed Puts A Floor Under Asset Purchases, Sees Rates At Zero Through 2022
The Fed on Wednesday delivered a cautious take on the US economy and pledged ongoing support for the fledgling recovery.
"The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world", the statement reads. "[The Fed] is committed to using its full range of tools to support the US economy in this challenging time".
A stunning upside surprise on the May jobs report appeared to show the US labor market is healing faster than anticipated,
Ok. So, US equity markets will blast through all time highs and keep climbing. All aboard to infinity. I guess I’ll have to join the party. No, wait, we’ll see what comes out of the press conference. If I wait and miss 100 points on $SPX this afternoon, no biggie since it’s going to 4k, then 5k, then 6k, with nary a 10% correction anywhere in sight.
No, wait, $GOLD shot up. Maybe that’s better.
No, Wait. Bonds. The 10yr yield moved 7.5% today. Dang. I missed it.
It won’t be enough.
why is that?
The power of QE and zero bound and even negative rates diminishes over time. The Fed will have to accelerate its provision of liquidity to permit zombies to roll over what otherwise be non-performing debt. What are we going to do all sit around and watch Netflix and eat money provided by the Fed in lieu of popcorn. The Fed would be better off embracing MMT explicitly as a loss of confidence in fiat currency is a less dire threat than simply pouring money into the yawning maw of Charybdis that will simply become an unbearable burden leading to disorderly defaults and write downs.
What time frame are you referencing here
Well we are 12 years in –have you seen any signs of inflation? Labor force participation rates have actually declined because the Fed is fighting a larger force –demography. Every developed Western economy has an aging population which results in more dependents being supported by fewer workers. Productivity increases are necessary in order to make that sustainable. Productivity has barely increased since the GFC for two reasons 1) hard to raise productivity in a service based economy 2) Free money permits inefficient firms to persist and discourages innovation –low margin activity is a profitable enough activity to permit rent seekers to redistribute wealth. In short we have been doing this for over a decade, there were serious problems emerging in 2019 that have been obscured by Covid 19. Basically we were on an QE IV because the Fed was terrified of even the smallest slip back into a recession — a liquidity trap and spiraling deflation were real prospects and their money printing just is not enough to address the underlying fundamental structural problems facing developed economies –they are just permitting rent seekers to concentrate wealth which will only exacerbate these problems to the point where it will become a political not economic matter. The Fed should be advocating for A) Helicopter Money as Andrew Yang has proposed and explicitly embrace B) MMT despite my very deep misgivings about our ability to maintain faith in the “full faith and credit” These half measures will wind up making it worse –and we have had a long enough time series to conclude 4% GDP debt to generate 2% growth and no inflation is not a good use of money.
i didn’t see a timeframe in there
Not to say you’re wrong, but I’d point to Japan and say this can last a very long time
Japan is teetering on the brink of deflation as we write and that is a cliff that is very steep indeed. Japan’s savings rate is/was much much higher than the US’s. The US’s financing needs are greater, its status as the world’s reserve currency essential. Japan has been a free rider in a way that the US cannot replicate.
Agree to disagree. Japan’s debt to gdp is far worse and their status as a reserve currency not in danger despite much deeper japanification (sorry in advance for that one)
Japan is a net exporter to the US and in USD… US net importer since Reagan. Lots of pressure built up.
The yen is a haven currency not really a reserve currency and few global transactions are denominated in Yen compared with the USD, in which virtually every commodity is priced much to our benefit. Private savings rate in Japan is much higher than the US. Japan’s “post office” is teeming with yen making it effectively a collective mattress under which every Japanese widow has her life savings, which is considerable when calculating entitlements, stuffed. Abe has not repealed the recent taxes, despite their recessionary effect, to show the world Japan really can tax sufficiently to sustain its debt service. I am not running out and making a widow-maker trade anytime soon, but I disagree with the notion that Japan provides as good analog for the US as is generally assumed.
What would be a better analogue or are we in uncharted territory?
I think the US has a unique position in the world but I think the closest analog to me is the EU, but again it is imperfect as the ECB has much less central authority than the Fed and the regional imbalances within the bloc make coordinated efforts more challenging. However in terms of economic scale, maturity of economies, legal structures and banking systems it would seem closest to me.
On a completely different note: what really scares me –and it is really because it really scares Hank Paulson, is Chinese municipal finance. On a local level budgets holes were plugged by auctioning off real estate development rights and then using that income stream as collateral for municipal finance (I hesitate to say “bonds”). No really knows how much is out there –it is one of the darkest pool of all –or how the cash flow from the developers is. Have you seen the movie “The Producers” (I prefer the original with Zero Mostel and Gene Wilder)? because it might end something like that.
Is the extended open of the Open Market Desk any indication the Fed is braced for another storm? With indices above or at all time higns then why is this needed if not for the potential of a shock?