The Great Tapering? (Oh, How Quaint)
If the flow of central bank purchases matters more than the stock, asset prices may lose a key pillar of support -- a year from now.
The "flow versus stock" debate is important. I used to bring it up at regular intervals.
Some would tell you that when it comes to QE, it's the stock that matters most. Sequestering assets away on central bank balance sheets and reinvesting the proceeds from maturing assets creates an artificial shortage, thereby supporting prices.
I've generally fallen on the o
In the event inflation shows up and eventually becomes problematic will the tune in this article change? Will the Fed’s “bloated” balance sheet shift from being some widely disdained, forever-swept-under-the-rug byproduct of stimulus to instead become the conveniently handy weapon of choice in some new war on inflation? Why mess around with policy rates and their long linkages when the Fed can pretty directly edit, in, say, the construction sector, everything from the price of lumber to housing demand to mortgage rates by using, the mortgage component of its balance sheet. If cooling parts of an economy is the prescription, then the Fed’s balance sheet will let them selectively raise rates anywhere, at any duration, inject fear, and slow entire industries anywhere they wish in the economy by selling those “forever unsellable” assets. One imagines Volker in ’80 thinking “Man, if only I could sell $50B of IG and MBS weekly starting tomorrow, I probably wouldn’t need to trash the whole economy from the ground up using the fed funds rate”
Interesting. I have a couple of econ degrees but never pledged the fraternity. Still this seems logical, local surgery instead of wholesale messing in the whole body of the beast.
Agree with the posters above that more targeted measures by central banks makes huge sense.
I’ve often been smitten with envy when I see the BOC or BOK simply tighten down-payment rules when housing prices start to run too hot.
In the US, the Fed must crank up rates and choke the whole economy since they appear to have no means to target a specific sector.
I said “appear” since political/interest group pressure probably plays a role as well. After all, we proudly declare that “the US government does not pick winners. Don’t you remember Solyndra?” while more mercantilist nations which do pick winners leave US industry in the dust.