EC QT Is Not The Opposite Of QE

Quantitative easing was the swapping of the Fed’s creation (reserves) for Treasuries and MBS. To the extent that financial conditions eased, it was because the Fed was signaling its intention. This may sound sacrilegious, but monetary policy is not solely but it largely a confidence game. Fed officials may or may be true believers of their narrative about how the stocks (holdings) are more important than the flows (purchases), but it did seem to strengthen what we suggest is mostly a placebo effect.

The Fed tells now that monetary policy will be conducted primarily through the Fed funds target and the interest paid on reserves (all reserves not just excess reserves). The balance sheet reduction, it says, is a technical issue now, though it could be used again if necessary (if the zero bound is being approached). Daly, the new San Francisco Fed President, recently suggested that the Fed’s balance sheet could become a tool under “normal” times not just in extremis, but there seems to be little appetite for that among her colleagues. 

If not QE, what drove rates down? Round up the usual suspects:  weak growth and low inflation. As explanatory variables, growth and inflation (and expectations) appear to be more robust than central bank purchases. The eurozone grew 0.7% in each quarter in 2017 that is why rates rose despite the ECB’s purchases. US rates rose in 2018 as fiscal stimulus hit goosed an economy that was already growing above trend. Rates fell at the end of the year as growth began disappointing and the fiscal stimulus was fading. 

From another perspective, the low price of money (interest rates) would seem to imply a surplus of supply relative to demand. The idea that there could be too much capital is absurd to many observers and economists. There can be too much of anything but capital. Yet it is common to speak of excessive debt. This is affirmation through negation, after all, one person’s liability is another’s asset.  

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Read more by Marc on his site Marc to Market.

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Gary Anderson 1 year ago Contributor's comment

I think it is more than weak growth and low inflation. Add to those the use of bonds as collateral like never before, and hoarding by Europe, and we see that the new normal means low bond yields and hoarding of bonds. It does not matter, QE or QT, there has been a relentless decline in bond yields over time since 1985. Bonds are the new gold. It will be hoarded and they will not act like people think they should act.