By Jeffrey P. Snider
There are subtle shifts underway in policy expectations and perceptions. Some of it is related to the change from Bernanke to Yellen, as there seems to be a different philosophy regarding mostly QE. Chairman Bernanke was nearly unequivocal in his belief that monetary policy both should and could return the economy to a state more closely aligned with historical experience (discounting, of course, that much of the growth of the past few decades was artificial and bubbly). So QE was a tool in the old Keynesian “pump priming” mold where government could push the economy, for lack of a better term.
Yellen’s views do not appear so straightforward, nor do they seem to be nearly as much enamored. Recent statements and publications are beginning to devolve backward to the idea that this is as good as it gets. In other words, the FOMC may be coming to terms with the idea that QE was grossly ineffective at anything in the real economy.
That conforms to the notions that have leaked out here and there of the acknowledged costs of QE – the “reach for yield,” comments on small cap P/Es and whatnot. There are also technical considerations with MBS in the TBA market, as well as repo. If there is no offsetting benefit, particularly anything that is obvious and unambiguous, then scrapping it makes sense.
But that may not be the full story either. As Bloomberg points out today:
No longer are they saying growth must accelerate from the 2 percent to 2.5 percent pace it has generally averaged since the recession ended. Instead, they are stressing the importance of preventing the expansion from faltering.
Exhibit number one: the Fed chief herself. Yellen said on April 16 that a key question facing the central bank is what “may be pushing the recovery off track.” Contrast that with her comments on March 4, 2013, of the importance of seeing “a convincing pickup in growth.”
That’s quite the contrast from all the commentary about acceleration in growth absent snowfall. But it does seemingly, in more than one sense, agree with the idea I laid out a few weeks back about Optimal Control Theory. If that is the correct interpretation, and I am increasingly convinced of it, then the Fed’s biggest concern is “dry powder”; the concept of policy “surprise.”
Since there is no money in monetary policy, all that remains is psychology. If the economy were to falter while QE is already fully engaged, there is little net gain from simply raising the amount of bond purchases. However, if QE were completely tapered and put back into the tool kit, there is the latent possibility of a more forceful response of being able to restart it once more. In terms of economic intrusion, that is a far more potent starting position (if you believe in such things) then what we see now.
I think the net result is where the FOMC and the orthodox parrots are engaged in coloring the current economic climate toward a somewhat opportune moment to reign QE back to nothing: “the economy looks decent and that is the best we can do, so we don’t need any more emergency measures.” You have to have both parts to maintain consistency, that the crappy economy now is both good and bad – good enough not to scare anyone into believing QE is being withdrawn at a dangerously unfavorable moment, and also bad enough that nobody wants QE to remain because of dreams of that elusive 4% recovery (nevermind the usual 6-8% recoveries that seem more like a distant fantasy of some other world). Thus, the good is cyclical; the bad structural.
In any event, it amounts to lowering the bar even further. And, I believe, it also points to an increasing recognition that this cycle, even for its lack of recovery to this point five years later, is more than aging. There are enough signs that hope of QE’s eventual efficacy is not enough. The FOMC may be facing up to at least the prospects of darker months ahead.
That’s quite a difference from the euphoria over April payrolls.