Friday, November 12, 2010

Bernanke: QE Rumours and Interest Rates

Tom Hickey posted a comment at another econ blog quoting Fed Chairman Bernanke from his OpEd on QE2 in the Washington Post last week. Part of it caught my attention:


This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
— Ben Bernanke, Washington Post op-Ed, Nov 4, 2010,


Emphasis mine. What data is Bernanke looking at? Here is a snip of the chart for the Ten Year Treasury rate for the last year:



Related to QE, Point A is April 2010 when the Fed terminated QE1. Immediately at that point a significant rally in the 10-year bond ensued that lasted into August with rates falling significantly. This rally was stopped cold in August around the Point B when the rumours of a possible QE2 started in earnest via Steve Leisman at CNBC. Since this time Mr. Chairman, rates have certainly NOT fallen, in fact they look like they are potentially ready for an upside breakout.

If the Fed does not specifically target interest rate levels with QE2, can they hope to lower the longer term interest rates by just "buying"? It looks like we will find out starting today.

26 comments:

Tom Hickey said...

Cullen Roche, a market analyst using MMT principles, has an interesting post at Pragmatic Capitalism today.

THE EARLY EVIDENCE: QE DOES MORE HARM THAN GOOD

welfarewarfare state said...

Mike Sandifer,

I went to that site you referenced on anohter thread and I found nothing of value. It was something that a juvenile put together. You hvae an abnormal hatred of Mr. Schiff--get some help.

I did find it amusing that the user CountingTheHours had a video of Harry Reid on the site though. Didn't this man get more corporate dollars in this last eletion cycle that any other politican? It would appear that this source is enamored with corporatism. Perhaps the reason that he hates Schiff so much is that he and others expose the progressive corporatist state for what it is? There is a differnce between the corporatism that Mr. Norman and others advocate and a free market.

welfarewarfare state said...

Tom,

What exactly is pragmatic capitalism but yet another euphemism for democratic socialism or central planning? Why do so many on the left appropriate the language of free market advocates when they are selling ideas inimical to it?

Mr. Norman,

The interest rates are going into the stratosphere within two years. I imagine the non-existent free market will get the blame for the sins of central planning when the dollar crisis/bond market implosion hits.

Brantley said...

All of what they are doing is illusionary wealth creation. US $ won't buy much on the backside of these policy tweaks….greater % of income going toward food and fuels.

The Deficit Reduction Commission's work doesn't help the middle class......at all.
1) Eliminate mortgage interest deduction
2) Eliminate state/ local tax deductions (R.E. tax deduction too)
3) Max FICA Tax income ceiling

googleheim said...

HI WWS :

PLEASE ELABORATE AD INFINITUM ABOUT :

............
The interest rates are going into the stratosphere within two years. I imagine the non-existent free market will get the blame for the sins of central planning when the dollar crisis/bond market implosion hits.
............

THANK YOU

googleheim said...

BRANTLEY :

WHAT ABOUT A POORLY STATIONED AND WEAK DOLLAR NOT BEING ABLE TO BUY GERMAN AND CHINESE GOODS SO THAT MORE FRUGALITY EXISTS ?

DISCOURAGING IMPORTS WHILE TRYING TO EXPORT IS THE ANSWER ?

MORE OF THE INVERSE OIL TO U$D RELATIONSHIP ?

Mike Norman said...

Brantley,

Food and fuel price rises are occuring because we allow unregulated speculation. Malicious price increases of this nature could easily be stopped if we clamped down on this type of activity.

Mike Norman said...

Welfare state:

I'll take that bet. Why don't you short Treasuries even at these low rates? Do like your boy, Schiff, who has been shorting the Treasury market since 1985. (Or, at least telling people to.) How has he done? At least you'll be shorting Treasuries when rates are near zero, but I'll still make more money than you. That trade--which many did in the Japanese bond market--became known as the "widowmaker's" trade. Feel free to short.

welfarewarfare state said...

Mike Norman,

Do you mean that you'll make more money than me in real dollars or in inflated dollars?

It's a bet though. I say that interest rates on any Treasury with at least a two year maturity will be at least 10% by November of2012.

If you lose the bet, you have to abstain from the tanning bed for a period of 1 month (p.s. I know what a sacrifice this will be for you.) If I lose, I'll supply you with a 3 month supply of tanning lotion and pancake makeup for your television appearances.

welfarewarfare state said...

Googleheim,

You're not supposed to respond to me anymore by your own orders, remember? My post doesn't need elaboration.

Cheers!

googleheim said...

Hi WWS :

No that was someone else.

I don't remember asking you to go anywhere else.

I was the one who found common ground in 1/2 of what you wrote and 1/2 of what the others wrote.

???

DoggeyStyleMikey said...

What artificial lending standards are you talking about?!?!?!!?!?

MT said...

Many times when the Fed has bought anything over the past couple years it would do so in contra-seasonal ways...aka they would do INFLATIONARY moves when the dollar is seasonally known to be strong...like right now as a matter of fact.

I think they do this VERY SMARTLY to avoid a major dollar move to the downside...the seasonal upswing tendency sort of "absorbs the blow" of the Fed's QE action if you will.

I think they are doing the same thing with treasuries...they would rather "imbed" their purchases...aka buy in weakness, sell in strength...so the market doesn't flip out on everyone and get out of control. Just my thoughts on the matter, b/c yes I do agree that bonds prices look ready for a downturn or at least a pullback in a uptrend...but seriously can T-bond rates get much lower!?!!? It's just amazing to think of that!!! Plus doesn't lower T-bond rates promote DEFLATION...which they say they are trying to offset?!?!!? I know their logic of saying they want to make bonds LESS attractive to bring people to the stock market and keep mortgage rates attractive but I'm just saying that fundamentally, usually, lower T rates means deflation as investors are okay with getting a smaller return to offset a smaller inflation.

In fact, maybe Bernake DOES SEE that bond rate are ready for an upswing Mike and that is EXACTLY WHY the Fed is buying them!!! To offset making bonds even more attractive to investors and lead them over to the stock market...that actually makes alot of sense to me now...doesn't it to you too???

Matt Franko said...

MT,
Then that is counter to the quote I got from Tom. He said they were trying to foster LOWER rates and the 5-year Treasury rate is UP 21% (and the day is not over!) in the 2 days that they are operating in QE2.

I think you are right, they are buying the dips and trying to 'get a good price'. If they wanted to achieve lower rates they should simply bid up the bonds until their target was hit.

This is actually destabilizing and DANGEROUS imo.

We have Larry, Moe and Curly running monetary policy. This may do more harm than good.

MT said...

Hey matt,

when bond prices go UP, the interest rate does go down. So what the Fed is doing by buying bonds would bring the rates down...people just seemed to expect bond rates to just DROP as soon as QE 2 started and I think that's kind of ridiculous...especially considering the bond market is GIGANTIC.

What does it mean to "bid up the bonds until their target was hit"? Do you mean buy bonds or are you talking about doing something else? I don't know what that "something else" would be and I'm curious and would like to understand better.

I don't see how this is "dangerous" though and I don't know why you are saying this is like the 3 stooges. I think what they are doing is pretty intelligent...there may also be another reason to buy bonds also...to make sure the government can stay afloat and keep up it's spending. Now if that's the case, then I think we do need to look at our government's balance sheet and make some PRUDENT changes in our spending and saving patterns. We'll see how it all pans out in the wash!! haha!! :D

googleheim said...

Hi MT and everyone :

Some people are calling this printing, some QE2, etc.

However, this is really all elastic currency theory. They are injecting $600 billion ulimately to prevent a run on the banks.

Look up Elastic Currency Theory and all that - it was done in Fall 2008 to prevent a run on the banks.

I was at Chase and BofA in September 2008 and they both would not answer my questions about a possible bank holiday such as in Argentina.

I was only told that if there is a Bank holiday, the safety deposit boxes would NOT be accessible so stuffing cash or certificates would not be helpful.

I also was in line to a Japanese teller. I had just read that the Japanese were isolated from housing products because of 1991 and laws from this.

I knew the Yen would spike, but I could not find an ETF or Yen bank account fast enough to make a difference, but I would have made 20% easily !

The market is going to go up again, who is ready for another subsidized 2 years of market rally by this $600 billion ?

The wall streeters will make you think they and the corporations are doing all this, but really they are all USED CAR SALESPEOPLE !!!!!!

googleheim said...

www.ft.com

Japanese economy grows as stimulus spurs spending


no duh dude !

welfarewarfare state said...

Googleheim,

Hasn't Japan been "stimulating" their economy for the last 15 years with the result being a depression? They have employed Keynesian remedies with endless waves of quantitative easing, spending projects, artificially low interest rates, subsidized zombie companies, make-work jobs, etc. with the effect being a reduction in the standard of living of the Japanes citizen. I know that some of you will doubtlessly trot out the, "It would have been worse without the stimulus" defense. This is a pathetic excuse that has been employed by people like Paul Krugman.

It is intersting to note the almost forgotten depression of 1920-'21 here in the U.S. The stock market dropped by more in percentage terms than it did in 1929. The GDP dropped by more during this period than in '29 as well. Unemployment surged greatly. The U.S. government responded to this burst asset bubble as it had always done before; namely, they did very little. Debt was liquidated, prices fell substantially, businesses went under, labor was reallocated to non-bubble activitites, so-called quantitative easing wasn't pursued. The few steps that the government did take were to reduce taxes and government spending.

The transition period was painful for many, but it was absolutely necessary. This depression lasted for about 18 months and prosperity resumed. This is in sharp contrast to the response of the burst asset bubble of 1929. When Austrian free market solutions were pursued, depression ended quickly. When interventionist crackpot ideas have ruled, depressions lasting many years have been the result.

Mike Norman said...

Matt's right. The Fed policy committee doesn't seem to understand that it's a function of price, not quantity. If they want bond yields to come down they ought to state what yield they are setting, i.e. 2% on a 10-year, for example and then buy enough bonds to get the yield there. Saying $600 bln is ridiculous. It's a totally arbitrary number. Will that accomplish their objective? Who knows. Even if it does, are they prepared to keep buying in order to sustain rates at their new target? That's doubtful. They're just incompetent.

MT said...

okay yeah I see what you and Matt are saying now Mike about picking a target interest rate and going there.

Good point indeed. However do you wonder if maybe the Fed would rather see if they can sort of "get the ball rolling" in the direction of whatever interest rates they would like and then see if the open market will take it the rest of the way? If the Fed can really put a "dent" in this upswing that's developing then maybe they won't need to do all the work...the open market will take over what they get started.

I don't know it's just a thought. I'm sure though that the Fed will be watching to see what happens and what else they can do.

Do you guys think that putting rates that low is a good idea in the first place? I agree with Matt about avoiding runs on the banks especially since loans are down so much...this is a DEMAND crisis not a credit crisis imo. However without QE and bailouts we probably would have had both a credit crisis and a demand crisis imo. Don't you guys think so?

Matt Franko said...

MT,

I'm just trying to evaluate the QE2 vs what Bernanke said the goals were. So far it looks like they have longer term rates going in the wrong direction (up) from what they said they would like to see (down).

Without specific rate targeting, I dont see any hope of this lowering rates any time soon, in fact Ill bet mortgage rates go up this week.

MT said...

Hey Matt,

yeah I'm sure many people are thinking the same thing...personally I don't think the Fed is surprised...at all.

We just put in another new high last week on the 10 year (yes it does make a double top on the daily but...), we have some decent support to bounce off of soon enough, and time is on our side...alot of movement can happen between now and June 2011. Again who knows!! We shall see. If more jobs can kick in soon next year with new reps on capital hill (haha!!!) then maybe we might see some some housing sales increase and all that comes with that...especially with spring coming...I really don't know...just showing another side of the coin perhaps more than anything else. :D

googleheim said...

WWS :

I never knew that about 1920 to 1921

I only know that during the 20's was Calvin Coolidge who according to my university professor, would leave work from the White House early - say around 2 pm and sit on the back White House steps and get drunk and smoke his pipe staying out of the way of things.

According to Mike the speculators on wall street should be reigned in since they do not contribute to the economy.

That equates to a portion of the Austrian side ( Mike is by no means 100% nonAustrian ) applied to the wall street largesse. The greyish area between the Feds and the Real economy.

You are applying the Austrian strictly to the real economy or main street - that the rest of us should take the full hit.

I agree more with Mike to first get to the bottom on Wall Street and Banks who recently revolted against Obama as some sort of anti-capitalist.

Then after clearing out these zombies, then allow the real economy to bottom out with the other zombies-lite so to speak.

Unclog the banks and wall street to get the money flowing to small business.

Many small and esp. middle tier companies should have been allowed to come in a scoop up the biggies who got bailed out or what not.

Norman even pointed that out, and he's definitely not a democrat.

I would say that things are very convulted, even too taffy for Austrian goose stepping. However,
it doesn't mean that some geese and geyers won't get blowing.

welfarewarfare state said...

Googleheim,

If we were only so lucky that we had Calvin coolidge now. You should check into the depression of '20-'21 and the government's response to it. The cause of the preceeding bubble was the Federal Reserve's easy monetary policies. Every asset bubble in this country's history was the result of excessive credit creation.

What is so intersteing about this depression is that the response was what free market advocates recommend. Government can't make those phony asset prices real anymore than they can make those bubble activities permanent once the phony bubble has popped, nor should they attempt to. It is important to understand that the stock market and GDP fell by more during this period than in the '29 crash. Deflation set in and unemployment spiked greatly. The market was allowed to function though, and soon the economy was restored to health within 18 months. If a progressive like Mr. Hoover or Mr. Roosevelt were in office at the time we would have had the great depression a decade sooner.

I suspect that the resaon that this depression isn't focused on is because the response to the asset bubble bursting was contrary to establishment orthodxy. It is like a slap in the face for the central planners. Actually, the response to the depression of '20-'21 was the same for all burst asset bubbles prior to 1929.

I found the story about your professor (indoctrinator?) enlightenting. My guesss is that you didn't get a classical liberal education at university, but, rather, a liberal (read:biased) "education." You were taught what to think and not how to think. It shows.

cheers!

Marty Steinberg said...

Japanese economy grows as stimulus spurs spending


no duh dude !


Wow! 15 years of stimulus and it finally worked! Hurrah. If not for the stimulus, the economy would have been stuck in rut like before Catchings & Foster or even Keynes and after the evolution of man.

Marty Steinberg said...

The Fed policy committee doesn't seem to understand

Wow! it is always a problem of having the wrong expert in charge! Mike Norman for Chairman of the Fed.