FX MONETARY POLICY
not because it isn’t necessary, but because it hasn’t worked and the Fed is courting unintended consequences by pursuing further QE. Recent Lacker’s comments fill that out arguing against additional QE and also suggesting that US GDP might be no better than 2% for a considerable time to come.
Te voting members of FOMC are 11. Te Chairman, the NY Fed president, 4 of
the other 12 regional Feds
with a yearly rotation, 5 Governors nominated by the President and the Congress. Te 2014 rotation will bring two hawks (Fisher and Plosser) in exchange for one (Esther George). Not a lot. But remember also that the most convincing dove, Ben Bernanke, should be gone soon.
The QE trap
BOE ‘s Mervyn King stated in January 2012: “I have absolutely no doubt that when the time comes for us to reduce the size of the balance sheet that we’ll find that a whole lot easier than we did when expanding it…”.
It sounds like a joke but it is not. It is just bluntly wrong as the Fed is already finding out. Tis is going to be the biggest challenge of all.
One hypothesis on how this perilous exit is going to unravel has been very well described recently by one of my favourite economists, Richard Koo. Te inventor of the “balance-sheet recession” now enlightens us on the miseries the Fed has to face: the ‘QE- trap’.
Aſter the no-tapering announcement US rates have been falling back but giving back only a small portion of the rise started with famous Bernanke’s speech in front of the
Joint Economic Committee
of the Congress on May 22nd, where the ‘tapering’ concept was born. Starting to speak about and performing tapering will generate a new leg higher, likely above previous highs. Koo: “I worry that this kind of intermittent increase in rates
threatens the recoveries in
interest rate-sensitive sectors such as housing and automobiles. That could lead to renewed hesitance at the Fed and prompt it to temporarily shelve or postpone tapering. While rates might then decline, reassuring the markets for a few months, talk of tapering would probably re-emerge as soon as the data showed some improvements, pushing rates higher and serving as a brake on the recovery. Then the Fed
50 FX TRADER MAGAZINE October - December 2013
would again be forced to delay or cancel tapering. In my view, recent events have greatly increased the likelihood of this kind of ’on again, off again’ scenario, something I warned about in my last report. To be honest, I did not expect it to occur so soon.”
It is a vicious cycle where, as soon as the economy picks up a bit, the authorities begin to talk about tapering, which sends long-term rates sharply higher and slacken recovery and inflation, effectively preventing them from winding down the policy. In this kind of world the economy never fully recovers
because businesses and
households live in constant fear of a sharp rise in long-term rates.
Good luck to the new Chairman/ Chairwoman.
Alessandro Balsotti
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