8. QE objectives
Objective: lower longer term interest rates
Stimulate aggregate demand. Change demand/supply
dynamics FI market
Push investors towards riskier assets (equity/corp)
Influence composition portfolio investors
Scarcity channel/duration channel/expectation
channel
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9. QE costs
Inflated balance sheet
Exit policy more difficult
Fed effectively lost rate setting power
Excess reserves: banks no longer dependent on Fed
Remedies are possible, but jury is still out
(IOER, reverse repo at FAFR)
Artificially pushing term (risk) premiums
down: recipe for bubbles
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10. QE & Fed
communication/evaluation
QE program linked to “substantial” improvement
labour market. (1 yr: 8.1% to 7.4%)
Time path Bernanke (June FOMC meeting)
Costs programme increase (bal. sheet) and risks
increase (Fed Stein: signs of overheating in some credit markets)
Criticism mounts (impact growth negligible:
favours the haves versus the have-nots).
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11. QE end-game
Start tapering at Sept. FOMC meeting
Start?: $15/20B
Pace: Dec $20B, March & June14 $20/25B
Evenly divided between MBS & Treasuries
Data-dependent, but asymmetrical risk
Largely discounted? Sell-off May/June?
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12. Determine 10-year Treasury yield
ECONOMIC
DATA
LIFT – OFF
DATE
FORWARD
GUIDANCE
SLOPE OF
OIS CURVE
TERM
PREMIUM
QUANTITATIVE
EASING
10-YEAR
YIELD
13. Monetary policy as zero bound is
reached (part 2): Forward guidance
History (Fed- BoE – ECB)
Objective: influence curve beyond short term
horizon
Promise about future rates (data-dependent/time-
dependent/undefined time period)
Conditional
Credibility
Has reaction function CB changed?
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14. Forward Guidance Fed
Fed version
March 2009 - August 2011: commitment to keep rates
low for an extended period
August 2011: explicit calendar guidance (at least
through mid-2013, later shifted backwards)
Dec 2012: tied to unemployment rate & inflation
• Unemployment rate 6.5%- inflation max. 2.5%, expect.
anchored thresholds, no triggers
June 2013: QE tapering tied to unemployment rate too
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15. Forward Guidance
Fed tries to convince markets QE tapering has
nothing to do with forward guidance FF
Possible changes to FG: lower unemployment rate
threshold to 6% and/or floor for inflation (1.5%)
Markets have doubts (see recent curve moves)
ECB & BoE forward guidance lacks credibility
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24. Time path ST Euribor/Libor3m rates
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25. Forward Guidance & markets
Shift forward in lift-off date Fed rate change is not
completely out of line with Fed guidance
Eco data to remain key
Uncertainty high about fundamentals after crisis
Quid productivity? Potential growth? Output gap?
Simultaneous shift forward ECB & BoE official
rates, even before better eco date
• Signs of normalization after debt crisis to happen faster?
• If so, rate hike expectations still too shy
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29. Determining 10-year US T-yield
ECONOMIC
DATA
LIFT – OFF
DATE
FORWARD
GUIDANCE
SLOPE OF
OIS CURVE
TERM
PREMIUM
QUANTITATIVE
EASING
10-YEAR
YIELD
30. ECB policy
No pre-commitment was guiding principle
Inflation objective sacro-saint
2% was the unofficial bottom of rates
Now: refi-rate: 0.5%
LTRO loans FA/FF: liquidity enhancing
ECB lost power over money market rate
Eonia (& euribor) drop below refi-rate
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31. ECB historical July decision
New tool: Forward guidance
rates will remain ‘at present or lower levels for an extended period of time’
Easing bias: 50 bps is not floor
All rates are envisaged: keeps open possibility of neg. deposit rate
ECB wants to influence rates further out on the MM curve
End of “we never precommit” mantra
“Extended period” should be seen in terms eco data, not calendar dates, but…
It suggests no tightening until at least end 2014/mid 2015
Attempt to dissociate ECB policy from Fed policy & European yields from US
ones (success poor in 1994)
EMU economy too weak to withstand higher yields
Is commitment credible or sounds it hollow?
32. Fed leads the way in good & bad days
23 september 2013 32