...against fictions and other tall tales

Sunday, 16 September 2012

Another round of QE: More of the same?

I once had a boss who always asked for briefing material of "no more than 100 words". He'd also say "Give me charts, please. Charts!" Here's a snapshot of what he would get if I was asked to update him on the effect of the Fed's quantitative easing (QE) strategy.

Recall that the Fed implements QE by buying financial assets from banks and other private institutions in the aim of putting downward pressure on yields and thus reducing interest rates. QE as a policy measure is easily identifiable in charts since it increases massively the amount of excess reserves in the banking system.

Given that Chairman Bernanke announced a new round of QE last week, I thought these charts might be of interest.* Not all of these indicators are related to QE's stated objectives. Still, given the centrality of QE in the Fed's overall strategy, I think it's useful to include them.

So, to summarize, since the start of QE, bank lending standards have returned to normal...

...business loans have rebounded, though not at pre-QE levels...

...the rate of increase in manufacturers' new orders has normalized...

...corporate profits have continued to rise well beyond pre-QE levels...

...the cost of borrowing for businesses (as reflected in the rate of 10-year inflation protected securities) has come down...

...as did the 30-year conventional mortgage rate...

... and stocks have recovered.

On the other hand, home prices have remained depressed...

...the employment-population ratio has flattened...

...and, finally, the rate of unemployment is still stubbornly high.

In a speech earlier this year, the President of the San Francisco Fed, John Williams, called the level of unemployment in the US a "national calamity that demands our attention". From the charts above, it's clear that another round of QE is unlikely to do much to help create more jobs moving forward.

* All charts and data are from the St. Louis Fed, FRED.


  1. A brilliant visual of the Fed's efforts and results. Every chart is worth three (3) WSJ commentaries.

  2. Great stuff -- I hate making charts, but they really are great when someone else makes one that I can show bosses and colleagues.

  3. You are indeed a brilliant chartist and chartalist. I hope that Republican pundit don't get a hold of these - as kp intones-they may be worth their economic platform and undermine the President's and the Fed's Chair accost to credibility on matters fiscal and monetary.

    On the other hand, Republicans have little to offer that is critically sensible. Republican visuals would be catastrophic esp. employment and the national accounts

  4. FRB is indeed the Lighthouse! Bitter-sweet it sometimes is, but reality and its checks, constitute the fabric of great policy. Policy must be prudential, and its political space explored before setting out an appropriate course.

    No one doubts that the BoC has been watching the Fed with suspect interest. The recent announcement by Mr. Bernanke that he's keeping rates low and buying back mortgage bonds is unfortunately a nail-biter for Mr. Carney as he envisages a loonie rising unless he accommodates a commensurate interest rate adjustment. Your unemployment chart should be revised for Canada highlighting US resolve on QE3 and Canadian unemployment worsens and manufacturing output and capacity shrink. The background argument that inflation may be rekindled is a minor tactical smokescreen for preserving some mode of fiscal independence of the BoC, a position that in the US, Mr. Bernanke has dared to affront and, has succeeded quite remarkably. Mr. Carney should dare follow a similar path. With global demand softening regularly, commodity prices, including oil, will back off, once the political irritants abate. The inflationary targets should moderate comfortably within the adjudicated range. Let's steer it like the Fed.

    1. B. Swells:
      You said "Let's steer it like the fed", which seems to suggest that QE is consequential (in term of impact on exchange rate, yields curve, etc).

      QE is an asset swap (QE3 in particular consists of exchanging reserve for MBS), I do not see the channel through which the exchange rate could be affected. Maybe it does impact the yield curve at the margin, but even there, the impact is likely very small. In my view, QE is a total distraction. Fiscal stimulus by the Treasury is the only game in town to get the economy going.

      The Bank of Canada has some room to decrease the overnight, but proceeding with a Canadian-made QE would be a distraction that would not achieve much, if anything at all.

  5. @circuit: I concur with the above comments, your column is a lighthouse. (swells!)I will only call on an anecdote from the Jackson Hole Meeting. Immediately following Chair Bernanke's speech, Michael Woodford, among the world's best, presented a magnificent piece that will lay the foundations for monetary policy for years to come.


    Policy's pathways will never be the same after this mapping and Chair Bernanke.

  6. @Thanks Tom and welcome.
    @KP and MI: I tried to be objective...I swear! I learned a while ago that it's hard to please everyone using methods of policy evaluation!
    @Swells, I'm with you but some say there is no downside for Canada! Here's one from the G&M today: http://m.theglobeandmail.com/report-on-business/economy/economy-lab/dont-fear-strong-loonie-exporters-should-embrace-qe3/article4550736/?service=mobile

    Mr Carney is indeed feeling the heat now. Between the US serious about tackling the jobs situation and the Harper team continuing with austerity, I don't see much improvement in Canada's unemployment. And as you say, betting on commodities right now involves significant risk. And on top of that, the housing sector is slowing. For what it is worth, my view is that Canada needs more, not less, public investment right now. Also, as JL wrote a while ago, this could help to deflate the loonie.

    @GC: I've started reading the paper. It's thick but well structured, which helps. The analysis is interesting, and the Canadian content is particularly useful to me. Also, I'm definitely on side with Prof. Woodford when he argues that the 'mechanical' aspect of QE (asset swap) is ineffectual on its own. For me, another big event was Bernanke's shift toward the labor market conditions as a target. I'm glad to see this move, and doubly pleased by the prospect that inflation be allowed to rise above the usual level until the economy improves markedly. That said, I wonder if this aspect will endure in the post-zero-lower-bound conditions? One of the ideas I support here at FRB is a higher tolerance for inflation as a way to improve employment conditions and help sustain growth.

  7. "...QE is ineffectual on its own" I mean here that for QE to work it needs to be met with a greater tolerance for inflation when the economy picks up. I still think that a large, job creating surplus would be much more effective. But, of course, that is not within the Fed's purview.

  8. !! circuit for your ready add-on at 20:42. most keynesians would welcome public investment as a softening catalyst for a currency. unfortunately. it is a fiscal initiative and complement to monetary pragmatism. i think swells contests BoC's pragmatism that the IR differential is not a relevant factor in the loonie's rise. i also squint on it on BoC's slight. nothing is more significant than yields especially on currency markets to justify in/outflows of capital.

    on the other hand, i am somewhat sceptical that the Corden/Neary model, and any of its variants, including the Samuelson addenda is appropriate to the canadian trade portfolio. moreover, that certain pundits and observers, actors or agents, contend that long term investments offset the trade impact on manufacturing of a strengthening currency is overly ambitious. they should analyze the volatility of currency fluctuations triggered by narrowing/widening differentials. many will argue that this scenario reflects short-term investments and O/N. there is some semblance of truth to that, but then reality is that the volumes characterize on the short term capital flows which in turn affect currencies in an immediate fashion. to the other contention that some form of direct foreign investment offsets the manufacturing deficits, i concur with swells on defining the loss of jobs as predominantly irreplaceable. in any case, direct foreign investments even in the manufacturing production sectors are nowadays contextualized by exit conditions and other governing contingencies that permit investors to bail out partially. but lost jobs are forever lost.

    the mechanism of corporate treasury operations that inhere in Mr. Moffat's article are common wisdom, and in no way address the concern of a rising currency. his take is tactical: they permit management to reconcile exposed balance sheets with p&l expectations, as well as stakeholder values. they do not address, as you have so often argued, the impact that rising unemployment has on the household sector and thereon on domestic demand.

    @gc. agreed. it is no accident that Mr. Woodford followed Chair Bernanke. readers should skim the acknowledgements. to some extent MW's reinforces the overall approach that the FED is trying to establish towards the public and markets in order to stabilize the planning and policy process. by doing so, the FED does facilitate the analytics of reward expectations for both small and institutional investors, in an attempt to give longer durations to the investment horizon.

    well done again circuit!! the stiglitz video was an excellent cameo to prequel this post.

  9. Thank you. Finally, useful visuals on quantitative easing. I concur that this column is a helpful aid at this juncture. One would think those other sites spewing nonsense about the hyperinflationary potential of the central bank's program would strengthen their case with charts. I have always found it is a good rule to defer to the facts and let them speak for themselves, as done here.

  10. I agree with the comments above. Ben Bernanke's recent actions place the BoC in a delicate position. I believe Mark Carney should take a page from Bernanke's playbook and articulate a course that would allow the central bank to temporarily shift its focus away from inflation control and toward labor market considerations. The Canadian dollar should not rise any further lest Canadian manufacturing will be swept away.

  11. CORRECTION: I noticed a typo in my comment dated Sept 19 (20:42). Obviously, I mean a DEFICIT, not a surplus. Although a full employment surplus would be acceptable!