misplaced angst about federal asset purchases with jim glassman

8/13/2019 Misplaced Angst About Federal Asset Purchases with Jim Glassman

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The Mechanics of Finance, The Milken Institute and the National Press Foundation, Washington DC, January 14, 2014.

The Magic Is Back

Misplaced Angst About Fed Asset Purchases


2/22

The Magic Is Back


2

The Feds Congressional (Public) Responsibilities


3/22

The Magic Is Back


3

Growth is a means, not an end

Real GDP (annualized percent change)

Source: US Department of Commerce. Updated through 2013 Q3.

2.9

0.2

2.0

4.3

3.1 3.0

2.4

1.9

-2.8

-0.2

2.8

2.02.0

2.7

3.53.8 3.8

3.5 3.53.0

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8

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

% change from the previous quarter

% change from four quarters earlier

% change over the four quarters of the year

Forecast


4/22

The Magic Is Back


Unemployment rate (percent)

Sources: Vertical bars denote recessions and are designated by the NBER; US Department of Labor. Updatedthrough December 2013. 4

Maximum employment is not just about this

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Horizontal bars denote the Fed's view

(forecast range) about the near-term andsustainable unemployment rate (often

referred to as the Nairu, or nonincreasing

inflationary rate of unemployment)

Note: The red boxes identify the first step in each Fed tightening sequence.

Proved to be

premature and the

Fed backed down


5/22

The Magic Is Back


Recent dropouts were not all retirees

Selected employment reference points (thousands)

Source: US Department of Labor. Updated through December 2013. 5

35

40

45

50

55

70

75

80

85

90

2007 2008 2009 2010 2011 2012 2013 2014

16 to 24 year olds (right scale)

35 to 44 year olds (left scale)



Over 55 years of age (right scale)


6/22

The Magic Is Back


A comprehensive view of true unemployment

Selected employment reference points (thousands)

Source: US Department of Labor. Updated through December 2013. 6

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.20

0.25

0.30

0.35

0.40

0.45

0.50

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

All over 16 years of age or older who are not classified as employed

16- to 54-year olds who are not classified as.............. employed


7/22

The Magic Is Back


Core PCE chain price index (percent change from 12 months earlier)

Range of FOMC forecasts for PCE inflation.

Sources: Vertical bars denote recessions and are designated by the NBER; US Department of Commerce.Updated through November 2013 (inflation) and December 18, 2013 (FOMC forecast).

What about inflation says the Fed is off base?

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

TheFOMC'sforecastfor PCEchainprice

inflationand long-run goal


8/22

The Magic Is Back


8

Three Monetary Weapons ...

(1) Short-term interest rates (federal funds rate);(2) Communications (the future path of the funds rate);(3) Asset purchases (long-term interest rates)


9/22

The Magic Is Back


Federal funds rate and nominal 10-year Treasury yield (percent)

Sources: Vertical bars denote recessions and are designated by the NBER; Federal Reserve Board. Updatedthrough January 10, 2014.

The zero-floor on rates forced the Fed to look to LSAPs

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0

4

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12

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60 65 70 75 80 85 90 95 00 05 10

Federalfundsrate

10-year

Treasury yield


10/22

The Magic Is Back


Nominal and inflation-adjusted 5-year Treasury yield 5 years in the future (percent)

Source: Federal Reserve Board. Updated through January 8, 2014.

Asset purchases helped the Fed to ...

10

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

2,750

3,000

3,250

3,500

3,750

4,000

4,250

4,500

4,750

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

2,750

3,000

3,250

3,500

3,750

4,000

4,250

4,500

4,750

Aug 2007 Aug 2008 Aug 2009 Aug 2010 Aug 2011 Aug 2012 Aug 2013 Aug 2014

Other Fed credit

TALF (Dec 31, 2009)

Credit extended to AIG, Inc.

Central bank liquidity swaps (Feb 1, 2010)

Discount Window

Term auction credit

RPs

MBS

GSE debt

Securities in reverse RPd with foreign officialinternational accounts

Securities committed to reverse repurchaseagreements with dealers

Securities loaned to dealers through the TSLfacility (Feb 1, 2010)

Securities loaned to dealers through the overfacility

Unencumbered Treasuries and agencies

All factors supplying Federal Reserve reserves

Forecast


11/22

The Magic Is Back




... hold long-term rates down, when needed

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Five-year forward Treasury yield (5 x 5)

Five-year forward inflation expectations plus inflation risk premium (5 x 5 breakeven)

Five-year forward real Treasury yield (5 x 5 TIPS)


12/22

The Magic Is Back


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Fed asset purchases have nothing to do with money,QE, liquidity, flooding the world with cheap money,

the Weimar Republic, inflation, printing presses,monetization of debt ...


13/22

The Magic Is Back


Wilshire 5000 (Dec 31, 1970 = 830.27)

Source: Dow Jones. Updated through January 10, 2014.

Claims that this is about printing money are off base ...

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0

2,010

4,020

6,030

8,040

10,050

12,060

14,070

16,080

18,090

20,100

0

2,010

4,020

6,030

8,040

10,050

12,060

14,070

16,080

18,090

20,100

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014


14/22

The Magic Is Back


Wilshire 5000 (Dec 31, 1970 = 830.27) After-tax GDP profits (billions of dollars)

Note: scales aligned to the historical 10.6 times price-earnings average (for these measures) ex. the 1990s.Sources: US Department of Commerce; Dow Jones. Updated through 2013 Q3 (profits) and Dec. 6, 2013.

... and ignore the earnings that guide equity markets

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0

300

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900

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1,500

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6,750

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11,250

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18,000

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1990199219941996199820002002200420062008201020122014201620182020

Line represents the Wilshire 5000 index (left scale)

Shaded area represents after-tax GDP profits (right scale)

Note: the Wilshire 5000 P/E has averaged 10.6 since 1947, excluding the unprecedented multiples during1997 - 2001.

Forecast


15/22

The Magic Is Back


Monetary base (billions of dollars)

Source: Federal Reserve Board. Updated through December 2013.

Why the Feds critics got off on the wrong foot

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0200400600800

1,0001,2001,4001,6001,8002,0002,2002,4002,6002,8003,0003,2003,4003,6003,8004,000

0200400600800

1,0001,2001,4001,6001,8002,0002,2002,4002,6002,8003,0003,2003,4003,6003,8004,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015


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The Magic Is Back


Selected components of the monetary base (billions of dollars)

Source: Federal Reserve Board. Updated through December 2013.

... the reserves created by LSAPs are excess (in quarantine)

17

02,0004,0006,0008,000

10,00012,00014,00016,00018,00020,00022,00024,00026,00028,00030,00032,00034,00036,00038,00040,000

0200400600800

1,0001,2001,4001,6001,8002,0002,2002,4002,6002,8003,0003,2003,4003,6003,8004,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

The monetary base =currency in circulation +required reserves +excess reserves (left)

M2 (right scale)


18/22

The Magic Is Back


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Markets have largely discounted the end of LSAPs


19/22

The Magic Is Back




How markets see it ... inflation views are steady ...

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Five-year forward inflation expectations plus inflationrisk premium (5 x 5 breakeven)



20/22

The Magic Is Back




... and if you look beyond the ZIRP window ...

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014





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The Magic Is Back




... the forward (5 x 5) real rate is not far from steady state

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014





22/22

The Magic Is Back

misplaced angst about federal asset purchases with jim glassman

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