it's a game changer for sure. As always Scott, great analysis.
Absolutly, absolutly correct. The lows for the equity markets I believe occured right after the announcement, and they should prove to be the lows for the year.
The Fed's move may be enough, but I would prefer targeting nominal GDP, and QE until we see some real traction.We may be entering a new era for monetary policy. In Japan they are stuck at zero bound, and have been since before I was bald. Staying at zero has not worked.Japan is still deflation-prone.We know from Japan that simply going to zero-bound is not enough. As for inflation, we need moderate inflation for a while.I will say this: Give to me the Triple Nickel. That is five years of five percent real GDP growth and five percent inflation. 5-5-5.If we do 5-5-5, we will all be writing love notes to each other in this blog. That's how happy we will be. America will be on top of the world again.Or, we dither, dawdle and limp along, like Japan. And your equity and real portfolios are worth less than today. John Taylor said five percent growth is doable, but he is mysteriously quiet on how that can happen with tight money.
It will be a first to devalue to prosperity. Did this not get us into trouble in the first place?
More of the same and getting worse. Financial repression is not how to build a thriving and robust society.
I'm sensitive to the reflationary implications of this move by the Fed. But I do recognize that strong money demand (cash hoarding and deleveraging) has been holding back some of the recovery that I expected to see as M2 velocity picked up. (i.e., M2 velocity has remained quite low). Also, by weakening money demand the FOMC announcement could be seen as offsetting some of the extra money demand (fear-induced) which came from the downgrade.
Furthermore, I note Scott Sumner's point about how this whole crisis has been aggravated by unusually weak growth in nominal GDP. To the extent that this announcement stimulates growth in M2 velocity, nominal GDP should pick up and that should go a long way to alleviating the problems of large debtors. (If nominal GDP comes in lower than a borrower expected, then he has a big cash flow problem.)
Seems like a lot of financial engineering and jiggery-pokery to me. Individuals and funds which need 'safe' & 'secure' yield have been left in the lurch. The re-risk is back on whether you like it or not. America is the new 'carry trade' operator. This type of 'bubble' prosperity never lasts or works! Heliocopter Ben flying blind and nothing more!
http://dmarron.com/2011/07/26/raise-the-debt-ceiling-rap/BTW ... this dude is next in line a Fed Chief!
Scott, thank you for your thoughts. The question I have is what happens, say 9-12 months from now, if we see a spike in inflation? What tools would the Fed have to fight inflation now that they have pledged to keep rates near zero until mid-2013?
great post scott
Thanks for the informed analysis. Much appreciated.William
Phil: your question is right on the mark. I have to believe that the Fed's move today will add to the inflationary pressure out there. I don't know how much, though, and I don't know what will happen if and when inflation picks up in a big way. All I can say is that while this is good news for risky assets right now, it poses the very real threat of a big tightening of policy somewhere down the road. There is no free lunch.
If inflation started kicking in prior to 2013, the Fed could always stop reinvesting payments from its treasury holdings, which would be a small, relative tightening.Also - and I admit I might be reading too much into this - but their statement said, "exceptionally low levels for the federal funds rate." I don't know about anyone else, but I would still consider a target of 0.25 - 0.5 instead of 0 - 0.25 to be "exceptionally low."Finally, and again I might be reading too much into this, but notice it says:"The Committee currently anticipates that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."In other words, they did not explicitly say, "We're going to keep the overnight rate at 0 - 0.25 until mid-2013 or later. Period."What they *did* say was, "we currently expect conditions to warrant such a low rate until mid-2013." That does not mean their expectations can't change in the meantime.I think they probably did that on purpose to give the markets a reasonable amount of certainty about their intentions for the next two years, but also didn't make it so definite-sounding to give them no room to change their mind in the prior to mid-2013.
So, why will zero interest rates work for the US when it hasn't in Japan?
Good question, Al.
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