The Rocky road away from QE
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Hanging over this year’s Jackson Hole gathering is the same policy question that has been kicked around in economic circles all summer: How quickly and aggressively should the Fed slow quantitative easing?
Caroline Baum thinks this WSJ headline says it all: “At Fed conference, everyone knows how to make an exit”. The problem, the WSJ’s Victoria McGrane reports in the story that follows, is that while opinions are everywhere, agreement isn’t.
The IMF’s Christine Lagarde urged the Fed to not to “rush to exit” and that “the path to exit will and should depend on the pace of recovery”. Lagarde was echoed by the head of the Mexican central bank, who said that Fed officials need to take the effect of their actions on emerging markets into account. The response of US policymakers was, in effect, ‘no, we don’t’.
Two academics told attendees that quantitative easing was having far less positive effect on the economy than the Fed thought. Arvind Krishnamurthy and Annette Vissing-Jorgensen, professors at Northwestern and Berkley, respectively, said that QE “works largely through narrow channels that affect the prices of purchased assets, with spillovers depending on particulars of the assets and economic conditions”. A slow end to QE would impact specific asset prices, but would have little impact on the larger economy. This study is a follow up to their widely-cited 2011 paper on the same subject. Cardiff Garcia excerpts Goldman’s analysis of the new study, which finds that QE pushed down MBS yields, but failed to do the same to Treasuries.
Neil Irwin looks at the post-crisis landscape and finds a world where central banking is interconnected and is now on the frontlines of regulation. Or, as Morgan Stanley’s chief economist Vincent Reinhart put it: “the biggest bubble of them all has been the bubble in central banking”. — Ben Walsh
On to today’s links: