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The great unwinding: Fed begins slow demise of its post-crash stimulus The great unwinding: Fed begins slow demise of its post-crash stimulus
(35 minutes later)
The Federal Reserve has announced it will begin the great unwinding of the gargantuan stimulus programme it began close to a decade ago in the teeth of the worst recession in living memory.The Federal Reserve has announced it will begin the great unwinding of the gargantuan stimulus programme it began close to a decade ago in the teeth of the worst recession in living memory.
As widely expected, the Fed voted to start reducing its portfolio starting in October, and kept interest rates at a range of 1% to 1.25%.As widely expected, the Fed voted to start reducing its portfolio starting in October, and kept interest rates at a range of 1% to 1.25%.
The move, announced after a two-day meeting by Fed officials, will start the gradual reduction of the central bank’s $4.5tn portfolio of bonds and other securities, bought to keep interest rates close to zero in an attempt to kick-start the economy. The move, announced after a two-day meeting by Fed officials, will start the gradual reduction of the central bank’s $4.5tn portfolio of bonds and other securities, bought to keep interest rates close to zero in an attempt to kickstart the economy.
Fed chair Janet Yellen has said she is hopeful the unwinding will be as uneventful as “watching paint dry” and the Fed plans to reduce its balance sheet in such a slow and steady manner that it will not impact the wider economy. The Fed chair, Janet Yellen, has said she is hopeful the unwinding will be as uneventful as “watching paint dry” and the Fed plans to reduce its balance sheet in such a slow and steady manner that it will not affect the wider economy.
Stock markets have continued to set new records despite Yellen’s clear signals that the giant sell-off is coming and that interest rates are likely to continue their slow and steady climb back towards historical norms.Stock markets have continued to set new records despite Yellen’s clear signals that the giant sell-off is coming and that interest rates are likely to continue their slow and steady climb back towards historical norms.
But the sell-off is just as unprecedented as the massive stimulus programme that came before it and others have expressed skepticism that the unwinding will proceed as smoothly as Yellen has expressed.But the sell-off is just as unprecedented as the massive stimulus programme that came before it and others have expressed skepticism that the unwinding will proceed as smoothly as Yellen has expressed.
In June, JP Morgan Funds chief global strategist David Kelly called Yellen’s comments a “tad complacent”. Writing after Yellen’s last press conference he praised Yellen’s ability to fine tune “the message the Fed is trying to convey and in deflecting political questions that she would do well to avoid”. In June, JP Morgan Funds’ chief global strategist, David Kelly, called Yellen’s comments a “tad complacent”. Writing after Yellen’s last press conference he praised Yellen’s ability to fine-tune “the message the Fed is trying to convey and in deflecting political questions that she would do well to avoid”.
But he warned that her belief that the US economy was bouncing back from a slowdown in the first quarter may be too optimistic and that the reduction in the balance sheet, combined with rising interest rates, “will very likely push long-term interest rates higher over the next few years. While still low inflation should limit the back up in yields, it will likely feel a little worse than ‘paint drying’ for investors heavily allocated to the long end of the treasury market,” he wrote.But he warned that her belief that the US economy was bouncing back from a slowdown in the first quarter may be too optimistic and that the reduction in the balance sheet, combined with rising interest rates, “will very likely push long-term interest rates higher over the next few years. While still low inflation should limit the back up in yields, it will likely feel a little worse than ‘paint drying’ for investors heavily allocated to the long end of the treasury market,” he wrote.
Former Fed chair Ben Bernanke started the giant stimulus programme, known as Quantitative Easing (QE), in 2008 after the financial crisis plunged the world economy into the worst recession since the Great Depression.Former Fed chair Ben Bernanke started the giant stimulus programme, known as Quantitative Easing (QE), in 2008 after the financial crisis plunged the world economy into the worst recession since the Great Depression.
The Fed’s balance sheet of treasury securities and US-backed mortgage-related securities grew from about $800bn to $4.5tn as the central bank moved to stimulate economic growth by reducing longer-term interest rates, such as those for mortgages and corporate bonds.The Fed’s balance sheet of treasury securities and US-backed mortgage-related securities grew from about $800bn to $4.5tn as the central bank moved to stimulate economic growth by reducing longer-term interest rates, such as those for mortgages and corporate bonds.
The programme has successfully kept interest rates down and US unemployment has fallen steadily from a peak of 10% in October 2009 to 4.4% in August this year. But while most economists see a clear link between low rates and record high stock markets the extent to which QE contributed to the fall in the unemployment rate is more controversial, and likely to remain so.The programme has successfully kept interest rates down and US unemployment has fallen steadily from a peak of 10% in October 2009 to 4.4% in August this year. But while most economists see a clear link between low rates and record high stock markets the extent to which QE contributed to the fall in the unemployment rate is more controversial, and likely to remain so.
Even one of the Fed’s own economists has questioned the impact of QE.Even one of the Fed’s own economists has questioned the impact of QE.
“Evaluating the effects of monetary policy is difficult, even in the case of conventional interest rate policy,” St Louis Fed economist Stephen D. Williamson wrote recently. “With respect to QE, there are good reasons to be skeptical that it works as advertised, and some economists have made a good case that QE is actually detrimental.”“Evaluating the effects of monetary policy is difficult, even in the case of conventional interest rate policy,” St Louis Fed economist Stephen D. Williamson wrote recently. “With respect to QE, there are good reasons to be skeptical that it works as advertised, and some economists have made a good case that QE is actually detrimental.”
The European Central Bank began a similar QE programme in March 2015 and is expected to continue the stimulus into 2019.The European Central Bank began a similar QE programme in March 2015 and is expected to continue the stimulus into 2019.