More QE?
Almost lost in the blizzard of tax reform talk, was a speech Fed Chair Yellen made in Washington recently, where she made the following comment, “The bottom line is that we must recognize that our unconventional tools might have to be used again. If we are indeed living in a low-neutral rate world, a significantly less severe economic downturn than the Great recession might be sufficient to drive short-term interest rates back to their effective lower bound.” (1) In other words, in the next recession, we could see not only a zero rate on Fed funds, but a re-started QE, which is what I have been saying would happen. She also said, “The probability that short term rates may need to be reduced to their effective lower bound at some point is uncomfortably high, even in the absence of a major financial and economic crisis” (2).
There it is, an admission that even a garden variety U.S. recession might trigger another round of asset purchases. Let me go one step further. Let’s assume John Taylor is the next Fed Chair. At the moment, the Taylor rule suggests Fed Funds should be about 250 bps higher, around 3.7%. But at one point in the Great Recession, late 2010, the Taylor Rule called for -2.5% Fed Funds rates. Even in the slow growth recoveries of 2011-2012 and 2013, the Fed Funds rate would essentially be zero, some 125 basis points below current levels. So two questions. Will the U.S. have another recession? Answer - yes, it will. Next question, if John Taylor is the next Fed Chair, what do you think the value of the Dollar will be in one year and in three years?
Perhaps a third question to ponder. In my view, the Fed remains the world central bank whether the PBOC or anyone else likes it or not. If Fed Funds were to trade at -2%, what will non-Dollar rates be and where will the major FX crosses trade against the Dollar, which would have a negative yield for the first time?
Sources:
(1), (2) “Yellen Says Fed Might Turn to QE in Another Downturn” CETUS News 26 October 2017
Bloomberg Data
Via:
William E. Bauer
Managing Director
Clearview Trading Advisors, Inc.
OF COURSE THEY WILL.
QE AD INFINITUM...
