Fisher Investments Editorial Staff
Monetary Policy

Ken Fisher on the Fed’s Un-Stimulus

By, 12/13/2012

Wednesday, the Fed made its last announcement of 2012: It will continue making purchases of initially about $85 billion per month ($45 billion in long-term Treasurys and some $40 billion in mortgage-backed securities) until it sees what it deems sufficient evidence of economic improvement.

If one of Ben Bernanke’s goals as Fed head has been increasing transparency, it’s hard to argue he’s failed—in some ways, this most recent announcement represents the most transparent we can remember the Fed’s being. Consider this section of the Fed’s Wednesday announcement:

In particular, the Committee decided to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

Hard to imagine getting a heck of a lot more specific than that. So we’re all pretty clear now on the goals and the various thresholds involved. But what about efficacy? What’s the likely impact?

Our CEO, Ken Fisher, has been rather skeptical of the Fed’s direction for a while. And it’s not hard to see why. A brief walk down memory lane: Coming out of the financial panic in 2008, accommodative monetary policy, including quantitative easing, seemed rather logical—the Fed’s fulfilling its “lender of last resort” role and supplying much-needed liquidity to a credit market that had effectively (temporarily) frozen. (Key word being “temporarily”—more on that to follow.)

Then, too, purchasing mortgage-backed securities at the time wasn’t outrageous given the role they were (and are) commonly believed to have played in the crisis in the first place (though we see that quite differently).

As the economy and markets began recovering and moving again, the Fed’s purchases tailed off—also logical given the aforementioned temporary nature of said credit freeze. But in August 2010, the Fed announced it would resume purchases, focusing primarily on 2- to 10-year Treasurys instead of mortgage-backed securities.  And in November 2010, the Fed announced another round of quantitative easing (QE2) in which it would buy $600 billion of Treasurys by the end of Q2 2011. These rounds of QE were predicated on the Fed’s belief the economy wasn’t growing robustly enough—as evidenced, in their view, by a still-high unemployment rate.

And when QE2 reached its expiration, the Fed acted again. Announcing Operation Twist—a maneuver by which the Fed sold short-term Treasurys and purchased longer bonds (Treasurys and MBS) in increments of $45 billion per month. Unlike QE, the Twist didn’t expand the Fed’s balance sheet, it simply changed its composition. Again, this action supposedly targets improved labor markets.

Finally, the Fed announced in September 2012 its plan to purchase $40 billion of mortgage-backed securities per month (QE3).

It’s these later rounds of easing we question. Particularly given some economic realities, not least of which is an economy that has actually been growing for some time now. Then, too, it doesn’t seem as though the more recent rounds of easing have had that much of an impact. Sure, rates have remained relatively low, so if that’s the primary aim, job well done! But as the Fed’s expressed numerous times now, it isn’t their only goal—helping create conditions that likely lower unemployment is seemingly currently the biggie, and if that’s the case, you’ll forgive our skepticism.

Einstein is commonly credited with defining insanity as doing the same thing over and over, expecting different results. We’re hardly suggesting Bernanke and the other voting members of the Fed policy committee are insane, but their actions are more questionable.

Think, too, about how they’re attempting to go about accomplishing their stated goals. Here are some rhetorical questions we’re asking ourselves that are worthy of some thought: 

  • In order to spur employment, they’re attempting to keep mortgage rates low. How low is low enough? Would the generational lows seen for the bulk of the last few years work for you?
  • Do too-high mortgage rates really seem the likeliest culprit for “too slow” growth? (Think about mortgage rates circa 1982 or so.)
  • What is the direct connection between maintaining low mortgage rates and employment? How does that transmission mechanism work, and is it likely to generate outsized hiring? If so, why has hiring been sluggish despite the aforementioned historically super low interest rates?
  • Who pays the price for keeping mortgage rates low? After all, there’s no such thing as a free lunch—who’s picking up this tab, and what’s the likely impact on the economy of that tab?
  • Are there other means the Fed has available to it to spur lending?
  • The Fed itself believes a steep yield curve is a sign of continued economic expansion ahead, considering the important incentive this creates for increased lending (increased bank profitability). Why, then, would the Fed knowingly and repeatedly pursue policies that (if successful) would flatten the yield curve?
  • What’s more, if the Fed wishes to boost lending, why is it paying banks a risk-free quarter percentage point to park funds back at the Fed? This creates a further disincentive for banks to lend, not the reverse.

We could go on, but you probably get the picture. Our point is the Fed’s actions amount to unstimulus not some magical growth-and-jobs elixir. The notion you’d focus so much on borrowers and what might motivate them that you pursue what we view as contractionary and deflationary policy is puzzling, to say the least. That said, though, our economy has grown in spite of such head-scratching policy, demonstrating its resilience. We see little reason that changes now. But similarly, we see little reason to believe that in its third (and now expanded) QE iteration, the impact of the Fed’s policy on hiring is materially different now, either.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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