QE2 & TIPS
Last year many economists argued that the economy needed more quantitative easing which would drive down real interest rates (whether by driving down long maturity nominal rates or by driving up expected inflation). The counter argument is that quantitative easing is not effective if there is a liquidity trap.
Well we now have QE2 (since early November 2010) and real interest rates actually increased (very slightly). The 8 year real interest rate (TIPS rate on notes due January 15 2019 increased. I think that this is the real rate which was most likely to decline when the Fed bought 7 year (ordinary nominal) Treasury notes.
http://research.stlouisfed.org/fred2/series/TP10J19
That didn’t do anything for the recovery and it is a response to an open market operation many times larger than the largest pre-Bernanke open market operation (I mean as a percent of high powered money outstanding — one has to be specific since Bernanke had earlier more than doubled Fed liabilities).
Robert, The Fed never intended to drive down real rates, rather to drive up inflation expectations. Real rates were/are negative – how is driving them lower going to do anything? Their asset bubble strategy (see below) has worked; and with the fiscal stimulus, really just amended bills that were set to expire, and global growth surprising to the upside, the increased growth expectation is (well before today) passing through to nominal yields.
I’ve actually written about this at AB – like you, it wasn’t clear that QE2 would work (I saw yields rising too and got worried). But David Beckworth has been on this story from day one. I’d say the wealth effect was really strong (see link to AB article): the S&P is up 25% since September and consumer saving has stabilized.
The reason that yields spiked AFTER the Fed announcement was because every investor and their dog tried to front-run the Fed. That was probably one of the most crowded trades in history! A 5yr real yield now is -0.3% (down from around 0.05%)! Goldman is forecasting 3.4% growth in 2011 and 3.8% in 2012. A real yield of 0% for the next 5 years? How does that make any economic sense?
Until today, risk assets were surging – corporate bonds, stocks, emerging markets, etc. That’s what the Fed was going for, not the interest rate channel.
Rebecca
Rebecca is correct that ‘risk on’ was the goal of QEII and Ben has not been shy about taking credit for the stock market rally. Stocks being the base risk asset class. All while vehemently denying any responsibility for the commodites rally. None at all, nada, zilch. Even the suggestion is an insult to the man so let us set that aside.
The Fed did use some pro forma words about lower interest rates but the FCB’s and banks have not been eager to buy Treasuries and have been satisifed to see the Fed do the heavy lifting in the intermedite areana so those have risen. (more than TIPS) At least with QEII the 10 year note took two days I think to rise about the pre announcement rate. With QEI that only took 20 minutes. One can suppose Ben in his daydreams hoped longer rates would fall but I doubt he expected it.
Now talk among ‘economists’ is a different matter. At least the ones that chatter on TV and in the media. They thought QE would bring rates down because that makes simple sense and when your on TV it’s best to be simple. Yes I mean to imply TV economists are simpletons.
If Treasury rates haven’t dropped they haven’t gone up much while stocks have soared which is a pretty good outcome for the behavioural kubuki economics racket. So expect QEIII and beyond. Even as the employment population ratio slides past the Great Depression low eventually.
What Rebecca and rapier said.
Oh, and even ignoring the points they made, to make your case you need a counterfactual. What would interest rates, asset prices and the economy have done in the absence of the Fed’s asset purchases?
Then, as Rebecca and rapier suggest, you’d need to figure out whether if interest rates had fallen, and riskier asset prices had fallen, that would be a more favorable outcome (more to the Fed’s liking) than having Treasury yields rise and riskier assets’ prices rise, too?
I support spending reductions in the national security and defense operations of the Federal Government. Regardless, there is the matter of Federal Budget share that such outlays represent in comparison to other outlays.
President Eisenhower faced a significantly different situation with Federal Budget outlays during his two terms than is evidenced today. Note the following comparison of Federal Budget outlays for national defense spending as compared to payments for individuals. Effectively, the Federal spending outlays have reversed positions as a percentage of GDP and percentage of outlays.
Federal Budget Spending as a Percentage of GDP
1953-1960
National defense spending 14.2 13.1 10.8 10.0 10.1 10.2 10.0 9.3
Payments for individuals 2.9 3.3 3.6 3.6 3.8 4.6 4.6 4.7
2001-2008
National defense spending 3.0 3.3 3.7 3.9 4.0 3.9 4.0 4.3
Payments for individuals 11.0 11.8 12.1 12.0 12.0 12.0 12.2 12.7
2009-2016
National defense spending 4.7 4.8 5.1 4.7 4.0 3.7 3.6 3.4
Payments for individuals 14.8 15.8 16.0 14.8 14.6 14.6 14.6 14.8
—–
Percentage of Federal Budget Total Outlays
1953-1960
National defense spending 69.4 69.5 62.4 60.2 59.3 56.8 53.2 52.2
Payments for individuals 14.4 17.8 20.9 21.5 22.2 25.4 24.7 26.2
2001-2008
National defense spending 16.4 17.3 18.7 19.9 20.0 19.7 20.2 20.7
Payments for individuals 60.6 61.7 61.7 61.0 60.3 60.0 61.9 61.2
2009-2016
National defense spending 18.8 20.1 20.1 19.8 17.9 16.7 16.0 15.2
Payments for individuals 59.5 66.1 63.1 62.8 64.9 65.5 65.5 65.7
—–
Notes:
1. National defense spending includes a small amount of grants to State and local governments and direct payments for individuals.
2. Payments for individuals includes direct payments for individuals and grants to States and local governments; includes some off-budget amounts; most of the off-budget amounts are direct payments for individuals (social security benefits).
3. Figures for 2011 through 2016 are Federal Budget projections provided by President Obama’s OMB.
Source:
Historical Tables
http://www.whitehouse.gov/omb/budget/Historicals
Table 6.1 — Composition of Outlays: 1940–2016
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist06z1.xls
I support spending reductions in the national security and defense operations of the Federal Government. Regardless, there is the matter of Federal Budget share that such outlays represent in comparison to other outlays.
President Eisenhower faced a significantly different situation with Federal Budget outlays during his two terms than is evidenced today. Note the following comparison of Federal Budget outlays for national defense spending as compared to payments for individuals. Effectively, the Federal spending outlays have reversed positions as a percentage of GDP and percentage of outlays.
Federal Budget Spending as a Percentage of GDP
1953-1960
National defense spending 14.2 13.1 10.8 10.0 10.1 10.2 10.0 9.3
Payments for individuals 2.9 3.3 3.6 3.6 3.8 4.6 4.6 4.7
2001-2008
National defense spending 3.0 3.3 3.7 3.9 4.0 3.9 4.0 4.3
Payments for individuals 11.0 11.8 12.1 12.0 12.0 12.0 12.2 12.7
2009-2016
National defense spending 4.7 4.8 5.1 4.7 4.0 3.7 3.6 3.4
Payments for individuals 14.8 15.8 16.0 14.8 14.6 14.6 14.6 14.8
—–
Percentage of Federal Budget Total Outlays
1953-1960
National defense spending 69.4 69.5 62.4 60.2 59.3 56.8 53.2 52.2
Payments for individuals 14.4 17.8 20.9 21.5 22.2 25.4 24.7 26.2
2001-2008
National defense spending 16.4 17.3 18.7 19.9 20.0 19.7 20.2 20.7
Payments for individuals 60.6 61.7 61.7 61.0 60.3 60.0 61.9 61.2
2009-2016
National defense spending 18.8 20.1 20.1 19.8 17.9 16.7 16.0 15.2
Payments for individuals 59.5 66.1 63.1 62.8 64.9 65.5 65.5 65.7
—–
Notes:
1. National defense spending includes a small amount of grants to State and local governments and direct payments for individuals.
2. Payments for individuals includes direct payments for individuals and grants to States and local governments; includes some off-budget amounts; most of the off-budget amounts are direct payments for individuals (social security benefits).
3. Figures for 2011 through 2016 are Federal Budget projections provided by President Obama’s OMB.
Source:
Historical Tables
http://www.whitehouse.gov/omb/budget/Historicals
Table 6.1 — Composition of Outlays: 1940–2016
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist06z1.xls
I support spending reductions in the national security and defense operations of the Federal Government. Regardless, there is the matter of Federal Budget share that such outlays represent in comparison to other outlays.
President Eisenhower faced a significantly different situation with Federal Budget outlays during his two terms than is evidenced today. Note the following comparison of Federal Budget outlays for national defense spending as compared to payments for individuals. Effectively, the Federal spending outlays have reversed positions as a percentage of GDP and percentage of outlays.
Federal Budget Spending as a Percentage of GDP
1953-1960
National defense spending 14.2 13.1 10.8 10.0 10.1 10.2 10.0 9.3
Payments for individuals 2.9 3.3 3.6 3.6 3.8 4.6 4.6 4.7
2001-2008
National defense spending 3.0 3.3 3.7 3.9 4.0 3.9 4.0 4.3
Payments for individuals 11.0 11.8 12.1 12.0 12.0 12.0 12.2 12.7
2009-2016
National defense spending 4.7 4.8 5.1 4.7 4.0 3.7 3.6 3.4
Payments for individuals 14.8 15.8 16.0 14.8 14.6 14.6 14.6 14.8
—–
Percentage of Federal Budget Total Outlays
1953-1960
National defense spending 69.4 69.5 62.4 60.2 59.3 56.8 53.2 52.2
Payments for individuals 14.4 17.8 20.9 21.5 22.2 25.4 24.7 26.2
2001-2008
National defense spending 16.4 17.3 18.7 19.9 20.0 19.7 20.2 20.7
Payments for individuals 60.6 61.7 61.7 61.0 60.3 60.0 61.9 61.2
2009-2016
National defense spending 18.8 20.1 20.1 19.8 17.9 16.7 16.0 15.2
Payments for individuals 59.5 66.1 63.1 62.8 64.9 65.5 65.5 65.7
—–
Notes:
1. National defense spending includes a small amount of grants to State and local governments and direct payments for individuals.
2. Payments for individuals includes direct payments for individuals and grants to States and local governments; includes some off-budget amounts; most of the off-budget amounts are direct payments for individuals (social security benefits).
3. Figures for 2011 through 2016 are Federal Budget projections provided by President Obama’s OMB.
Source:
Historical Tables
I support spending reductions in the national security and defense operations of the Federal Government. Regardless, there is the matter of Federal Budget share that such outlays represent in comparison to other outlays.
President Eisenhower faced a significantly different situation with Federal Budget outlays during his two terms than is evidenced today. Note the following comparison of Federal Budget outlays for national defense spending as compared to payments for individuals. Effectively, the Federal spending outlays have reversed positions as a percentage of GDP and percentage of outlays.
Federal Budget Spending as a Percentage of GDP
1953-1960
National defense spending 14.2 13.1 10.8 10.0 10.1 10.2 10.0 9.3
Payments for individuals 2.9 3.3 3.6 3.6 3.8 4.6 4.6 4.7
2001-2008
National defense spending 3.0 3.3 3.7 3.9 4.0 3.9 4.0 4.3
Payments for individuals 11.0 11.8 12.1 12.0 12.0 12.0 12.2 12.7
2009-2016
National defense spending 4.7 4.8 5.1 4.7 4.0 3.7 3.6 3.4
Payments for individuals 14.8 15.8 16.0 14.8 14.6 14.6 14.6 14.8
—–
Percentage of Federal Budget Total Outlays
1953-1960
National defense spending 69.4 69.5 62.4 60.2 59.3 56.8 53.2 52.2
Payments for individuals 14.4 17.8 20.9 21.5 22.2 25.4 24.7 26.2
2001-2008
National defense spending 16.4 17.3 18.7 19.9 20.0 19.7 20.2 20.7
Payments for individuals 60.6 61.7 61.7 61.0 60.3 60.0 61.9 61.2
2009-2016
National defense spending 18.8 20.1 20.1 19.8 17.9 16.7 16.0 15.2
Payments for individuals 59.5 66.1 63.1 62.8 64.9 65.5 65.5 65.7
—–
Notes:
1. National defense spending includes a small amount of grants to State and local governments and direct payments for individuals.
2. Payments for individuals includes direct payments for individuals and grants to States and local governments; includes some off-budget amounts; most of the off-budget amounts are direct payments for individuals (social security benefits).
3. Figures for 2011 through 2016 are Federal Budget projections provided by President Obama’s OMB.
Source:
Historical Tables
http://www.whitehouse.gov/omb/budget/Historicals
Table 6.1 — Composition of Outlays: 1940–2016
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist06z1.xls