Time Duy on QE and Signalling*

Mark Thoma once claimed to be pleased that I was shrilly criticizing him.  I sure hope he meant it, because here I go again.  He
Update: I have trouble with reading comprehension.  A one syllable name was too hard.  I am commenting on Tim Duy who posted at Mark Thoma’s site.  I apologize for the mistake.

Tim Duy

 comments on the newly released FOMC minutes

I have long believed that the Fed failed to appreciate the signalling component of quantitative easing. Indeed, I could be convinced it was the most effective channel of transmission. I am glad to see that policymakers are starting to see that as well.

I am no longer sure whether Thoma Duy thinks that QE as actually implemented was an effective signal of future monetary policy (as I guessed when writing the comment below) or whether he thinks that a new combined strategy of forward guidance and QE at the same time with the explicit assertion that the QE means the forward guidance should be taken seriously would work.

Below I copy the comment I made based on the first interpretation and argue that QE2, QE3 and QE4 were not effective signals of future conventional monetary policy.   I went to FRED and stayed there (part of the reason is I had exams to grade and FRED was one place to hide from them).

The signalling effect of QE should show up as low medium term interest rates.  I think there really is no sign of this on the dates of announcement of QE2 (3 or 4 dates right there) QE3 or QE3.1 (Dec 12 2012).  I don’t see it either on the day (as asset prices should respond quickly) or over an interval of time.

I really think that the hypothesis that signalling future short term rates is a highly effective component of QE is fairly easily testable and rejected by the data.

Consider QE3 announced September 13 2012 the 5 year constant maturity rate went from 0.7 on he 12th to 0.65 the 13th to 0.72 the 14th.  These are tiny fluctuations.  Over a longer horizon in all of September it went from 0.62% on the first trading day (Tuesday the 4th) to 0.62% on Friday the 28th.  The 3 year rate declined all of one basis point on the 13th then rose 5 on the 14th (0.33 to 0.32 to 0.35) in all of September it moved not at all (0.31 on the first trading day  to 0.31 on the last).

There is no sign at all of a forward guidance effect. I note QE3 included explicit forward guidance about future short term rates.

QE4 (December 12th 2012) was definitely a surprise.  The 3 year rate shows no change on the 12th and up 2 basis points on on the 13th.  From the first to last trading day in December it went up 2 basis points.  The 5 year rate down one basis point on the 12th and up 4 on the 13th.  In December overall it went up from 0.63% to 0.72%.

Again no sign of a forward guidance effect.  The fluctuations are tiny, much to small to be economically significant and even too small to be statistically significant.

QE2 is harder as the announcement was telegraphed.  There was Bernanke’s August 27 2010 Jackson Hole speech, the  and the final announcement November 3 2010 and other announcements in between (and even the FOMC meeting before the speech).  The 5 year rate went up (a bit) on August 27th and was higher the 28th than the 26th.  It dropped 11 basis points from the November 2nd to 4th. This is the best news the forward guidance hypothesis and it is definitely economically insignficant.  Overall from August 26th till the last trading day in November 2010 the 5 year rate went up.

I might be convinced that forward guidance is the strongest channel for QE to work, but only because I might be convinced that QE doesn’t work at all.  In fact, I think that the right kind of QE would work — that so called QE would be buying 100% of new issues of RMBS at a higher than market price.

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