I have gone a bit quiet on the QE front. Obviously, this is because I have been surprised and my pet theory has taken a beating. The theory was that QE amounts to basically nothing much. The dramatic effects on asset prices due to Abe/Kuroda announcements in Japan were seriousy damaging. But now not all is quiet on the Western QE front. There were huge asset price responses to loose talk about tapering QE3 (down to just the third most hugely expansionary US monetary effort after QE1 and QE3 so far) and then recently a huge response to the announced decision to not taper. I am puzzled, but I have a story.
The oddest thing is that the beginning of QE3 and the Evans rule announcement (Dec 2012 sometimes called QE infinity) were not associated with jumps in asset prices. The natural explanation is that they weren’t surprises (although the Evans rule announcement clearly was a surprise). But there was also no huge shift roughly around the time of the annoucements.
The second oddest thing is the very large movement of stock prices along with the fairly small movement of federal funds rate futures (the llargest was an increase in the implied rate for January 2015 by around 40 basis points). As far as I can tell, the data don’t at all correspond ot the Woodford/Krugman theory that QE works by affecting expectations of future conventional (federal funds rate) monetary policy. This isn’t really all that odd. Many people argue that even at the ZLB the quantity of high powered money matters. I am thinking of the people who predicted hyperinflation by now. Such people don’t exist in a standard worked out new Keynesian model, because the belief is inconsistent with the rational expectations hypothesis. So ?
I have a story. Obama and many others hurt the feelings of the most active investor/traders http://wapo.st/18SMlRO. So they predicted that the stock market would perform poorly (how can anything go well when people don’t appreciate their genius). Then it performed very well. They could admit that disrespecting them is not proof of total economic policy incompetence. They could even concede that they basically just guess which way the market will go and are right almost exactly half the time. Of course I am joking, they couldn’t possibly do either. So they needed an excuse for their nth utter failure. Their line was “and it would have worked to if it weren’t for that meddling Fed” It was necessary to argue that the Fed could and had pushed up the S&P 500 for both psychological and client keeping reasons. So ex poste and entirely ad hoc (and other lating words) they decided that shifts in QE had a huge effect on the stock market. So it does.
What is needed is an inbred mass of people who talk to each other and herd which is large enough to affect prices but isn’t so huge that investors who are not part of the group can’t move the market in ways which surprise them.