mercredi 29 octobre 2014

Fed - the exit... of what ?

Repeatedly since the begin of the first Quantitative Easing program (QE) there was a narrative that the Federal Reserve would have an "exit strategy" at an appropriate point of time. The story (either originated by a Fed official or by some collective media wishful thinking) was that all those bonds bought with money created out of nothing could be sold easily and without nasty effect. Consequence of that, QE was not debt monetization since it was presented as temporary.
Already from the beginning, the story sounded strange: if the bond buying is effective at lowering interest rates and facilitate lending, how can the resell of those bonds have no reverse effect in terms of increasing interest rates and making lending more difficult (something that the Fed doesn't want at any price) ? Anyway, the story of the "exit strategy" proved to be, as expected by us, no more than a fairy tale.

The QE programs and their expected lack of exits. Chart courtesy of Incrementum AG. Click chart to enlarge.
But probably someone at the Fed began to be worried about credibility. What ? Again a QE instead of an exit ? So for the third round, some "spin doctor" had a very bright idea: instead of stopping abruptly the bond buying, they decided to reduce it very progressively and made lots of noise about it (the famous "tapering"). It was presented as the exit. It worked. Everybody in the media and in their audience is focusing on the reduction, its beginning, its end, its timeline and so on, forgetting that it is only a reduction of the increase rate of the balance sheet, not a reduction of the balance sheet itself. It is fascinating how easily people can be manipulated: for economics questions, they just cannot distinguish distance from speed from acceleration. A typical example is from this CNN Money article "Fed set to finally get out of the market" with a nice drawing of Ms Yellen, the Fed Chairwoman in a car passing near a big "Market Exit" sign. Another misconception in this article (and others) is the idea that there has been only one QE program since 2008, ending now. This inaccuracy helps giving the impression of a big, resolute exit.

Looking forward for the next QE...

See also this previous article (in French): La magie de la communication de la Fed.

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