Maybe QE Was Helping A Little More than You Thought

April 24th, 2014 at 1:02 pm

It’s hard to find anyone outside the Fed to say something positive about the impact of their quantitative easing, or “large-scale asset purchase” program.  And while there’s certainly some concrete evidence that it had its intended direct impact of lowering longer-term interest rates, there’s less evidence that it hit its broader, indirect target of investment, growth, and jobs.

Still, one cannot help but notice the recent slowdown in the housing recovery and one further cannot help but wonder about the extent to which Fed actions to pull back on their LSAPs are implicated in said slowdown, though there are of course other moving parts here.

First, there’s no doubt that the housing recovery has significantly slowed.  According to a Credit Suisse index, homebuyer traffic is down more than a third from last year, and yesterday’s new home sales were off big-time, with sales down 13% from a year ago, the first yr/yr decline since 2011q2.  Pending home sales have also been negative in recently months and recently hit their lowest level since late 2011.

Before turning to QE, however, note the lousy winter weather is implicated, as are still tight credit standards for mortgage lending.  And while Case-Shilller home prices have decelerated, they’re still posting double-digit gains, yr/yr.  Plus, some of the slowdown was warranted—housing bubble watcher Dean Baker tagged the pace of growth in some markets as “clearly unsustainable.”

But re QE, note these facts:

–When former Fed chair Bernanke set off the “taper tantrum” in a press conference in June of last year by pointing out that at some point, the Fed would start scaling back the LSAP, bond and mortgage rates spiked (see first chart here re the 10-yr yield).

–The 30-yr fixed rate mortgage went up about a point around then from the mid-3’s to the mid-4’s and has stayed there.

–As the Fed has tapered its asset buys, which include agency (GSE) mortgage-backed-securities, from $85 billion/month to its current level of $55 billion, the yield curve for bonds has steepened.  As market analyst Chris Rupkey recently noted: “The 2-yr to 10-yr yield spread was 232 bps still in March 2014, near the widest levels reached in this post-recession period.”

Sure, there are some signs of a strengthening macro economy which would steepen the yield curve, but they’re still pretty ambiguous.  I don’t think anyone should be seeing strong green shoots, as they say, and it won’t help if housing weakens further.

All’s I’m saying is that sometimes it’s hard to see the impact of something until you start doing less of it, and I suspect more careful, ceteris paribus, research would find a link between tapering the LSAP, higher mortgage rates, and the slowing housing market.

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17 comments in reply to "Maybe QE Was Helping A Little More than You Thought"

  1. Peter K. says:

    Excellent point and I agree very much. I hope Yellen will delay hikes if the data leads her to that conclusion.

    On the positive side: state and local government budgets have recovered so there’s less of a drag there. The sequester is over so there should be less of a drag from the Federal government. Also the Republicans in Congress have seemed to stop threatening to blow up the economy for the moment. And with Obamacare, people should feel more financially secure and it should help with their debt levels and finances, etc. It’s a complex issue. It’s almost as if the “demand managers” are balancing the lessening of governments’ fiscal drags with an increasing of monetary drag. So that we get supbar inflation and a very slow healing of the labor markets.

    I don’t know what’s happening with trade (and other nations’ economies) and the value of the dollar.

    • MBAissuesdotcom says:

      Peter- I agreed with you all the way until “Obamacare” fka the ACA. The ACA has created too much short term uncertainty in the labor market. President Obama would have been much better off not delaying the employer mandates so the labor market could get its shock and awe over with, accept it as a new business expense and move on rather than keeping this looming over its head with still a possibility (perception only) of a Republican repeal of the mandate.

      We do know that we need healthcare in this country and it is long past due. However, we need to remove the cost burden from being tied to human capital (in addition to all the other dis-incentives of taxes on human work) and reverse this funding with a form of VAT or a progressive geared consumption tax that would remove the incentive (tax shields and write-offs for) equipment to automate. Companies only automate when their is a bottom line savings to be had. Maybe single payer catastrophic/ chronic illness at the states level?

  2. rjs says:

    i always figured the MBS buying and the attendant lower mortgage rates was the impetus for this second real estate bubble, but it’s still as unsustainable as the first, unless we continue to attract a lot of Chinese, European, and Emirates cash buyers…the median disposable personal income just doesnt support a 30 year mortgage on the median priced homes at these or higher interest rates…

    • Peter K. says:

      It’s sustainable as long as the Fed keeps it up. It can keep it up until the labor market is healed and the slack is gone.

      It’s a conservative trope to deny the Fed this power and argue that we depend on the largesse of the Chinese and rich foreigners. That’s nonsense.

      • Robert buttons says:

        Of course the fed can sustain a phony housing economy. The question is: are the side effects (it’s liberal trope to deny the existence of side effects) worth it?

        • Peter K. says:

          Why is the housing economy phony? Why do you consider the Fed’s actions phony?

          If the side effects are financial instability, there are others ways to combat instability other than subpar inflation, slow growth and slack labor markets. One of the reasons the financial system is so fragile is years of conservative deregulation.

  3. Larry Signor says:

    QE may be responsible for the steepening of the bond curve, but it may be something much more fundamental, such as an incomplete recovery from the recession. The Fed has curtailed bond purchases by $60 billion, in a $40 trillion dollar market, that is %.0015. Even isolating the housing bond market and assuming all LSAP were directed toward that $8 trillion dollar market, this is only %.0075 of the market total. These numbers seem very modest to be as impact-ful as is attributed to QE.(These bond market numbers are proximate, from 2012: Expectations seem to be a likely culprit for the steepening of the curve. The Fed will eventually raise rates and Ms. Yellen seems to favor at least a modest increase in inflation. The real problem, as Jared points out, is we don’t know exactly what QE did do.

    • Robert Buttons says:

      Your 0.0015% claim is utterly misleading. I can only assume it is based on market VOLUME. As of 2012Q3 the fed owned 14.6% of all outstanding treasury securities.

      • Larry Signor says:

        It is not what the government, in the form of the Fed, owns. It is about the impact or non-impact of winding down LSAP. The impact of reducing demand by $60 billion in an 8 or 40 trillion dollar market seems irrelevant. This may change as the LSAP initiative winds down completely, but the Fed will most likely be the buyer of last resort for Treasuries. This is a powerful tool.

        • Robert Buttons says:

          Goods (including treasuries) are priced on SUPPLY and DEMAND, not trading volume. The fed is holding ~15% of the supply off the market whilst bond traders move the other 85% (in reality it is much less) back and forth between themselves. The fed holdings ARE a big deal.

          • Tom McManus says:

            Mr Buttons I would agree with your approach to looking at Fed’s holdings of Tsy securities as a % of total, but would use debt held by the public as the denominator (thus raising the proportion to ~20% recently I think) but also keep in mind that their ownership of longer-term bonds is much higher as a % of what is outstanding there. (Most people do not realize that ~90% of Treasury debt is due to mature in less than 10 years).

            That said, I think the impact of QE on the economy has more to do with the rate of Fed purchases — and what the Fed’s counter parties (ie those who sell securities to the Fed) purchase with the proceeds of their sales, and how those funds flow through the capital markets and eventually into the economy in places that are impossible to pinpoint (because money is fungible).

            Eventually, the dollars spent by the Fed wind up deposited at the Fed as reserves, but it is impossible AFIAK to determine the exact path they took to get there. If they take a short path, then QE may be less effective than I believe, but then one must question whether QE helped cushion the negative impact of the “other side” of the Fed’s transaction.

            What do I mean by a short path? Let’s say you are a real estate developer with plans to build a hotel, shopping mall etc and create thousands of jobs. You go to a bank to borrow money and spend it over time on construction costs etc and set up a leasing office etc. Eventually those dollars you spent wind up in others accounts that they now may spend however they wish etc etc
            Now contrast that with the (hypothetical) case wher the loan is made and the developer deposits the funds in his account at the bank while waiting for approval of the project. Nothing gets done until the project starts. The bank has made a loan, but there is a short path back to a deposit at the bank.

            If those selling Treasury securities to the Fed simply deposit the proceeds of those sales in very short term securities, then QE is ineffective. But anyone who understands how capital markets work and why those players purchased Treasury securities to begin with should see why they have been replacing them with other securities of similar duration and (by definition) higher risk.

            This is called the portfolio rebalance channel and the flow of funds through this channel is likely more important than the change in the price/interest rates of the securities themselves.

  4. Robert Buttons says:

    The government, in its quixotic attempt to help home ownership has:
    1. Price fixed interest rates below market
    2. Given tax breaks on mortgage interest.
    3. Provided all sorts and manner of help and incentives through FHA and GSEs

    The end result is that home prices have risen to a level that makes home ownership much more difficult.

    But here comes QE, which:
    4. Further suppresses interest rates
    5. Provides the capital for speculators to rule the market.

    With the result of FURTHER inflating home prices.

    You can only have infinitely expanding prices in an infinitely expanding economy. The economic downturn continues to expose the rot that was underlying the pretty facade of US housing. We need to remove the market manipulating subsidies and let home prices fall to a reasonable level.

  5. Perplexed says:

    -“…and I suspect more careful, ceteris paribus, research…”

    Hopefully some of that research will be directed at telling us other “benefits” as well, like giving banks a place to sell risky assets and get them off their balance sheets at much improved “market” prices. After all, isn’t keeping banker’s bonuses high and TBTF’s from failing the 1st Fed mandate post crash?

  6. Tom in MN says:

    It’s odd to think 4.5% interest rates slow home buying. When we bought our house we were very happy with 7% as anything below 10% back in the 80-90’s seemed good.

    Of course the fact that real wages have not increased since then can’t help.

    How did you manage to write this post without using “counter factual” ?

  7. Millwright101 says:

    I’m no economist, but all this complaining about QE, is completely off the rails. The FED was only using QE to keep the economy from going into full Depression, and it has accomplished that! It is the job of the US congress to get the economy going again, but they refuse to allow any more stimulus such as infrastructure or education or anything to put people back to work. As some one on another blog said, ‘F*** the debit, we got no jobs, we got no money … ‘!

    • Robert Buttons says:

      1. prove the economy would have gone off the rails
      2. Prove QE won’t keep us “off the rails” in the near future.
      3. Prove stimulus is efficacious.
      4. Is “back to work” the monomaniacal goal? Shall we pay people to prepare for alien invasions or to dig holes and fill them up?