Through the lens of someone looking at economies with rapidly ageing populations we can simply say that this problem arises because there isn’t any consumption to pull forward! Fisher’s interest theory was always valid, it is merely that in the context of a rapidly ageing population the consumption smoothing mechanism breaks for obvious and quite logical reasons. Quite simply, even in ZIRP you are not stealing a sufficient amount of “future” growth to kick-start the recovery because such future growth is not there.
Tag: permanent zero
In the aftermath of the financial crisis, policy makers’ aversion to fiscal policy is still large. So monetary policy rules the roost. With developed economies burdened by low growth, unemployment, and high levels of debt, monetary agents have become aggressive in policy responses. This will lead to unintended consequences. Below are my thoughts.
Recently, I wrote a series of posts predicting that the Fed would give up on QE and move toward forward guidance in order to be able to normalize policy. Nevertheless, I have also been saying for quite some time I believe the US zero rate policy is ‘permanent’. There are big implications from this for markets. Yesterday, we finally got an extraordinary confirmation from two Fed papers that the Fed is indeed going for forward guidance. But the papers also indicated the Fed has moved toward a near-permanent zero rate policy due to the economic situation in the United States.
Long-term interest rates are largely a reflection of expected future short-term future interest rates plus a term premium. So when you see yields move up, it reflects either an increase in term premiums from uncertainty or a change in the consensus view of the expected future path of policy rates. This means that rates are anchored by present rates, inflation expectations and the Fed’s reaction function. The Fed’s reaction function is the key variable here as the other two aspects are known quantities.
The Fed will be stuck at zero for a very long time, perhaps forever. Investors who are anticipating the Fed’s tightening are premature in their assessment of when rate hikes can reasonably occur. Ben Bernanke and other Fed members have made this clear. Below I set out in long form, why this is so.
The following are today’s prepared remarks of the Semiannual Monetary Policy Report to the US Congress by US Federal Reserve Chairman Ben S. Bernanke. While the totality of Chairman Bernanke’s remarks are not new, we have underlined and bolded the parts we think bear noting.
Retail savers in the US are abandoning certificates of deposits (CDs). The amount of CDs outstanding that are $100K or smaller has been on a sharp decline since the recession and is now at the lowest level since the Fed began keeping track of these balances.
Quick note here on the US and the UK to change things up a bit from the Cyprus obsession.
Greetings to you all on Christmas Eve. I think the big deal today is not America or Europe, but Japan. The incoming Japanese Prime Minister is threatening to strip the Bank of Japan, the central bank, of its independence. What Mr. Abe said is that the Bank of Japan needs to set at least a 2% inflation target. And he went […]
Quick post here to continue the theme of Christine Lagarde doing a complete makeover of the IMF. Yesterday, the Financial Times reported on an IMF staff paper that accepted capital controls as a necessary evil in specific cases, a sharp contrast to the liberalisation dogmatism that characterised IMF policy views during the 1990s. The paper does speak to the need […]
Currency war: Free capital flows increasingly at risk as Fed policy forces Brazil into a “dirty float”
After embarking on a third round of easing last year that only involved extending the length of its zero rate policy and changing the Fed’s Treasury portfolio duration mix, the Fed has recently started QE3 with an even more aggressive tone. It is now targeting the unemployment rate, communicating its commitment to accommodation even after the US economy has picked […]
Two years ago, I noted that the steep yield curve produced by the Fed’s policy accommodation would give way to a flatter and more treacherous yield curve environment as a weak recovery continued. The Fed would see the weak recovery as a reason to keep rates at zero percent and, thus, cause interest rate expectations to decline. With rates stuck […]