More QE will be on the agenda of the US Federal Reserve

Later today the policymakers of what is effectively the world’s central bank meet up to deliberate before making their policy announcement tomorrow evening UK time. Although there is a catch in my description because the US Federal Reserve goes through sustained periods when it effectively ignores the rest of the world and becomes like the US itself can do, rather isolationist. The Financial Times puts it like this.

US coronavirus surge to dominate Federal Reserve meeting…..Central bank policymakers face delicate decision on best way to deliver more monetary support.

As it happens the coronavirus numbers look a little better today. But there are clearly domestic issues at hand which is a switch on the initial situation where on the middle of March the US Federal Reserve intervened to help the rest of the world with foreign exchange liquidity swaps. We were ahead of that game on March 16th. Anyway, that was then and now we see the US $446 billion that they rose to is now US $118 billion and falling.

The US Dollar

There has been a shift of emphasis with Aloe Blacc mulling a dip in royalties from this.

I need a dollar dollar, a dollar is what I need
Hey hey
Well I need a dollar dollar, a dollar is what I need
Hey hey
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me

This was represented back in the spring not only by a Dollar rally that especially hit the Emerging Market currencies but the Fed response I looked at above. Since then we have gone from slip-sliding away to the Fallin’ of Alicia Keys. Putting that into numbers the peak of 103.6 for September Dollar Index futures on March 19th has been replaced by 93.9 this morning.

If we look at the Euro it fell to 1.06 versus the Dollar and a warning signal flashed as the parity calls began. They had their usual impact as it is now at 1.17. Actually there were some parity calls for the UK Pound $ too so you will not be surprised to see it above US $1.28 as I type this. In terms of economic policy perhaps the most significant is the Japanese Yen at 105.50 because the Bank of Japan has made an enormous effort to weaken it and looks increasingly like King Canute.

There are economic efforts from this as I recall the words of the then Vice-Chair Stanley Fischer from 2015.

Figure 3 uses these results to gauge how a 10 percent dollar appreciation would reduce U.S. gross domestic product (GDP) through the net export channels we have just discussed. The staff’s model indicates that the direct effects on GDP through net exports are large, with GDP falling over 1-1/2 percent below baseline after three years.

We have seen the reverse of that so a rise in GDP of 1.5%. Of course such moves seem smaller right now and they need the move to be sustained but a welcome development none the less.

Whilst the US economy is less affected in terms of inflation than others due to the role of the US Dollar as the reserve currency in which commodities are prices there still is an impact.

This particular model implies that core PCE inflation dips about 0.5 percent in the two quarters following the appreciation before gradually returning to baseline, which is consistent with a four-quarter decline in core PCE inflation of about 0.3 percent in the first year following the shock.

Again this impact is the other way so inflation will rise. For those unaware PCE means Personal Consumption Expenditures and as so familiar for an official choice leads to a lower inflation reading than the more widely known CPI alternative.

Back Home


This is a troubled area for the US Federal Reserve which resembles the shambles of General Custer at Little Big Horn. We we being signposted to a “normalisation” where the new interest-rate would be of the order of 3%+ or what was called r*. I am pleased to report I called it out at the time as the reality was that the underpinnings of this particular Ivory Tower crumbled as the eye of Trump turned on it. The pandemic in this sense provided cover for the US Federal Reserve to cut to around 0.1% ( strictly 0% to 0.25%).

Back on March 16th I noted this and you know my view in official denials.

#BREAKING Fed’s Powell says negative interest rates not likely to be appropriate ( @AFP )

I also not this from Reuters yesterday,

With U.S. central bank officials resisting negative interest rates,

How are they resisting them? They could hardly have cut much quicker! This feels like a PR campaign ahead of applying them at some future date.

Yield Curve Control

This is the new way of explaining that the central bank is funding government policy. Although not on the scale some are claiming.

Foreigners have levelled off buying US Debt. Federal Reserve buying has gone parabolic. This tells us all this additional debt the govt is issuing by running HUGE budget deficits is being purchased by directly the Fed. That is what they do in “banana republics”. #monetizethedebt

That was from Ben Rickert on Twitter and is the number one tweet if you look for the US Federal Reserve. Sadly for someone who calls himself The Mentor actual purchases of US government bonds have declined substantially.

the Desk plans to continue to increase SOMA holdings of Treasury securities at that pace, which is the equivalent of approximately $80 billion per month.  ( New York Fed.)

That is less in a month than it was buying some days as I recall a period when it was US £125 billion a day.

If Ben had not ramped up his rhetoric he would be on the scent because Yield Curve Control is where the central bank implicitly rather than explicitly finances the government. Regular readers will have noted my updates on the Bank of Japan doing this and there have been several variations but the sum is that the benchmark ten-year yield has been kept in a range between -0.1% and 0.1%.

There is an obvious issue with the US ten-year yield being around 0.6% and we may see tomorrow the beginning of the process of getting it lower. On the tenth of this month I pointed out that some US bond yields could go negative and if we are to see a Japanese style YCC then the Fed needs to get on with it for the reasons I will note below.


As the battleground for the US Federal Reserve now seems to be bond yields it has a problem.

INSKEEP: Senator, our time is short. I’ve got a couple of quick questions here. Is there a limit to how much the United States can borrow? Granting the emergency, its another trillion dollars here. ( NPR)

Even in these inflated times that is a lot and the Democrat opposition want treble that. With an election around the corner we are likely to see more grand spending schemes. But returning to the Fed that is a lot to fund and $80 billion a month looks rather thin in response. So somewhere on this yellow brick road I am expecting more QE.

Oh and if you look at Japan if it has done any good it is well hidden. But that seems not to bother policymakers much these days. Also another example of Turning Japanese is provided by giving QE  new name. After all successes do not need one do they?

Still at least the researchers at the Kansas City Fed have kept their sense of humour.

Based on the FOMC’s past use of forward guidance, we argue that date-based forward guidance has the potential to deliver much, though not all, of the accommodation of yield curve control.


11 thoughts on “More QE will be on the agenda of the US Federal Reserve

  1. Interest rates are going nowhere fast in the US nor the UK as I have said time and time again the last few months.

    This is quite an interesting article on Yahoo this morning:

    In the meantime Barclays now pays next to nothing on saving rates, and it may not be long before rates do go negative imo if things don’t turn around soon in the UK.

    For all those who keep giving me the thumbs down when I mention this topic, I do not take a view this is the correct thing to do but warning that this is a real possibility under this new world of economics, the fact is yields on bonds are already in negative territory.

    On another topic is there any good news?

    Rents could fall 5% due to covid-19 but are we now looking at deflation?

    • Hello Peter,

      currently the housing market is in limbo, I see some have dropped but many new comers are asking last year’s prices ……

      I beleive we both think that September will be ” interesting ” .

      you don’t just need a cheap mortgage ( will they pay you to borrow ? frankly thats not off the board in this climate.) you need a job .

      Covid Derangement Syndrom may well become a thing ……

      and if it does, and any small number of cases shuts the economy down, then we will be in uncharted waters .

      Keep Calm and Carry On

      will become

      Keep Scared and Hide *


      * not just frighten the horses but have them so petrified they cannot move or think.

      • Hi forbin

        I noticed you got a lot of thumbs down on a post recently, they need to come out of hiding and dispute things if they don’t like what is being said !

        The worlds in a mess at the moment and we haven’t been here in most of our lifetimes unless anyone can claim to be 300 years old !

        But back to the UK economy it wont be long now before furlough ends and to give a hint what things are looking like 1,000 applicants for a receptionist job in Manchester !

        With millions expected to become unemployed in the it mans millions of Joe Public going to see a whacking reduction in income, and some of these people are well paid at that if you take into account an airline pilot.

        What is an airline pilot going to do pick fruit in the fields for minimum wage?

        In the meantime a second wave of corona-19 is now creeping in many places and even in China where they thought they had got the better of it and that will cause more damage to the world economy.

        The next thing we will see later in the year is crime increases and if the government cannot come up with any new ideas we could well see riots on the streets.

        • Well I have no fear of the down tickers, if they had the effort they’d post their reply as to why they disagree. some do , the idea is to provoke for the greater debate and the sharing of ideas , even if you disagree with them seems to have died and be replaced by popularity contests. left swipe/ right swipe pfft!

          take care


        • I get a load of down-ticks on many posts, but I don’t fret. I will occasionally comment on it, it’s only natural, and I would often like to know what in particular they disagree with & why.
          The facility is there so that people can comment in their own way, & most of us post under pseudonym.
          Tick away.

      • The housing market around here is red hot! Rishi appears to have got his wish. My daughter is interested in a property that went on 3 days ago and has had 4 buyers accept price marketed at but they have been told to email best bid by noontime tomorrow. And this is for an estate house priced at above it’s value only 8 months ago. It’s definitely a sellers market here – Gloucestershire.

  2. Hello Shaun,

    re: “Even in these inflated times that is a lot and the Democrat opposition want treble that. ”

    well it’s only money and MMT supposition tells me it will all go into “savings” , so higher asset prices then . Assets are exempt from inflation measures ao that any ” inflation” will be imaginary ……..

    Well , it’s only money……

    Popcorn and a comfy chair ready.


    • Popcorn and a comfy chair if you are in the UK but a flak jacket and helmet if you’re in the USA. Scary stuff going on over there.

  3. Hello Shaun,

    negative rates and free money

    what’s the economic theory got to say about that ?


    Great if you actually get that money , I didn’t as I was already out of work !

    Job hunting never been so hard but I’ll keep looking and applying

    Hosuing market ? if Pav report pans out across the country do they need to drop rates into negative ?

    who knows ( I sure they don’t , just whistling past the grave yard )


    • Hi Forbin

      You are not alone in getting nothing out of the scheme. One of my neighbours did not and nor did I. Although he is thinking of taking the £50k for 0% for a year in case he finds something to use it on.

      I will cover the housing market tomorrow so l will leave it for tonight. Good luck with the job hunting.

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