People who pay attention to monetary policy know that easy money often raises long term interest rates. We have lots of high frequency data showing this (expansionary monetary surprises often raise long term bond yields) and low frequency data (long periods of accelerating M2 growth usually result in higher inflation and higher bond yields.)
But most people don’t understand this, probably because they equate the terms ‘easy money’ and ‘low interest rates.’ So the claim that easy money raises rates leads to one of the “that does not compute” moments of puzzlement.
Commenter Brendan recently directed me to a blog post that had some fun with some predictions by a Wall Street commentator named John Hussman. Here’s Brendan commenting on a quotation from a Hussman post:
It’s June 28th, 2010. The S&P 500 has declined from a high of 1220 in April to 1,011 in late June, a plunge of 18% in just two months. The economic expansion and bull market is barely more than a year old and people are skittish. Here is what John Hussman had to say at the time (emphasis mine):
“Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.”
Then Brendan goes on to report some follow-up information:
Since monetary policy works primarily through shaping expectations, it makes sense to consider the QE2 hints at Jackson Hole as the functional start date for QE2. . . .
The S&P, which was at 1100 when QE2 was hinted at, rose to 1330 in the next six months, a gain of 21%. And over that same time frame 10-year inflation expectations rose from an anemic 1.7% to a healthier 2.6%.
By late 2010 or early 2011, economic data was firming and statistical recession forecasting models were no longer predicting recession. Human nature being what it is, bears who had been predicting recession and predicting the futility of QE2 refused to admit that the policy may have successfully averted recession.
Here’s Hussman in late December 2010:
“As for the notion that the Fed’s targeted Treasury purchases have directly aided the economy, the argument requires bizarre logical gymnastics. It demands one to believe that although the purchases were intended to stimulate the economy by lowering rates, they have been successful without lowering them, and in fact by raising them, because the expectation of lower rates was so stimulative that it caused rates to rise, so that the higher rates can be taken as evidence that lowering rates without lowering them was a success. Oh, brother.”
Yes, the Fed says it’s trying to lower bond yields. Don’t believe them. They are trying to raise the yields; they just don’t know it.
PS. I added the Hussman links to the Brendan quotes, to make it easier for readers to follow the threads.