Beckworth interviews Hamilton

David Beckworth recently interviewed Jim Hamilton on a wide variety of topics, including energy and monetary policy.  At one point they discussed Hamilton’s recent research on the impact of QE.  Hamilton discussed the March 18, 2009 QE announcement, which is sometimes cited as evidence that QE was effective.  On the day of the announcement, 10-year bond yields plunged from roughly 3.0% to 2.5%.

Hamilton pointed out that the market response doesn’t necessarily indicate that rates fell due to monetary expansion.  An alternative interpretation is that the announcement led traders to re-evaluate their view of the economy, perceiving the Fed to have relevant non-public information. Hamilton suggested that investors may have thought:

What do they know that I didn’t?  And, maybe the economy is in worse shape than I thought.

If that were the case, then you’d expect other markets to reflect this bearish perception.  In fact, exactly the opposite occurred.  Here is the NYT, from March 18, 2009:

The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities. . . .

Investors responded with surprise and enthusiasm. The Dow Jones industrial average, which had been down about 50 points just before the announcement, jumped immediately and ended the day up almost 91 points at 7,486.58. Yields on long-term Treasury bonds dropped markedly, and analysts predicted that interest rates on fixed-rate mortgages would soon drop below 5 percent.

This suggests that markets treated the QE announcement as an expansionary monetary policy, which sharply lowered long term bond yields and also raised equity prices by roughly 2%.

On the other hand, I do agree with Hamilton’s claim that the big decline in interest rates (throughout the world) during the Great Recession was mostly due to other factors such as slow growth, not QE.

PS.  Let me reiterate that QE is not a policy, it’s a tool.  Thus QE is not the way to prevent demand shortfalls.  To do that you need a sound monetary policy, preferably NGDPLT.  Then QE can be used as a tool to implement that policy, in the unlikely event it is needed.


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19 Responses to “Beckworth interviews Hamilton”

  1. Gravatar of Benjamin Cole Benjamin Cole
    2. May 2018 at 17:23

    Interesting post, and I have to think Hamilton is off-target in this case, for reasons cited by Sumner.

    We can all hope QE is not needed again, but the question remains if QE is rather weak tea.

    The Bank of Japan has been heroic in its application of QE (the BoJ owns 45% of JGBs), and with holding interest rates on 10-year JGBs at zero, and with placing negative interest rates on most bank deposits. Yet, Japan can’t break 1% inflation or real GDP growth ceiling (despite 159 job openings for every job hunter). Europe slogs along with QE.

    Numerous Fed studies, and a recent Booth School study, say QE does little, perhaps 100 basis point on long-term rates.

    The flaccid QE results raise a couple interesting questions:

    1. Can a nation pay down a large chunk of its national debt through QE without consequence? So far, the answer is indisputably “Yes.” The “you will rue the day” crowd is getting rather long in the tooth.

    2. Why tweetybird around with recessions, using QE? Send in the choppers—that is money-financed tax cuts, which Ben Bernanke advised for Japan in 2003. Sumner advised students to study with the future in mind—perhaps money-financed tax cuts are in the monetary policy of the future.

    (BTW, I am old, but even I like to study monetary policy, with the future in mind. I advise greybeards to ponder chopper drops too!)

  2. Gravatar of rtd rtd
    3. May 2018 at 04:19

    I was under the impression that the fact yields didn’t stay depressed after the March 18th drop, as being behind Hamilton’s claims.

  3. Gravatar of ssumner ssumner
    3. May 2018 at 07:00

    rtd, They did not stay depressed, but that might be for a wide variety of reasons, including the success of QE in reviving the economy. Economists uses event studies to determine the specific effect of the policy announcement.

  4. Gravatar of Rtd Rtd
    3. May 2018 at 07:15

    Prof Sumner:
    Agreed, but (based on daily numbers via FRED) they increased back to March 17th levels in a few weeks. Are you asserting that QE had a nearly immediate impact in reviving the economy?

  5. Gravatar of ssumner ssumner
    3. May 2018 at 07:55

    rtd, No, but that’s not relevant when doing an event study. You are interested in the effect of the policy announcement. Remember, the actual level of interest rates has no bearing on the stance of monetary policy. It doesn’t matter if rates rose for other reasons, we are concerned with the specific effect of the monetary shock.

  6. Gravatar of rtd rtd
    3. May 2018 at 10:40

    Agreed that rates have no bearing on the stance of policy but it was you who stated “They did not stay depressed, but that might be for a wide variety of reasons, including the success of QE in reviving the economy”. I’m asking solely based on your reply.

    You state “It doesn’t matter if rates rose for other reasons, we are concerned with the specific effect of the monetary shock.” but we do see rates move after FOMC statements seemingly irrespective of the policy announcement with reversion often happening shortly thereafter. How are such announcements assessed?

    I think the issue with many event studies is confusing correlation and causation. E.g. we see one instance (March 18, 2009) with a high and positive Pearson-R but others with low and negative correlations. Do we know what we think we know?

  7. Gravatar of ssumner ssumner
    3. May 2018 at 15:12

    rtd, The whole point of event studies is to avoid techniques that confuse correlation with causation. Event studies are the single most powerful method of showing causation. What happens to rates in the subsequent weeks is totally irrelevant.

  8. Gravatar of B Cole B Cole
    3. May 2018 at 16:44

    OT: Q1 unit labor costs up 1.1% y/y.

    It is those tight labor markets that require the Fed to suffocate growth.

  9. Gravatar of Benjamin Cole Benjamin Cole
    3. May 2018 at 19:14

    Add on: Q1 unit labor costs up 1.1% YOY.

    https://www.bls.gov/news.release/archives/prod2_05032018.htm

    But also unit labor costs are up less than 1% from Q2…of 2016. In total!

    https://fred.stlouisfed.org/series/ULCNFB

    As it stands now, unit labor costs are a drag on the Fed’s 2% IT.

  10. Gravatar of Benjamin Cole Benjamin Cole
    4. May 2018 at 01:31

    Given Scott’s recent sojourn to Japan, I thought this was interesting.

    “At the end of last year, the median net financial wealth — all financial assets minus liabilities — for households in Japan stood at $96,000. In the United States, the same number was a mere $50,000. In other words, the average Japanese is de facto twice as wealthy as the average American.”

    https://www.japantimes.co.jp/opinion/2018/05/04/commentary/japan-commentary/japan-form-capitalism-works/#.WuwnqyN95jc

    I wonder if this exludes housing….

  11. Gravatar of rayward rayward
    4. May 2018 at 05:38

    That markets spiked in response to QE confirms the intent of the Fed in implementing QE. What was the intent? To inflate asset prices. Indeed, the point of aggressive monetary stimulus in a financial crisis and its lingering after-effects is to, first, stop the collapse of asset prices during the crisis and, second, to restore asset prices to the pre-crisis level. Why economists fail to acknowledge this simple point baffles me. I suppose one answer is that nobody wants to acknowledge that the Fed was helping owners of assets by limiting their losses and restoring the value of their investment in assets. Instead, we babble on about how monetary stimulus increases economic growth. Sure, it eventually increases economic growth but only indirectly as the result of rising asset prices. It seems that most folks have short, or selective, memories, and have forgotten the rage of homeowners for the failure of the Fed and Treasury to rescue home prices as the Fed and government had rescued asset prices (i.e., mainly financial asset prices). Then there were our Austrian friends whose complaint was that the Fed rescued asset prices rather than letting them fall and recover naturally (if at all).

  12. Gravatar of rayward rayward
    4. May 2018 at 06:04

    Sumner’s brainchild (his alternative to inflation targeting) I describe as “pre-emptive QE”. If that doesn’t illuminate the light bulb, I suggest you study Roger Farmer’s brainchild. And if that doesn’t illuminate the light bulb, I suggest you consider changing the bulb.

  13. Gravatar of Cameron Blank Cameron Blank
    4. May 2018 at 11:29

    I found both this podcast and this blog post by Paul Krugman (https://www.nytimes.com/2018/05/04/opinion/is-the-great-recession-still-holding-down-wages-wonkish.html) frustrating. It’s impressive how difficult it is to explain recent history through the mainstream perspectives of interest rates and labor markets compared to explaining them through market monetaristism.

    Long live Market Monetarism!

  14. Gravatar of ssumner ssumner
    5. May 2018 at 09:53

    Rayward, You said:

    “Why economists fail to acknowledge this simple point baffles me.”

    Maybe because it is not true? The goal is to boost AD, not asset prices.

  15. Gravatar of rayward rayward
    5. May 2018 at 12:38

    “Investors responded with surprise and enthusiasm. The Dow Jones industrial average, which had been down about 50 points just before the announcement, jumped immediately and ended the day up almost 91 points at 7,486.58.” Does Sumner not realize his own brainchild inflates asset prices? And has he even read Farmer’s proposal? Yes he has. Chinese and American trade negotiators concluded two days of negotiations on Friday. The American negotiators made several demands, the one that jumped out at me being the demand that America have veto power over China’s fiscal policy. America’s negotiators believe all that government spending is making China too powerful, both economically and militarily, and want China to reduce spending. Let that sink in for a minute. All that government spending is making China too powerful. And I thought . . . . I had two reactions to the demand. One, the arrogance: veto power over China’s fiscal policy, really! The problem with the arrogant is that they are the last to know they are ignorant. My second reaction was that the demand is a classic Kinsley gaffe. How can too much government spending make a country more powerful economically? Ideologues in America have been predicting China’s collapse as a result of too much government spending. I suppose some hold out hope that their predictions will come true. America’s trade negotiators believe the opposite. Who do you believe? America has chosen its fiscal path, a path very different from China’s. AD, sure.

  16. Gravatar of ssumner ssumner
    6. May 2018 at 10:23

    Rayward, You said:

    “Does Sumner not realize his own brainchild inflates asset prices?”

    Now you are struggling with basic logic. There is no connection between thinking higher asset prices are a goal of policy, and thinking that policy affects asset prices.

  17. Gravatar of rayward rayward
    6. May 2018 at 12:53

    What? You propose the government buy assets (bonds) if growth falls below the level targeted, and now you state that doesn’t affect asset prices? Farmer goes one step further and proposes that the government buy equities (stock) in such cases. What you and Farmer are proposing is preemptive intervention in markets. Don’t run away from the substance of what you are proposing just because I’m more clearly defining it. I’m not being critical of your proposal or Farmer’s proposal, I’m just seeing it for what it is. My view, as expressed in earlier comments, is that rising asset prices is not the path to prosperity. Not unless prosperity is defined as a ride on a roller coaster.

  18. Gravatar of Rajat Rajat
    6. May 2018 at 17:47

    Scott, you may want to comment on this – Stephen Williamson raising the victory flag: http://newmonetarism.blogspot.com.au/2018/05/neo-fisherism-look-it-works.html

  19. Gravatar of Jim Bowerman Jim Bowerman
    10. May 2018 at 12:45

    In a sense, the lack of QE (or really a lack of NGDP target) has INCREASED asset prices (or at least stock multiples). A NGDP target would’ve increased growth rates and increased interest rates which should keep a lid on P/E multiples. P/E ratios are going to go much higher in a world with 2% interest rates vs 5% interest rates (though of course, earnings growth will likely be higher in the 5% world)

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