Markets react strongly to another “meaningless” hint from the ECB

The view that QE is ineffective is pretty widely held—except in the asset markets. Earlier today, Mario Draghi hinted than another round of QE might be coming later in the year, if the global economy continues to be weak.  The euro fell 2% against the dollar, and European stock indices rose sharply.  Even Wall Street rallied on the news (so much for “beggar-thy-neighbor” theories.)  For an ineffective policy QE sure has a big effect on asset prices.  (And note that the big move down in the euro means that imported oil, and other commodities, are immediately more expensive, and hence the eurozone cost of living rose a few basis points today.)

At the same time these steps are much too weak to solve “the problem”, they merely make the eurozone economy a bit less weak.  The ECB should do much more.  One possible step is a further cut in interest rates:

“The ECB will almost certainly be delivering an early Christmas present this year,” said Nick Kounis, head of macro and financial markets research at ABN Amro.

“This could include an adjustment of the QE programme but also further policy rate cuts, something which had been ruled out before.”

Analysts at Barclays said: “We do not rule out the possibility of a deposit rate cut in December, although this is not our baseline. The likely trigger for a deposit rate cut, in our view, would be a further material appreciation of the euro, possibly in a scenario where the Fed remains on hold for longer.”

Wait, I thought the zero bound was the lowest that rates can fall.  I guess not. Lower interest rates will help, but what they really need is a better policy target, as explained by James Alexander:

Nominal GDP growth and thus Real GDP growth cannot get that much better in the Eurozone as a whole while the overarching target remains the self-defeating one of the <2% inflation ceiling. Draghi can prevent tail risks with the QE programme, lower rates for longer and even more negative rates. But it will never be enough to see healthy growth. The inflation ceiling offsets almost of the good work from the other policies.

Overall, monetary policy is just not that accommodative. Draghi says he and his fellow governors and their staff are working hard:

“the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis.”

Please, Mr Draghi, it is the mandate itself that is the obstacle. In the UK we may be looking soon at the mandate  and there were hints that the European Parliament is also looking into the mandate. At least talk about NGDP Targeting and you can then “Feel The Power” in time for the pre-Christmas release of Star Wars 7.




28 Responses to “Markets react strongly to another “meaningless” hint from the ECB”

  1. Gravatar of E. Harding E. Harding
    22. October 2015 at 17:09

    But why did stocks fall back when China devalued?

  2. Gravatar of Jason Smith Jason Smith
    22. October 2015 at 17:46

    I still don’t think a 2% change is very significant given the size of fluctuations in exchange rates:

    The stock market moves are swamped by the day-to-day variance as well.

  3. Gravatar of JP Koning JP Koning
    22. October 2015 at 18:36

    “Earlier today, Mario Draghi hinted than another round of QE might be coming later in the year, if the global economy continues to be weak. The euro fell 2% against the dollar, and European stock indices rose sharply.”

    How do you know that stocks reacted to the potential for more QE and not the hint of future rate cuts?

  4. Gravatar of Ray Lopez Ray Lopez
    22. October 2015 at 18:50

    Amen says Sumner. Seems he’s wishing Santa will grant him more than just 15 minutes of fame for pushing the bogus NGDPLT monetary framework. Sumner has never explained why he feels that an economy responds strongly, in a non-continuous, “jump” fashion, to a slight increase in the money supply, except to invoke the ‘expectations fairy’. In other words, Sumner feels the present expansion of the money supply is sub-optimal, and increasing it to his preferred target will radically “jump start” the economy. This is his ‘prior’, there’s no evidence to support this metaphysical assumption. It’s like the Communists saying that once communism is adopted, magically everybody will be free of want and in heaven. A dangerous prior, especially when you assert your ideology is scientific, as the Marxists (and Sumner) do.

  5. Gravatar of TallDave TallDave
    22. October 2015 at 19:03

    In more cynical moments one suspects CBs of maximizing their influence by exacerbating conditions where a little signaling has huge effects on markets.

  6. Gravatar of TravisV TravisV
    22. October 2015 at 19:54

    Dear commenters,

    How can I access the Eurozone equivalent of inflation breakevens to estimate the impact of this news on Eurozone aggregate demand?

  7. Gravatar of Dan W. Dan W.
    23. October 2015 at 04:29

    “monetary policy is just not that accommodative”

    Pray tell, who in the global economy is facing a difficult time accessing money? The only way I could see monetary policy being more accommodative than what it is now is if there were an explicit statement that debt would never need be paid back, in contrast to the implicit agreement that exists now which is that debt can always be rolled over at lower rates.

    Who knew tight money was coincident with record tax revenues, record government spending and stock markets within percentage points of their all-time highs? Oh, that’s right, money is tight because the central banks are failing to produce inflation. But such a conclusion presumes the quantity theory of money is relevant to real economic activity. And if it is not?

    Oh well, perhaps some day string pushing will be an Olympic competition. In the meantime, buy financial assets and enjoy the show.

  8. Gravatar of benjamin cole benjamin cole
    23. October 2015 at 04:57

    Print more money. The PBoC, BoJ, Fed, ECB should go heavy into QE and target robust NGDPLT.

    When it is Full Tilt Boogie Boom Times in Fat City then maybe after a couple years, possibly then could be, they might want to reduce QE.

    But maybe not. Let the good times roll. After all, there are worse things than inflation in the 3% to 4% range.

  9. Gravatar of Dan W. Dan W.
    23. October 2015 at 05:24

    Stockman lays the wood down on the religion of 2% inflation (very entertaining, as will surely be the denouncements of him and his words):

    “In fact, 2% inflation is a purely religious proposition that is unrelated to the prosperity of main street; it is no more relevant to gains in real wealth than the rite of full immersion baptism.

    Indeed, the 2% inflation meme is so threadbare that it needs to be called out for what it is. It’s a convenient cover for the radical usurpation of power undertaken by the worlds central bankers during the last two decades. And it survives only because it serves the interest of Wall Street gamblers and the world fiscal authorities alike.”

  10. Gravatar of ssumner ssumner
    23. October 2015 at 05:34

    E. Harding, I don’t know.

    Jason. You’d expect small market reactions to small shocks, wouldn’t you? This shock only slightly increased the odds of QE.

    JP, I have two responses:

    1. There are other examples of QE rumors boosting stocks–surely they aren’t all accompanied by rumors of lower rates.

    2. Even if it were due to some other factors, such as lower expectations for IOR, that would also violate the claim (made again a few days ago by Krugman) that central banks are out of ammo when rates fall to zero. So either way the Keynesian model is wrong.

    Ray, You said:

    “Sumner has never explained why he feels that an economy responds strongly, in a non-continuous, “jump” fashion, to a slight increase in the money supply”

    Maybe because I don’t believe that?

    Dan, You said:

    “Pray tell, who in the global economy is facing a difficult time accessing money?”

    And for the 147th time Dan shows he doesn’t know the difference between money and credit. If you had any idea how silly your comments look to the rest of us.

  11. Gravatar of James Alexander James Alexander
    23. October 2015 at 05:47

    The interesting thing about the market moves in Europe yesterday was that bond prices roses across the curve tank yields.
    [great intra-day chart here]

    If Draghi was really serious about easing the market would respond by selling bonds, not buying them.

    TravisV … historic EZ inflation expectations are in Chart 22 here:

  12. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. October 2015 at 06:05

    China’s central bank late Friday cut both interest rates and the reserve-requirement ratio for banks, in a bid to revive slowing economic growth.

    The central bank also scrapped its cap on deposit rates for China’s commercial lenders and rural cooperatives, a key move toward the government’s long-promised interest-rate liberalization.

    The People’s Bank of China said in a statement that it will cut its benchmark lending and deposit rate by 0.25 percentage point. After the cuts, China’s benchmark one-year lending rate will be 4.35%, down from 4.6%, and the one-year deposit rate will be 1.5%, lowered from 1.75%, effective Saturday.

    This is the sixth cut in benchmark interest rates since November last year.

    Meanwhile, the PBOC said it would also lower its reserve-requirement ratio for banks by 0.5 percentage point, also effective Saturday, in a bid to boost liquidity and maintain stable credit growth. The official reserve-requirement ratio for most large banks will fall to 17.5% after the cut takes effect.

    The central bank said there would be an extra 0.5 percentage point cut in certain banks’ reserve-requirement ratio, in a bid to support the country’s small businesses and agricultural sector.

  13. Gravatar of TravisV TravisV
    23. October 2015 at 06:20

    Martin Wolf: Lunch with the FT: Ben Bernanke

  14. Gravatar of Dan W. Dan W.
    23. October 2015 at 06:26


    How does this accommodative money get to people, if not via credit? You are making me think Ray is correct that you do believe in Santa Claus.

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. October 2015 at 06:27

    Because the overall global savings/investment rate has been relatively stable, it is not so easy to disentangle the relative importance of a rise in the propensity to save and a fall in the propensity to invest (the global savings/investment rate might be expected to rise if it is the former and fall if it is the latter). This relative stability of the global savings/investment rate probably reflects the low elasticity – at a global level – of savings and/or investment to changes in the real rate of interest.

    Our discussion of the evidence therefore relies more on whether the timing of movements in the underlying drivers fits with the decline in rates. This leads us to conclude that demographic developments are likely to have been an important factor increasing the propensity to save, not just in China but more generally. In particular, aggregate saving should reflect the relative sizes of the population shares of the middle-aged, who are in their peak earnings years and so saving for their retirement, and those who are retired, who will instead be running down their savings. We note that the period of falling interest rates has coincided with a period when the population share of the high-saving middle-aged (40-65 years) has been rising relative to that of the population aged over 65 (and especially so in China)….

  16. Gravatar of TravisV TravisV
    23. October 2015 at 06:27

    James Alexander, also notice that the U.S. 10-year and 30-year treasury yields are significantly higher today.

    It’s almost as if interest rates are not a reliable indicator of monetary easing or tightening…..

  17. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. October 2015 at 06:53

    Breaking bread with Ben;

    ‘The waitress takes our orders. I choose pan-seared swordfish with fingerling potatoes, onions and Brussels sprouts. He selects grilled halibut with green beans, blue cheese and mashed potatoes.

    ‘….At this stage, we are eating. My swordfish is firm and juicy.

    ‘….The waitress asks us if we would like anything more. I order a double espresso. Bernanke asks for tea.’

    Which might explain why Martin Wolf let Ben get away with saying;

    ‘”There’s two ways to get rid of ‘too-big-to-fail’. One is by having a lot of capital. And the other approach is via the liquidation authority in the Dodd-Frank law [whereby the finances of failing banks can be reorganised, without a bailout].” But, he adds, “if you break the firms down to the size of community banks, you lose a lot of functionality. At the same time, you don’t necessarily stop financial panics, because we had financial panics in the 1930s.”’

    There’s another way. And it was authorized in 1999 by Gramm, Leach, Bliley; Use CoCos to provide an automatic re-capitalization of troubled banks by converting subordinated debentures into equity when the share price of the bank drops below a trigger point.

    It’s also authorized in Dodd-Frank.

  18. Gravatar of James Alexander James Alexander
    23. October 2015 at 06:57

    Interest rates are not a reliable, or at least easy to interpret, indicator of monetary easing or tightening. We’ve known that for a while 🙂

    These higher US yields today are a good thing. The Chinese easing is obviously having a good and, as usual, immediate impact.

  19. Gravatar of Ray Lopez Ray Lopez
    23. October 2015 at 07:26

    @Sumner – you are a liar. You say:

    Ray, You said:

    “Sumner has never explained why he feels that an economy responds strongly, in a non-continuous, “jump” fashion, to a slight increase in the money supply”

    Maybe because I don’t believe that?

    You have clearly stated several times that the slightest change in central bank pronouncements in various targets, and actions concomitant with such pronouncements, have huge effects on the market. Long-time readers will attest to this. I believe the mechanism for this is the ‘expectations fairy’ via Ratex, but it’s not important what the mechanism is, but only that you believe in it. Now you claim the opposite.

    Weasel words coming from both sides of your Janus-head, Mr. Two-Face.

  20. Gravatar of TravisV TravisV
    23. October 2015 at 07:27

    Patrick R. Sullivan,

    As a smart right-winger, I’m curious whether you generally agree with:



  21. Gravatar of ssumner ssumner
    23. October 2015 at 08:08

    Dan, You’ve been reading this blog for years, and you still don’t know how money gets to the “people”? Seriously?

    You’ve never heard of OMOs? You’ve never seen an ATM? You and Ray do make a nice team.

    Ray, Now that funny!! Claim I made a ridiculous claim about the “money supply” and the “economy,” and then when I call your bluff come back with a completely different claim about Fed statements regarding “various targets” and “markets.” Classic Ray. You and Dan make quite a pair.

  22. Gravatar of Dan W. Dan W.
    23. October 2015 at 13:56


    An independent source explains that monetary actions, such as OMO, influence the economy by changing the amount of money banks can lend. To lend is to extend credit. Without the expansion of credit any attempt to influence real economic growth through monetary action will be futile. And I don’t know about your ATM but the balance of what I can withdraw does not change one iota as a consequence of monetary policy. I wish it did but the balance is only what I make it, not what the central bank or monetary theorists says it should be.

    “When the Federal Reserve purchases government securities on the open market, it increases the reserves of commercial banks and allows them to increase their loans…”

  23. Gravatar of Ray Lopez Ray Lopez
    23. October 2015 at 18:26

    @Sumner – I see where you’re going, you’re parsing my words in an obscure manner known only in your mind, to win the argument. So you believe that when the Fed makes pronouncements, the economy does respond, but you apparently don’t think changes in the money supply (whether Fed induced or otherwise) have such an effect (essentially you are arguing money is neutral then). Bizarre, but I do see the distinction you’re making, even though it’s illogical by your own rules. Changes in the money supply may be induced by the Fed (according to you I believe–I certainly don’t believe this), or by the market. So it should not matter which of the two is making the changes, whether endogenously (market driven internals) or exogenous (by the Fed, deus ex machina style). Put another way, if the economy does respond to a change in the money supply induced endogenously, why should that invalidate your world view? Anyway, as one can see, this conversation is like arguing over how many angels fit on a nail head, which is to say, it’s metaphysics, which is right up your alley.

  24. Gravatar of marcusbalbus marcusbalbus
    23. October 2015 at 18:40

    Is “Ray” the Mr Hyde of Sumner as Dr Jekyll?

  25. Gravatar of ssumner ssumner
    23. October 2015 at 19:02

    Dan, Meet Ray.

  26. Gravatar of Postkey Postkey
    24. October 2015 at 00:49

    Dan W.

    This is what the ‘Friedmanite’ Monetarist has to say re QE and he thinks he ‘knows’ that it will ‘work’?
    “Strange though it may sound, monetary expansion could occur even if bank lending to the private sector were contracting.”
    “In short, although the cash injected into the economy by the Bank of England’s quantitative easing may in the first instance be held by pension funds, insurance companies and other financial institutions, it soon passes to profitable companies with strong balance sheets and then to marginal businesses with weak balance sheets, and so on. The cash strains throughout the economy are eliminated, asset prices recover, and demand, output and employment all revive.”

  27. Gravatar of septizoniombalbus septizoniombalbus
    24. October 2015 at 15:25

    Why do you think “asset prices” being moved higher by monetary policy is a good thing in isolation? Shouldn’t asset prices move higher only as productivity thereof moves higher to be sustainable?

  28. Gravatar of ssumner ssumner
    25. October 2015 at 18:47


    I don’t think it’s good in isolation. Monetary policy should target NGDP, not asset prices. Asset prices would move higher due to either productivity growth, or less destructive monetary policy.

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