Readers of TheMoneyIllusion are not confused

Headline from Yahoo:

Yields Rally as FOMC Signals QE Likely to End in October

Is that the real reason yields rallied?  Stocks also rallied, and the media reported the statement was slightly more expansionary than expected, due to the “considerable period” language.



29 Responses to “Readers of TheMoneyIllusion are not confused”

  1. Gravatar of TravisV TravisV
    17. September 2014 at 13:21

    Jan Hatzius on Yellen’s press conference: “Few surprises”

  2. Gravatar of John Hall John Hall
    17. September 2014 at 13:26

    The links a little messed up.

    Also, it’s weird when people say yields rally. Rally typically means something good happened, when in fact bond holders lost money.

  3. Gravatar of benjamin cole benjamin cole
    17. September 2014 at 15:55

    Sad. Yellen somewhat trapped into ending QE. The risk may be in ending, not extending QE. Martin Wolf suggests long-term QE. He may be right. The Japan case suggests they should have stayed with QE in 2006, when they stopped.
    Maybe decades of QE are in order.

  4. Gravatar of Michael Byrnes Michael Byrnes
    17. September 2014 at 17:14

    I don’t think ending QE now makes any difference – since that is exactly what everyone expects to happen (and has expected to happen for months).

  5. Gravatar of Major.Freedom Major.Freedom
    17. September 2014 at 17:54

    There have been many occasions when bond yields fell during an expansion, and when bond yields rose during a tightening.

    The reason there is so much confusion for other bond types is because central bank intervention in those bond markets have made economic reasoning/rationalism invalid.

    Junk bonds are not purchased by the Fed, and they are not typically modelled as being linked or tied to rates the Fed influences. Changes in junk bond yields are perhaps our best dataset for what is left of “the market.”

  6. Gravatar of Jim Caton Jim Caton
    17. September 2014 at 19:33

    Reduced uncertainty. It’s not just that the volume of QE is better than expected. Yellen makes a point of not surprising the market.

  7. Gravatar of Mike Sax Mike Sax
    17. September 2014 at 20:20

    Michael Byrnes that’s the key to how expectations are supposed to work I guess.

    I don’t know that it’s been expected that QE will go on-it’s been understood for at least 5 months that the Fed will slowly ‘taper off’ on QE.

    Under this expectations premise then QE would make a lot of difference as it’s expected to end next month.

    Of course, no one ever explains any kind of realistic transmission mechanism for QE-the point is basically expectations of future policy.

  8. Gravatar of Saturos Saturos
    17. September 2014 at 21:57

    Mankiw responds to Lars Christensen:

  9. Gravatar of Benjamin Cole Benjamin Cole
    17. September 2014 at 22:02

    Mike Sax and Michael Byrnes (and other Mikes out there, in league with these two Mikes):

    Yes, expectations, but there is also a real-world result from QE.

    People who sell bonds to the Fed have to do something with the loot. They can invest, put it in the bank, or spend it.

    Good, if they invest or spend it. I am not certain what it means if bondsellers put proceeds in the bank, and the banks sit on it. But even so, not all bondsellers put the money in the bank.

    And as long as bond sellers have money in the bank, it is there for spending or investing. I would want a higher rate of inflation, to encourage doing something with the money, other than leaving it inert in a bank. But anyway, bond sellers who put the money in the bank have now watched great rallies in properties and equities. So, maybe they have been edging out of the banks.

    Frankly, QE is like having your cake and eating it too. We can pay down the national debt and stimulate the economy. What is not to like? So far, as in Japan, it does not appear that QE causes inflation, in the ranges it has been used.

    The Fed may wish to use QE more aggressively.

    The sad part is, Yellen has signed and now owns the Bernanke taper. Should she think QE is needed, she will called a “flip-flopper” and indecisive and so forth. Bernanke’s timidity has trapped her.

    The FOMC inflation-hysterics are going nuts already, talking about a deflationist utopia. They can feel it—gut QE and we move to deflation. They are this close to nirvana. If you think I am joking, read some of the stuff by Plosser and Fisher. They are extremists in suits.

    Just like Japan. Plosser and Fisher actually want that.

    The real question is: Why does 3 percent inflation bother some economists so much? Can a central bank obtain zero inflation (as dubiously, and officially measured) without asphyxiating the economy?

    If it results in asphyxiation, than why is 0 percent, or 2 percent, inflation a goal?

    What modern economy has ever flourished at 0 percent inflation? Deflation?

  10. Gravatar of Kevin Erdmann Kevin Erdmann
    17. September 2014 at 22:54

    Core minus Shelter inflation has gone negative the last couple of months. I think shelter inflation reflects a supply shock from the lack of new building, due to dried up credit markets and deleveraging households. It’s potentially bad news coming out of the inflation indicators.

  11. Gravatar of Maurizio Maurizio
    17. September 2014 at 23:23

    Dr Sumner,

    To clarify, are you saying that bond yields rallied because starting to incorporate rising inflation expectations?

    But then why did gold slump, and why aren’t commodities rising?

  12. Gravatar of James in London James in London
    18. September 2014 at 00:17

    The trade-weighted US$ index rose nearly 1% and stayed up = evidence of a slight tightening.

    Two year bond yield held on to its immediate move (up from 0.53% to 0.57%) overnight, while 30yr bond yields having rallied very slightly (3.34% to 3.37%) are now back down where they started = more evidence of a slight tightening. A flattening of the yield curve.

    Stocks ralled a bit and then quickly fell back, giving little evidence of a net impact from the FOMC.

  13. Gravatar of Vivian Darkbloom Vivian Darkbloom
    18. September 2014 at 03:32

    Prepositions are often ambiguous.

    “As”, as in “Yields Rally as FOMC Signals QE likely to end in October”, can mean a couple of different things.

    First, “as” can denote solely a temporal correlation–two things happening at the same time without the author intending to imply causation between the two. This could be particularly true of the item linked to here which referenced 3:16 pm in a running discussion.

    Or, it can also infer, as Scott suggests, causation. “As” can mean “because”.

    Also, while mainstream media isn’t very savvy with regard to technical matters, headlines are often at odds with the main text of an article. Perhaps that’s because they are normally written by folks who didn’t have anything to do with writing the main text. I ran across a case in point today, again at Yahoo. The headline went: “Why Stocks and Bonds See Fed Outlook Differently”. That certainly got me curious (the author of the headline must be a tease, but I guess that’s part of the job). I read the article hoping to be enlightened. Rather than be enlightened, I encountered a jumbled up mess and this is what it all culminated in (literally, near the very end):

    “”Why stocks are ignoring the bond market response, I don’t know,” said Boockvar. “This discrepancy between markets is glaring.””

  14. Gravatar of Nick Nick
    18. September 2014 at 04:28

    This blog certainly gave me a lot of insight into the markets response last afternoon and into this morning, but it’s really not a crystal ball. Regardless of the statements text, the projections called for less inflation and higher rates sooner … To me, as a money illusion reader, that is monetary tightening and stocks should suffer, and maybe the long bond should even rally a little. Plus we picked up an additional hawkish dissent to slightly more hawkish language (though possibly more dovish than expected) in the statement. So that could be a sign of tightening too. So I don’t think the takeaway is obvious.

  15. Gravatar of Neil Neil
    18. September 2014 at 05:10

    The dollar rallied and bonds sold off. Equities rallied initially and gave back some of there gains to close the day up only marginally. That strikes me as a neutral to marginally hawkish reading of the FOMC directive, dots plot, and press conference.

  16. Gravatar of ssumner ssumner
    18. September 2014 at 06:13

    Maurizio, I’m not sure why yields rose, my only point is that no one should be surprised that an easier than expected monetary policy raises yields–it happens quite often.

    James, You might be right, but I’d put more weight on the reaction after the announcement than the subsequent moves, which could reflect many factors. I believe stocks initially rallied based on a perception of easier money.

    Vivian, Good point.

    Neil, Don’t you think the initial stock rally was due to perceptions that the statement was dovish? I’m not saying the markets necessarily read the statement correctly, at least initially, I’m just interested in explaining the market reaction.

  17. Gravatar of Tom Tom
    18. September 2014 at 06:16

    I think it’s important to keep in mind market expectations. Expectations are what drive market fluctuations, and as Scott always “interest rates are not a good indicator of the stance of monetary policy”. Why this is relevant:

    Imagine the FED had been hinting at ending QE altogether and the language they had been using prior to the meeting had been contractionary Markets expect a more significant monetary contraction. This information would be somewhat built into what has happened in the market over the past few months.

    Now let’s say the FED instead of ending QE altogether and using more contractionary language, had instead dialed back QE but kept more expansionary language:

    The act of dialing back QE would seem contractionary, however because the markets expected an even greater contraction- it would end up being more expansionary.

    Markets expect FED to raise 10yr to 5%
    FED only wants to raise rates to 3%
    Result- Stocks increase and bond yields rise…

    (I realize this is a drastic example but I think it helps paint the picture)

  18. Gravatar of ssumner ssumner
    18. September 2014 at 06:21

    Saturos, That’s a good post by Mankiw.,

    Everyone, Here’s how the media is reporting the story today:

    “The Federal Reserve stuck to its slow-but-steady plans to tighten monetary policy Wednesday, disappointing so-called inflation hawks but sending US stocks to a fresh record.”

    I’m not saying that I’m certain the Fed eased, but it’s certainly plausible to claim they were perceived to have eased.

  19. Gravatar of Jim Caton Jim Caton
    18. September 2014 at 07:57


    Policy uncertainty can cause divergent expectations. Bears (like zerohedge…) expect the worst from activist policies. The bulls expect more accommodation to continue offsetting demand deficiencies. The market becomes turbulent as investors cluster around different sets of expectations.

    It is significant that Yellen has not assumed the same commanding stance that Bernanke took on. This is more than just expectations about QE. Less policy uncertainty promotes greater convergence of expectations as investors can worry more about markets and less about the whims of policymakers.

    At the WSJ-opinion, they describe Yellen’s role so far as straight forward, but warn that “the days of the Bernanke autopilot will be over” when the QE wind down ends. Her policies have been relatively predictable so far, lets hope it stays that way.

  20. Gravatar of Kevin Erdmann Kevin Erdmann
    18. September 2014 at 12:19

    I followed up on my earlier post:

    I’m afraid the Fed has pulled back the reins too early again. I’m starting to get nervous.

  21. Gravatar of TravisV TravisV
    18. September 2014 at 18:53

    Here’s video of Prof. Sumner on Boom Bust……

  22. Gravatar of TravisV TravisV
    18. September 2014 at 18:55


    If the Fed has pulled back the reins too early, then why is the S&P 500 at 2,011?

  23. Gravatar of Kevin Erdmann Kevin Erdmann
    18. September 2014 at 21:22

    Travis, where’s it supposed to be?

  24. Gravatar of James in London James in London
    19. September 2014 at 03:29

    Stocks immediately rallied and then gave back. The dollar immediately rallied and didn’t give back. Not everything is about stocks, FX is a big market too. Foreigners saw it as tightening (FX) market, locals as neutral/dov’sih (stocks). Locals matter more when it comes to domestic demand. So maybe you are more right than wrong. Not big, lasting moves either way at the end of the day.

  25. Gravatar of ssumner ssumner
    19. September 2014 at 05:43

    Jim, I think she’ll be similar to Bernanke.

    James, Maybe, but the media certainly viewed it as dovish. Even a day later the media was full of reports that stocks in Europe rose the next day due to the Fed’s more dovish than expected statement. Almost everything I read suggested that was the standard interpretation. Not saying you are wrong, but I wouldn’t dismiss the stock market reaction–it’s probably the cleanest reaction in this case.

    You said foreigners saw tightening in the forex markets. Are you sure that foreigners didn’t see higher US interest rates in the forex markets–and perhaps a journalist interpreted that as “tightening.”

  26. Gravatar of James in London James in London
    19. September 2014 at 08:06

    All I am sasying is that the US$ rose sharply immediately after the FOMC release, usually a signal of monetary tightening. Who drove it? Hard to say. But what happened, happened.

    The media often struuggles to understand market moves, that’s our expertise I thought. This time the media focused on the modst move in stocks, the bond market sent conflicting signals.

    Maybe the US media hardly think about the US$ as that is only for foreigners or that small percentage of traitorous US cititzens who have a passport. 🙂

    Actually, I see that this percentage has doulbed in the last 15 years from 15% to 30%.

  27. Gravatar of Brian Donohue Brian Donohue
    20. September 2014 at 04:58

    @ James, TravisV,

    As far as the S&P, I’ve felt that it in some ways is a “dollar hedge”, since so many big U.S. companies earn significant profits overseas.

    The Russell 2000 has been much more lackluster this year, so perhaps the market is picking up tightening signals this year.

  28. Gravatar of Dale Dale
    20. September 2014 at 05:16

    I wrote a “Shadow FOMC” statement that you might be interested in, similar to how the UK opposition comments on the actual government. Here’s the opening:

    “Information received since the Shadow Federal Open Market Committee last met, which was never, suggest that the early universe rapidly expanded due to cosmic inflation. However, the expansion was disjointed due to quantum fluctuations. The effects of these imbalances continue to have a major effect on the universe, as they are the cause of all variation, including galaxies, planets, and the fractional reserve banking system. More recently, fear of another kind of inflation lead to mistakenly tight monetary policy during 2008, a key cause of the recession, from which the economy has now partially recovered. Private Sector GDP is running at a trend rate almost as high as during the Clinton and Bush II bull years, though many analysts miss this due to a mistaken focus on total NGDP, which includes government spending at cost. Industrial production rose. The S&P500, which appeared on the verge of mass bankruptcy, is now at record levels, seeing a 30% rise in 2013. Unemployment, painfully high for a very long time, has started to accelerate downwards. Employment figures, however, have been very disappointing; partly because of demographics, many of the unemployed have simply given up looking for a job. Only recently have we seen the employment/population ratio begin to rise.”

  29. Gravatar of ssumner ssumner
    20. September 2014 at 06:13

    James, I don’t believe the stock and bond markets sent conflicting signals—both stock prices and bond yields rose, which is consistent with faster expected NGDP growth.

    I’m not saying you might not be right (the dollar is a puzzle), but I still believe the move was seen as dovish, as do most other market watchers.

    Thanks Dale.

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