What’s one of the most noticeable consequences of the Fed’s third round of quantitative easing (i.e. QE3)? It’s the stark drop in fixed income volatility. Look at the chart below, which demonstrates this point for the investment grade credit market. The blue line is the rolling 21-day realized total-return volatility for a Barclays Global Investment Grade Credit Index. The red line is Thursday, September 13, 2012 – the day the Fed announced QE3. As the blue line crosses the red one, you can see marked drops in the level and range of volatility.
Posts tagged ‘QE3’
Janet Yellen, the vice chairman of the Federal Reserve, is the latest in a string of Fed bigwigs to get behind an idea of using explicit inflation and unemployment targets to inform the market about the Fed’s future plans – forward guidance, in Fed-speak. During a speech to the Haas School of Business at the University of California, Berkley, Yellen endorsed the idea of moving beyond calendar-date approximations as the means of conveying information on the Fed’s future moves. Now, she stopped short of actually naming any sort of numbers, but this seems like a good direction for the Fed to move. Ms. Yellen knows what she’s talking about too; in 2010, Fed chairman Ben Bernanke appointed her the chair of a new FOMC communications subcommittee. Not to mention that if Bernanke decides not to accept a third term at the head of the Fed, Ms. Yellen is widely seen as first in line as his replacement.
Did you know that Shakespeare was a proponent of quantitative easing?
Sure! Go look at The Merry Wives of Windsor, act 2, scene 2. He says, “If money go before, all ways do lie open.”
And the Federal Reserve, the ECB, the Bank of England, and now the Bank of Japan all seem to agree that spending money can open up the path to increased economic activity…or at least that it’s worth trying. So all of these central banks are now back in balance sheet-expanding mode, buying assets to keep rates down. And equity markets loved it, but now that the initial intoxication of all that QE has hit the system, it’s time to look back at the data. That’s where we’re going to see the improvement…if it comes. Reviewing last week’s data, it’s still a mixed bag. Manufacturing activity, based on the Markit flash PMI readings, was up slightly in China, down in the Eurozone, and stagnant in the United States. Housing data – at least in the U.S. market – has continued on its strong path; though don’t expect it to hit its pre-recession peaks anytime soon. And in the United States, jobless claims were down, but the four-week average ticked up. So, all told, it continues to be a slow recovery.
Imagine you’ve just finished dinner. You sit down to watch one of the various season premieres that will be populating the airwaves. During one of the program breaks, you see a strange commercial showing young people running, old people laughing, and children hugging their parents. It’s got to be one of those commercials for some new prescription medication you think…but no. This is an ad for the Federal Reserve’s new monetary policy tool, QE3. Wondering if you’re dreaming, you think, what channel is this?
If you don’t skip over commercials, this is what you might hear.
ANNOUNCER (in a calm, relaxing tone): If a sluggish economy is keeping you awake at night, and lowering the federal funds rate just hasn’t worked, QE3 is here to help. And if you suffer from the discomfort of chronic, persistent unemployment, QE3 is here to help.