Lorie Logan implicitly highlights how tough ending QT will be/comparing 10 yr yield, then vs now
Let's start with this and get it out of the way,
Dallas Fed president Lorie Logan didn't just expand on the Fed minutes commentary that it's time to start discussing the cadence of QT from here as the reverse repo facility further winds down but she also, possibly inadvertently and maybe just implicitly, highlighted without saying it how difficult it will be to end QT because she also said "If we don't maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up and reverse the progress we've made. In light of the easing in financial conditions in recent months, we shouldn't take the possibility of another rate increase off the table just yet...Over the past few months, long term yields have given back most of the tightening that we saw over the summer. We can't count on sustaining price stability if we don't maintain sufficiently restrictive financial conditions."
I will quote here what Ben Bernanke penned in an editorial in the Washington Post back on November 5th, 2010 in rationalizing the use of another round of QE after the use the first time:
"This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long term interest rates fell when investors began to anticipate this additional action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." https://www.federalreserve.gov/newsevents/other/o_bernanke20101105a.htm
In other words, Bernanke said let's print all this money via QE, ease financial conditions, goose asset prices, narrow credit spreads and the economic will in turn grow. Rather than having the economy recover and grow on its own, that would in turn lift asset prices. Now Lorie Logan is not saying she wants to shift from QT to QE of course but just ending QT could be seen by markets as a step towards an eventual QE, especially with all the US Treasuries that need to be sold in coming years.
And here is the trap, how does the Fed extricate themselves from all of this without stoking inflation again, triggered in part by a notable easing in financial conditions. It's a much trickier juggling act this time around. Maybe Logan’s answer, as she said, for countering the further loosening potential of ending QT will be higher for longer short rates and this is another push back to the market expectations of 6 cuts this year.
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