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In 1850, Economist Frederic Bastiat famously wrote an essay entitled “That which is seen, and that which is not seen.” The first chapter, “The Broken Window,” argues that good economics requires considering not just the immediate, visible effects of an action but also the delayed, less obvious (unseen) consequences. Unfortunately, most commentators, when asked about QE, focus on the “seen” or the benefit of improved liquidity. Rare is it that the “unseen” is discussed.
The Fed is “marketing” this round of QE as Reserve Management Purchases (RMP). They claim it’s different from QE because it involves buying short-term bills rather than longer-term bonds. Let us set aside the “seen” for a moment and focus on the unseen. Consider the following:
- When Treasury bills mature, the Fed will use the proceeds to purchase new assets to maintain its balance sheet and support market liquidity. Thus, will they continue to buy bills, or might they extend their purchases to notes and bonds? If the latter, this RMP-not QE is a ruse or bookmark for more traditional QE, just delayed.
- Via the Fed, the Treasury has a new buyer of $40 billion of its Treasury bills in each of the next four months. Might they wisely limit longer-term issuance while pushing more bill issuance? Such would be the equivalent of yield curve control.
The “seen”, or temporary liquidity boost, is easy to see. The unseen is that this may be a misleading way for the Fed to push longer-term bond yields lower. Doing so would meet the President’s recent demands, support the housing market, and possibly prevent further deterioration in the labor market. But make no mistake, the unseen is that RMP is QE.
What To Watch Today
Earnings
- No earnings releases today
Economy
The Week Ahead
Markets will be closed on Thursday, and trading volumes will likely be very light on Wednesday and Friday. Economic data will also be sparse. On Friday, the University of Michigan Consumer Sentiment survey rose from 51.0 to 52.9. Notably, inflation expectations continue to decline, as shown below.
The Federal Reserve places significant weight on inflation expectations. Combined with Thursday’s surprisingly low CPI report, we may begin to see some members become slightly less hawkish. To wit, New York Fed President John Williams stated the following on CNBC:
Some of the new data has been encouraging and shows more disinflation
