YouSaid · the spoken record

William English

lines on the record: 100
first: 2024-06-10
most recent: 2024-06-10
sittings or episodes: 1
sources: podcast

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“But their problem was the deposits were not sticky low cost deposits. And particularly once people realized the embedded losses they had on their portfolios, they suffered massive runs and they just couldn't manage the runs. And so they failed. But I do think those are particular institutions that took on particular excessive risks. And the work I did earlier was looking at basically all publicly traded banks. And for them, run-ups and interest rates had adverse effects, but the adverse effects were much smaller and showed up in reductions in stock prices of, I forget, a few percentage points or something like that, but not the sort of massive problems that we're doing. We had at those banks that had gone way out on a limb.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“They had thought that their deposits would be sticky low cost deposits. And if they had been right, maybe the situation wouldn't have been so bad. There would have had lousy returns on their assets given the increase in interest rates. But on the other hand, they could have offset that with low rates on their deposits, and maybe that would have been okay.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Was somewhat different in the sense that they were way, way out in the tail of the distribution in terms of their maturity mismatch. And so the typical bank has kind of a mix of assets and a mix of liabilities. And surprisingly maybe, not a whole lot of sensitivity of net interest margins to interest rate moves. There's been some nice work that's been done on that in recent years. These were banks that were not typical. They had bought a lot of long-term securities. Or in the case of First Republic, they made a lot of long-term mortgage loans. And when market rates went up, they had big losses on their assets.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“That reduces their profitability. I expected, but we didn't actually see, but I would have thought you would see, and it may just be you can't estimate precisely enough that there would also be some increase in loan losses from higher interest rates. Some borrowers would be unable to pay back at the higher rates. But anyway, there are reasons to think profitability should fall. Then you're discounting those future earnings at a higher discount rate. And so stock prices should fall. I mean, we know stock prices broadly fall for sure after the Fed tightens monetary policy and banks are no different than others on that score. That's what we found. And I think that's surely right. Now, the Silicon Valley signature bank, First Republic issue.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So the paper that I wrote on this general issue showed first that higher interest rates all else equal do reduce bank stock prices. And that affects pretty big. And then we tried to tease out why that might be. I think there were kind of three pieces to that story. One is that tighter monetary policy means probably means a slower economy, weaker loan demand. So you're not lending as much as you would have otherwise. Loans are profitable. The second is that when market rates go up, there's an outflow in banks' retail deposits. They're cheap, retail deposits. So they're low-cost funding. Some of that flows out, raises their funding costs.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Bill, you've got two papers about how banks deal with interest rate risk, one from a lot earlier. And the second one was about how bank stocks actually trade down when interest rates go up, despite the refrain that banks make more money and banks benefit when interest rates go up, which is in a sense true because of their maturity transformation. But I'll just ask this one final question about what are your broad conclusions from observing how the US banking system reacted to the rapid interest rates rises of the Federal Reserve from 2022 to 2023. Of course, I'm referencing the failure of Silicon Valley Bank in March 2023, as well as First Republic Bank in May 2023. And now we are over a year later and things appear to be much better.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“or whether in fact it's okay it's just it's just an operation it's a repo operation of a sort everybody's more or less used to it's just a standing offer to do the operation if people want it rather than the fed going in and announcing in the morning they're going to do it i i don't know and uh it'll be it'll be another thing that we'll learn about as the balance sheet comes down”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Repo facility is there, and if folks want to repo with the Fed, they can. And maybe they get $100 billion repo orders coming in, the standing repo facility. And that would have the same effect. But if they were unsure whether people would use the standing repo facility, maybe it's unfamiliar, maybe it feels strange, maybe you have to go to your board and get your board to approve use of this new thing. Maybe you're worried that it looks like you're coming to the discount window and it makes you look bad. I don't know, but they could be worried that the standing repro facility won't be that effective. And so doing an operation could be effective. It'll be very interesting to see whether the standing repo facility suffers from some of the stigma that the discount window clears.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So wouldn't do quantitative easing, that's a totally different thing. They could do what used to be a standard monetary policy operation. They could announce in the morning that we're going to do, I don't know, three-day repo on treasuries with the primary dealers and they'll take bids and they'll, you know, they're going to do the repo. And that would add reserves, as you say, and that would be a way to do it and they know how to do that and they could add some reserves. So if they knew for some strange set of circumstances, reserves were going to fall $150 billion on a given day, they'd say, well, let's add $100, right? Let's not have that big a decline in reserves. And they could go in and they could do an operation to add $100 billion of reserves through repo. The other is they could simply remind everybody that the standing”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“And I could be wrong about this, so please correct me if I am. But when banks borrow from the Fed's standard repro facility, I think reserves in the system increase because it is an overnight purchase. Is that what you mean when you say Fed will inject liquidity into the system? Or do you mean it will outright do quantitative using?”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Do that, or they could just remind everybody that there's a standing repo facility if you want to come get a repo at the Fed, come and get it. We'll do whatever you need. But either way, it simply is a complicated business, and there are estimates of how far they'll want to go, but I think those estimates have big standard errors. And a lot of this is going to be kind of feeling their way as they get close and trying to make sure that they don't shock markets unintentionally and cause a problem.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Trying to kind of walk very, very slowly towards a level of reserves that will still give you good functioning in money markets and so on, but not go too far. And the best you can do, I think, is try to ensure that you're moving pretty slowly when you get there. In September of 2019, there were a couple of things that happened. There was a tax day and there was a settlement of a big treasury auction that knocked the level of reserves down abruptly by a fair amount on a given day. And that suddenly took them kind of past where markets were comfortable. I think if they got to a similar situation now, they might be inclined to add some reserves if that happened just to be sure that they don't have an abrupt decline in the level of reserves that's big and maybe takes them past the point where markets are comfortable.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“When reserves get small enough that market rates begin to really go up in a serious way. These are all approaches. I think they're all kind of imperfect. And what the Fed has emphasized is they'll kind of know it when they see it because they'll begin to see adjustments at banks. They'll begin to see adjustments in money markets that will say reserves are beginning to feel a little bit scarce or kind of at the edge of scarce. And that's when they want to stop. But it's a tricky game because there.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So I think different ways. One way is you survey banks and you try to find out how are they thinking about their demand for reserves and how many reserves that they want. And so that's one way forward. Another way is in some sense mechanically you could say, well, we kind of know where we got in 2019 and that seemed like the right level of reserves. Maybe that level of reserves grows with GDP. So you take the level of reserves relative to GDP at that time, apply that today, and that would give you a number today. And so there are different ways that you can do this sort of calculation. You can try to estimate demand curves for reserves by looking at changes in market interest rates as reserves decline and see when do you think you're going to get to the”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Can you just walk me and our viewers here through how some Federal Reserve officials and economists estimate the lowest common level? Is it percentage of GDP? I know it's about $3 trillion. How do people come up with that number?”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“In early 2019, they decided they were going to stick with the ample reserves framework that they had been using since 2008. And then the issue was, well, what do we mean by Ample? And that's where this term comes up and kind of how far down do you want to take the level of reserves? And so that discussion all came well after my time, I'm afraid.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So I don't remember when I first heard that term, but I think that really came up after I had left the board. So I left in 2016 and came to Yale. And there had been discussion at that point about when might it be right to begin runoffs and so on. But I learned about the runoffs the same way you did by looking at the press release that came out. And then the question was, well, What was the operating system they wanted to go back to? What was the long-term balance sheet they wanted? And that wasn't really determined, I think, until early 2019, if I remember correctly. They had left it vague. Maybe they would try to go back to a quarter system with a much lower level of reserves, or maybe they go with an ample reserve system and a bigger balance sheet. And I think it was only.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So, the phrase lowest comfortable level of reserves, LCLR, when is the first time you encounter that phrase? I mean, maybe you were the one who invented that phrase. I don't know. When was it apparent that... Okay, we've taken reserves from a de minimis amount under the corridor system to trillions under the floor system. When would it be apparent of the fact that 800 billion of reserves sounds like a lot relative to 2007 and prior levels, but it actually might not be a lot because the banking system has changed? And as you've written, the demand for reserves was much higher than the federal reserve expected in 2019, which led to the repo crisis of September 2019.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“And, you know, you could sell a little slowly, I think. But, you know, if they tried to go in and sell a lot, particularly at the MBS market, I think market liquidity would be a big problem. So they would get an effect, which they don't want, presumably.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So, quantitative tightening could be less effective than quantitative easing and have much less of an impact on market liquidity, especially the kind of quantitative tightening that the Federal Reserve does where it is letting the balance sheet roll off and not selling.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Liquidity premium effect on MBS yields at that time. Again, if you're doing Qt right and you're doing it kind of gradually and slowly and running things off, there shouldn't be a big deterioration in market liquidity. There shouldn't be a big widening of liquidity premiums. So with no signaling effect and no market, liquidity effect, and also the fact that the Fed's kind of the underlying size of the balance sheet is growing with GDP or something like that. So you buy a lot and then you're going to bring it back down less because the underlying size of the balance sheet is bigger. I think QT is likely to have much smaller effects than QE. And I think you do see that as an empirical question.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“I think also Qt doesn't, at least unless you screw it up, it doesn't have a kind of market liquidity effect or market functioning effect. So I talked earlier about the effects of QE on market functioning and liquidity risk premium and things like that. You saw that in a big way when the Fed did the first QE back in the fall of 2008 and early 2009. There were really, really big effects on MBS yields. And I think a lot of that was because the MBS market was not functioning very well. And the Fed saying we're going to step in or going to be buying in bulk for a long time made it much easier for market makers to say, oh, okay, we can make markets, we can have an inventory of MBS. Because if we need to, we can sell them to the Fed later on, and we won't get stuck. And so you got a big...”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Rates. And so I think the signaling effect may be a much bigger deal when you're doing a combination of forward guidance in QE. And it's evidence that the central bank is being forceful and using all its tools to provide accommodation. And that presumably encourages market participants to expand Rachel to stay lower for longer. And so I think this comes back to the issue that people sometimes raise of is QT kind of as powerful as QE, right? Is it just QE with the sign reversed or is it different? And I think it really is different as we were just discussing. I think QT doesn't really have a signaling effect, whereas QE does. And we can see that in the data.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So that's probably right. I think it works in cases where you're cutting rates and then you're doing forward guidance in QE and the QE, in effect, is reinforcing some of that forward guidance. And I think there's a lot of evidence that that signaling effect matters that you got effects of QE announcements on expected future short rates. And I'm not sure that you get a signaling effect in the case of QT, for example. So in the case of QT, the Fed had already started raising rates. by the time it initiated QT. So there wasn't any information there about moving up the time of the expected first increase in rates. They're already.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“It in your 2012 paper on QE, you write about large scale assets purchases affect the long rate via three factors. One, the scarcity channel, two, the duration channel, and three signaling or expectations. I think scarcity and duration are some form, as I understand it, of the portfolio rebalancing effect. But number three, that signaling or expectations channel, does that work only if and only if the policies are moving in the same direction?”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“And indeed, it's pretty easy to think of situations where they should not be pointing in the same direction. And I think the Fed to wear that.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Before, I think you want to get the balance sheet back to some kind of neutral level. And I don't see a big problem with that. Again, there may be a communication issue, but I'm not even sure there's that. You've said that you're shrinking the balance sheet. You're running assets off in the background, and you're going to do that gradually for a time and get the balance sheet back to kind of its baseline size. And in the meanwhile, it's appropriate to use monetary policy. You might have to ease a little more than you would have if you weren't during the QT. But on the other hand, you can do that. You're well away from the zero pound and there isn't really a constraint. So I guess I would back away from the sense that these things have to be pointing in the same direction. I don't think that's true.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“And so we're going to buy taper off our purchase program over a month or two, but given the situation, it's appropriate to raise rates and we'd start to raise rates today. I think they could have done that potentially it'd be confusing, but I think you could communicate about that in a way that would work. Harder to do that if you're the ECB, they were much more explicit about their forward guidance was we're buying this amount until then. We're not going to raise rates until after we're done buying. That would have been a harder thing to work around. So in that direction, I think you didn't feel particularly constrained. And in terms of, you know, if the Fed began easing, at some point this year, and they were still shrinking the balance sheet, as we talked about.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Even though they had announced very soon thereafter they would have begun shrinking their balance sheet. So certainly in cases where there were a need to buy assets to support market functioning, you could imagine doing that with interest rates well away from zero. There's no particular contradiction there. On the question of should these things always point in the same direction, I think the answer is no. And I think it's no kind of in both directions. So could the Fed have said in the fall of 21, we're going to raise rates, even though we're not done with the purchases that we've been doing. I think you could. You could say we're tapering down the purchases. We're ending that program. But again, because of market functioning issues, we don't want to just stop today.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“On the Bernanke doctrine. I'm not sure. I remember him actually saying that, but there was some discussion about this. I think some members of the FOMC weren't so sure. They could have imagined situations where you'd want to use the balance sheet. I think a particular case that's worth mentioning is what if you had a market functioning problem, then I could certainly imagine that you would be purchasing assets to support market functioning, even if as a monetary policy issue you didn't have a particular heat to do it, interest rate threw away from zero and so on. I mean, the Bank of England ran into this issue with their liability-driven investment issues. And I think that was the fall of 22. And they found themselves”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Thank you. So there are two principles or sort of kind of rules that I'd like to hone in on that, you know, it's my informal understanding of the Bernanke and quantitative easing doctrine. Number one, quantitative easing is an unconventional policy, so it only should be done when interest rates are at zero. And number two is that it should be moving in the same direction as the balance sheet. So in other words, if you're doing quantitative tightening, the Federal Reserve should be raising interest rates at the same time. I know that the second policy is now, maybe the Federal Reserve has walked it back because it is actively discussing continuing to do quantitative tightening as it cuts rates. So the policies would be moving in opposite directions. Is that roughly correct? What are your thoughts on that? And then secondly, is that Bernanke doctrine still in place of quantitative easing must, as a rule, be done only when interest rates are at zero?”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Or do whatever, you know, whatever they have to do with the balance sheet at that point. But so I think the issue is kind of what are the probabilities you apply to moving too quickly and then having to stop abruptly because you have problems in money markets versus a recession happens. And at that point, you have a balance sheet that's somewhat bigger than you would have had if you were running things off more slowly. So it's a complicated decision for the Fed and no doubt one that had a lot of discussion and a lot of give and take over exactly these issues. And they made the decision they made seems a plausible decision to me, but certainly people could question it.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“It's a question of probabilities, I think, Jack. So on the one hand, what Powell was saying is that if they try to run down the balance sheet quickly and they run into problems in money markets and they have to stop, they may end up with a bigger balance sheet than they would have if they took their time and moved more slowly. And so by slowing, they make themselves in some longer run sense more likely to get to a smaller balance sheet size. But that is assuming that there isn't a recession between now and then. If there is, you know, and they wouldn't have had a problem with the more rapid runoff, then yeah, then they'll end up with the larger balance sheet than they would have if they had been shrinking the balance sheet quickly and then a recession hit and they had to do QE.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Thank you. And so the Fed has been insistent, and Jay Powell has been insistent that this slowdown in pace is not going to impact the terminal level of the Fed's balance sheet. So if the Fed is going to go to $5 trillion, I'm just making that number up, it doesn't matter that the Fed is now only reducing by $25 billion a month max for treasuries and not $60 billion. Ultimately, it won't change that destination. It will just take longer. But if as you write during your paper when there's recession, there might have to be a cessation of quantitative tightening or a resumption of quantitative easing at the lower bound, doesn't that kind of necessarily mean that in a probabilistic way, it actually does mean that the Fed's balance sheet, that the shrinkage will be less because the pace is less?”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Of the balance sheet, they're going to want to end up with, and they don't want to be shrinking their balance sheet fast when they get there and suddenly hit a wall and have it be a big problem. So I think slowing is sensible. And they may slow further before they ultimately get to the point where they'll want to stop. And with luck, all of that happens before there's another recession. And they cut rates a lot and potentially want to use QE again.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“In other Fed liabilities that will reduce reserves at a very gradual pace, and they'll see when they get to a level of reserves, they think they can manage. And they may, in the event of particular market effects that move reserves around, they may actually step in and provide reserves to try to be sure that there isn't some sort of problem in money markets. In addition, they put in place the standing repo facility so that if there is a problem in money markets as there was in the fall of 2019, there'll be easy access to Fed repo and effectively unlimited amounts, and they hope that that will help to limit any sort of fallout in money markets. But look, they're feeling their way. They don't really know exactly the size.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“I think the point there is that they want to avoid having reserves decline rapidly and reach a point where markets can't manage the decline and have a snafu in money markets. That's what happened in September of 2019. And at that point, they started to buy securities again to add more reserves because they had problems in markets that they needed to address. I think the thought is that they want to be shrinking the balance sheet at a relatively slow pace when they get to the point where they think they're going to want to stop. Then they can kind of feel their way a little bit, right? They can let securities run off some. At some point, they'll stop having securities run off at all. But then they'll have increases in.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Faster than they did in 2017 to 2019 after the financial crisis QE, because I think they were worried about that. They were worried that in 2019 they got to kind of the balance sheet size that they wanted. But then in 2020, the pandemic hit, they bought a lot of securities. They wanted to try to be sure that they run the securities down before the next recession happens. You'll have bad luck. There'll be recessions that come in quick succession, but the idea is kind of on average you have enough time to run off the securities before you need to do purchases again in some subsequent recession. Whether this pace is exactly enough to do that, I don't know, but I think it seems close. As for the decision to slow the pace of runoff,”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So, a couple of thoughts on that. One is I don't think there's any real question that there is a potential problem from the Fed that if they buy a lot of securities in deep recessions when they get stuck at the zero bound is a way of providing accommodation, they run them off relatively slowly. The intent is to have them kind of running off quietly at the background, use interest rates as the active tool of policy, just let the balance sheet kind of run off gradually. If you have bad luck and you have recessions that come quickly, you're not done running off the securities. And so you just end up with the Fed balance sheet that gets bigger and bigger. I think that's why this time around they ran the securities off much.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Tightening, but because the Qt is done in such a slow way, via Rolloff not sales, it goes up two flights of stairs, down one, up two flights of stairs, down one, or might be even up six flights of stairs down one, up six flights of stairs down one. Explain your thinking about the risk, and then we'll get into the context of the Federal Reserve has slowed down the pace of rolloff from 60 to 25 billion, and it insists that just because it's doing it slower doesn't mean that the ultimate size of the Fed balance sheet is going to be smaller. But as you write, if there's a recession and the balance sheet has to get higher, maybe that does. So I know I threw a lot at you, but what are your thoughts?”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“It off and not directly selling, such as, for example, I think the Bank of England does some sales occasionally. So you say given the size of the Fed's balance sheet, this apology strategy, i.e. doing rolloff and doing quantitative height slowly rather than directly selling, involves some risk of the Fed not completing the normalization process before the next recession. If that recession also pushes interest rates lower, I'm paraphrasing, then the Fed could end up restarting asset percentages, i.e. restart QT to provide an additional accommodation. The result could be a ratchet effect in which the Fed's balance sheet gets significantly larger in each recession and never returns to its previous size even as a share of GDP before the next recession. Besides that risk behind that risk of in a recession, the Fed's balance sheet explodes higher in the recovery it declines somewhat as the Fed does quantitatively.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Thank you. So, the size of the Fed's balance sheet peaked at, I believe, just shy of $9 trillion in the spring of 2020. Last, you know, we were recording the morning of Monday, June 3rd, soon that the Federal Reserve will have its FOMC meeting. But in the previous FOMC meeting in March, the Fed announced that it would be reducing the amount of quantitative tightening from a maximum of $60 billion of roll-off to 25 billion starting June 1st, which was we're on Monday, June 3rd. So that June 1st is Saturday, and I don't think there's a lot of activity in the weekend. So today is the first day of the $25 billion cap for Treasury rolloff in the month. So that's just the background I'm explaining for the audience. Now, I'm going to quote your paper on the Fed's balance sheets, which it was chapter one from a book, which you have co-authors just to set a stage for the audience. You talk about how the way the Federal Reserve does quantitative tightening is by rolling.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Target for a while. So it was one sided. The story they had was if they had another period when they were stuck at the lower bound, they couldn't provide enough accommodation and inflation was really low, they would offset that. But not that if inflation were surprisingly high for a while, they'd offset that with low inflation. So I think at this point, what are they aiming to do? They're just aiming to get inflation back to target over a reasonable horizon. And there's no teeth to the flexible average inflation targeting, and there's no intent to offset the temporary period of high inflation with a period of low or negative inflation.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“I guess I think that they were kind of vague, as I think you said at the outset, about exactly kind of how far the lookback period was and so on. But I think even if you looked back to 2010 or something, they way overshot the amount of undershooting was, as you said, I mean, for any given year, it was probably half a percent or a quarter of a percent or something like that. They overshot by five percentage points or something, right? When inflation was at its peak. So I don't think there's any remaining deficit and they're not looking to continue to have inflation above target at this point. They also were pretty clear that if there were a supply shock and they had inflation that was well above target, they would not aim to offset that with inflation below.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“You said the framework is under review, and a new one will be announced next year. But just to be clear, so the flexible average inflation targeting framework is still in place. Does that mean that the inflation deficit of from 2009 to 2019, and I'm just making numbers up because I don't know what they are, the average inflation was, let's say 25 basis points short. So let's say averaging 1.75%. And therefore over 10 years, 11 years, let's make it that you had inflation budget of 3%. And then, oh, in 2021, we have 3%. So the deficit was filled, or was the deficit not filled and flexible inflation average targeting actually was not directly followed? In other words, the inflation deficit budget was not reached, but interest rates were raised because of exigent circumstances.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“And I don't know. It'll be interesting to see how much they respond to what's happened over the last few years and say, well, we should adjust the framework. Or do they say, you know, the pandemic really was a bunch of century thing. We had a pretty good framework that we liked and we're going to stick with it. I don't know. But we will find out next year.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Because monetary policy by necessity is focusing on forecasts. Monetary policy works with lags. They're pretty long. You can't wait until the economy is overheating to start tightening because then you've waited much too long and your tightening won't have effects for a while and you end up with a problem. So anyway, I would if we're up to me I would change that part of the new framework they put in place. Happily they have promised, they promised in 2020 they're going to do a review of that framework in 2025. So I expect work on that's already begun and by the end of next year we'll see a new framework and a bunch of work and a bunch of discussion and so on and speeches. So we'll learn what they're thinking about the framework.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“I think they reacted to these experiences over the decade before the framework review by saying, gee, let's not make those mistakes again. If we get constrained, we're going to commit to overshoot, and that should help us provide more accommodation. And we should wait until we've got output high and employment high and see when inflation starts to pick up. We shouldn't necessarily start tightening because we think we're going to get there because we could be wrong. Can debate those things. I actually think the flexible average inflation targeting argument is right. And I'm okay with that. I worry a little bit about the shortfalls debate.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Believe that aside for now thou is the idea, so both of these changes were to some degree looking backward. They were looking at the experience after the financial crisis when they got constrained by the lower bound. They were unable to provide as much accommodation as they would have liked. Inflation stayed low for a very long time. And that was bad. And then once the economy began to recover, it turned out that the natural rate of unemployment or the kind of longer run normal rate of unemployment was lower than they thought when the economy was recovering. They thought the unemployment rate could go down to, let's say, I don't remember exactly what they had in the SEP, but 5% or some number like that. Turned out they got all the way down below four in inflation still wasn't picking up. And so...”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“For that is that, particularly in models, I think there's a debate about whether in real life. But in models, that's pretty powerful because as the economy stays weak for a long time and you're at the zero lower bound and you're constrained and inflation, say is running at 1% instead of 2%, you're building up, but you need to overshoot more to make up for that low inflation. And that's a way of committing an effect to keeping rates lower for longer to generate the high inflation later. And so rates are going to be lower for longer. Inflation's going to be higher. So real interest rates, again, long-term interest, real interest rates today are lower. And that helps boost the economy today. Again, in models that works very well, we could debate whether it works in practice. I'm happy to talk about that.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT