Trump has been a frequent Fed critic as the central bank has raised rates as well as moved to undo the historically easy monetary policy in place for much of the past decade. He has blamed the central bank for the fourth-quarter stock market meltdown in 2018 as well as said growth would certainly have been much faster without rate hikes, four of which came last year.
“I personally think the Fed should drop rates,” the president told reporters Friday. “I think they’ve genuinely slowed us down. There’s no inflation. In terms of quantitative tightening, This specific should actually at This specific point be quantitative easing.”
However, Neely pushed back on the president’s ideas about the future policy path, writing of which “quantitative tightening will probably not affect the economy in any noticeable way.”
“The pace of the recent decline within the Fed’s asset holdings — if such declines continue — would certainly take at least 5 years to return to the pre-crisis trend,” Neely said. “Such gradual effects contrast with the large, discrete asset cost alterations of which immediately followed the original asset purchase announcements as well as reflected almost the whole expected near-term change in fundamentals.”
Neely cited four specific reasons why QT won’t bite as hard:
- Benefits to yields won’t reverse as QE had only repaired “temporarily illiquid markets.”
- Because the Fed ended asset purchases in 2014 as well as started out hiking rates in 2015, tightening already has been happening with little negative impact on either financial markets or the economy.
- The Treasury has been issuing longer-dated bonds at lower yields, helping mitigate some of the damage by the Fed also shedding similar duration debt.
- The Fed has reduced its holdings by such a modest amount of which This specific will take years to be felt by markets.
Neely notes the angst caused in markets by the tightening moves, although said the Fed’s actions are “unlikely to significantly impede economic activity.”
In addition to ending the bond portfolio rolloff, the Fed also pledged to take a “patient” approach to further rate hikes as well as indicated of which no increases are likely in 2019 unless the data alterations significantly.