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Fear! Another $4 Trillion Of Asset Purchases May Be Needed By Fed In Another Severe Recession

This is a syndicated repost published with the permission of Confounded Interest. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

As we approach the annual Jackson Hole symposium for the Federal Reserve (this year’s theme is “Designing Resilient Monetary Policy Frameworks for the Future,”) the Fed released a working paper titled “Gauging the Ability of the FOMC to Respond to Future Recessions.”   2016068pap In this paper,  the author (David Reifschneider) finds that “simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited [ability] to cut short-term interest rates in most, but probably not all, circumstances.” And the amount of the large-scale assets purchase would be … $4 trillion.

In other words, The Fed would have to purchase ANOTHER $4 trillion in assets. The Fed’s asset purchases (or Quantitative Easing [QE]) have totaled $4.5 trillion as of today, the majority of which happened following the house price and credit bubble explosion in late 2007 and 2008. To be exact, $3.56 trillion added (net) since September 3, 2008.

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But despite a Fed Funds Target rate of 25 basis points from December 2008 to December 2015 (the Fed Funds Target rate was raised in December to 50 basis points or 0.50%) and a $4.46 trillion expansion of The Fed’s asset balance sheet,  core personal consumption expenditures YoY remains at 1.57%. That was a lot of effort by The Fed to generate 1.57% core PCE growth.

So, the finding of The Fed’s David Reifschneider is that even MORE asset purchases will be needed for the next severe recession. Since The Fed’s activities (and global pressures) have already pushed interest rates close to the zero-bound.

Since September 10, 2007, the US Treasury actives curve has fallen over 350 basis points on the short-end of the curve and over 250 basis points at the 10 year tenor (maturity).

yc090707v

Unless the US moves to negative nominal rates at the short-end, more and more asset purchases will generate less and less positive results.

Here is a chart of the US Dollar since 2007.

usdollarrec

On the unemployment side, the U-3 unemployment rate has fallen to the natural rate of uemployment, so there isn’t a lot of room for further declines. Of course, a severe recession would like cause a large increase in unemployment again.

natu3

So, there you have it. Another severe recession will require The Fed to engage in the purchase of another $4 trillion in Treasury Notes (and perhaps agency mortgage-backed securities). But unless interest rates rise before the next severe recession, there will be little room to move without going to negative interest rates.

fer2

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