Fed Vice Chair Fischer on QE

He says that balance sheet contraction will be no big deal. QE itself was a big deal (very stimulative), but its going away will be pretty much irrelevant.  It is asymmetrical that way, as magical things are. And we all know QE works mostly through magic. Bernanke covers his tracks, just like our lord and savior does.

Fischer is particularly clear that the balance sheet contraction will not be so bad as the taper tantrum, which is pretty hilarious.  During the tantrum, the forward stock of assets on the Fed’s balance sheet was actually risingbecause Fed signaling was reducing the expected pace of ultimate asset sales to greater effect than it was dragging forward the date of the slowdown of purchases  Hardly anybody mentions this because it wrecks the whole QE / tantrum story, which is aloof from any need for — you know — evidence.

But Ben Bernanke alluded obliquely to this when he said, correctly, that the taper tantrum was not about the size of the balance sheet. It was instead about the Fed being clear that it had turned hawkish and markets drawing an inference for the path of RATES. Not that things are so because Bernanke says they are, but I find it piquant that a big advocate for QE, like Bernanke, would so readily surrender such an important pro-QE argument. Good for him! Objective, if only safely in hindsight.

Again, this is not something mentioned in polite company.  And now here comes Fischer to assure us that the tantrum will not happen again.  The balance sheet contracting will have much less effect than its forward size slowing its rate of assent.

How could that possibly be? Umm, because the balance sheet never mattered much. But the willingness of academia, Wall Street and the media to swallow uncritically anything the Fed says is a sight to behold. I betcha few will even note any logical inconsistency in what Fischer says, although I would guess his most recent assertion is the right one.

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Academic, media and Wall Street analysts of QE

That some of this crew would also believe in the supposed heroic skepticism and independent thinking of the so-called bond vigilante is richer still. Not so much mounted gun slingers as sheep. Baaaah Baaaah.