Macro Wrap – The End of QE Might Be Continually Out of Reach

by Enis October 22, 2013 7:07 am • Commentary

The heightened focus on the monthly Nonfarm Payrolls report over the last 5 years has been directly due to the Federal Reserve’s emphasis on the employment picture in its policy decision-making.  Market participants have been keenly focused on each up and down of the report in trying to extrapolate future easing or tightening by the Fed.

Interestingly, the chart of Nonfarm Payrolls going back to the mid-90’s actually shows a rather robust recent jobs picture relative to history:

Nonfarm Payrolls, Courtesy of Bloomberg
Monthly Nonfarm Payrolls, Courtesy of Bloomberg

Several Fed policymakers have laid out a 6 month average of 200k job additions per month as the threshold for removing QE.  The red line is drawn at the 200k level.  Over the past 15 years, there are very few 6 month periods that averaged greater than 200k jobs per month.  Perhaps the threshold is too high.  The threshold doesn’t really matter, though.

Federal Reserve policy reminds me of the story of Tantalus in Greek mythology.  Zeus punished Tantalus as follows:

Tantalus (Ancient Greek: Τάνταλος, Tántalos) was a Greek mythological figure, most famous for his eternal punishment in Tartarus. He was made to stand in a pool of water beneath a fruit tree with low branches, with the fruit ever eluding his grasp, and the water always receding before he could take a drink

Whenever we seem tantalizingly close to a return to normal policy, a new kink in the U.S. economic story is introduced.  The debt ceiling debate is the latest kink that has delayed Fed easing.

Some might argue that the end to QE is still premature.  Clearly, the unemployment picture is far from ideal.  The participation rate is near its lows of the past few decades.  But just as QE did not cure those ills over the past 4 years, I’m skeptical that more QE will do the trick going forward.

I view QE is an extremely blunt tool, effective during a crisis, but risky overall.  QE also introduces numerous, poorly understood negative externalities – not limited to economics, but also encompassing sociology, politics, and international affairs.

(I once asked a senior member in the Department of Defense whether they consulted with the Federal Reserve or the Treasury given the widespread influence of monetary policy in foreign affairs.  He stared at me blankly.  I mentioned that the rise in food prices, which was a major cause of the Arab Spring, could be partially due to Quantitative Easing).

The long-term evidence, such as the NFP chart above, also strongly suggests that much of the difficulty in the U.S. economy is due to structural rather than cyclical concerns (of which I would place a high debt load and changing demographics at the top of the list).  In that case, policies aimed at structural reforms and improvements would be far more effective than more monetary juice.

But policymakers don’t care what I think.  The central bankers at the Federal Reserve are still too fearful of the immediate consequences of removing the foot off the pedal now, vs. the unforeseen future consequences of continuing full speed ahead.  In that context, the blurry threshold of the end of QE might continually be out of reach.  Tantalizingly out of reach.