Wednesday, May 14, 2014

Update on QE and the ZLB

Here are the graphs of the estimated escape from the zero lower bound, inferred from treasury yields.  The schedule of the escape continues apace, in the face of the taper, suggesting that we might finally be heading back to normalcy.

The first graph is the expected date of the first short term rate increase on a stationary calendar. 

The second graph is the expected date of the first short term rate increase, measured in number of years from present.  As hopeful as this looks, it's also a reminder that we are basically just getting back to where we were 3 years ago, when QE2 ended.  How much further into a recovery would we be today if QE2 had been maintained until sustainable inflation pressures were established?


  1. And what happens at the end of QE3? I don't think this means a damned thing- ZIRP is here to stay.

    1. You should take a long position on 2018 Eurodollar contracts. If you are right, you would make a killing. They are priced at about 3%.

      Eventually, I think we will be back here, but it looks to me like we might see short term rates move up for a little while first. Stanley Fischer and Yellen give me some hope though.....

    2. It will be interesting to see what happens to interest rates if we continue to see recovery. It seems like rates would stay at zero if there are large excess reserves still in the system, but that assumes that reserves are the bottleneck. If bank capital is the bottleneck, then I think rates could rise even with extra reserves in the system. I have come to treat excess reserves as if they are disconnected from the operations of commercial banks.

      I would assume that we would eventually see capital flowing into banks in that case, but that might not happen immediately.