QE risks vs benefits
June 2, 2021
–The purpose of $120 billion per month in QE is to bring employment back to full capacity, which I suppose means that all service businesses that closed during Covid should be re-opened. At this point, QE appears to be a blunt tool, working against a counterforce of extended unemployment benefits. Yesterday Bullard said the US job market is tighter than it looks. We’ll get more information on Friday, as the employment report is released (NFP expected 650k). The gains on employment from additional QE appear marginal at best, however, downward pressure on money market rates is increasing due to QE, with $448 billion in RRP yesterday. Short rates continue to make new lows, with 3 month libor setting below 13 bps yesterday. Rock bottom short term yields are fostering speculation; moving investors further out the reddit risk curve. I would personally judge that benefits of QE are now completely outweighed by risks to financial stability that will ensue with an unwind of complacency. Perhaps some clues will come with today’s release of the Beige Book, exactly two weeks before the June 16 FOMC announcement.
–Are price pressures increased by continued hacks? Yesterday JBS beef plants were hit, with ramifications to US meat supplies. Security enhancements and redundancies are likely not transitory in nature. But if that’s conceptually hard to quantify, WTI prices above $68/bbl aren’t.
–The curve edged a bit steeper yesterday, with tens +2.9 bps to 1.615% and bonds +3.2 to 2.294%. Relatively quiet in dollars, though red/gold pack spread rose 4 bps to 162.25. In late March I marked this spread as high as 182.
