CIO Vantage Point;
Economic Outlook
February 05, 2013 Posted by:
Joe Morgan, CFA
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.
The FOMC had an uneventful meeting last week. Uneventful, that is, if you consider ongoing balance sheet expansion as "nothing new."
Though it may be nothing new, the Fed's stubborn attitude toward the economy is ramping up the exit risk they will face once the economy catches hold. By increasing its balance sheet $85 billion per month, the Fed is tempting banks to transact in the private sector rather than leave their funds on deposit with the government institution.
Once banks begin to pull reserves from the Fed, driving money supply up, the risk to price spikes can dramatically increase putting the Fed in the awkward position of reversing months - if not years - of nontraditional action within a short period of time. The fact this reversal of course will by definition be reactive, puts them even further behind the 8-ball, not to mention no central bank has attempted such policies or reversal of policies in the past.
Will they be successful?
Like many answers in the world of economics, it depends - primarily on how you define success.
I believe success of monetary policy for the next ten years or so should be defined as "action that does not propel the economy entirely off the rails."
The reality of our current situation translates to avoiding any bouts of high inflation while accepting a series of potentially deep recessions going forward.
Several deep recessions caused by aggressive tightening (once the economy catches hold) would be much better than one single depression caused by hyperinflation that impacts all financial decisions in the medium term.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value.
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Stubborn SolutionsFebruary 05, 2013 Posted by: Joe Morgan, CFAThe views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.
The FOMC had an uneventful meeting last week. Uneventful, that is, if you consider ongoing balance sheet expansion as "nothing new."
Though it may be nothing new, the Fed's stubborn attitude toward the economy is ramping up the exit risk they will face once the economy catches hold. By increasing its balance sheet $85 billion per month, the Fed is tempting banks to transact in the private sector rather than leave their funds on deposit with the government institution.
Once banks begin to pull reserves from the Fed, driving money supply up, the risk to price spikes can dramatically increase putting the Fed in the awkward position of reversing months - if not years - of nontraditional action within a short period of time. The fact this reversal of course will by definition be reactive, puts them even further behind the 8-ball, not to mention no central bank has attempted such policies or reversal of policies in the past.
Will they be successful?
Like many answers in the world of economics, it depends - primarily on how you define success.
I believe success of monetary policy for the next ten years or so should be defined as "action that does not propel the economy entirely off the rails."
The reality of our current situation translates to avoiding any bouts of high inflation while accepting a series of potentially deep recessions going forward.
Several deep recessions caused by aggressive tightening (once the economy catches hold) would be much better than one single depression caused by hyperinflation that impacts all financial decisions in the medium term.
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