ECONOMY/FEDERAL RESERVE: “Bond yields around the world have surged since the European Central Bank hinted last month that its bond buying was coming to an end, a replay of the ‘taper tantrum’ in 2013 when the Federal Reserve caught markets off guard with similar plans.
Both episodes are fodder for a view widespread in markets, that bonds long ago ceased to be an independent reflection of economic fundamentals and are now just a giant bet on what central banks do with their securities portfolios. According to this view, quantitative easing (QE), as this bond buying is known, zero to negative interest rates and detailed guidance on future monetary policy amount to market manipulation on a grand scale. Whatever the theoretical benefit to the economy, such manipulation muffles market signals, misallocates capital, and creates excesses that can come undone violently.
This critique has been around for years, but it stands to gain in prominence because it’s shared by some of the people who may one day run the Federal Reserve. Janet Yellen’s term as chairwoman expires next February and if President Donald Trump doesn’t reappoint her, there’s a good chance her successor will come from the financial industry. A banker or trader would not necessarily prefer higher or lower interest rates than an economist, but would be much less trusting of economic models and unwilling to deploy the exotic tools the Fed has used since 2009.”
-Greg Ip, “Markets to Fed: Please Leave Us Alone,” The Wall Street Journal online, July 19, 2017 07:42am