Is The Federal Reserve Using Its Full Toolbox?

At a Glance

  • Economist, Trader panel examines options for the Fed as they adjust to economic headwinds
  • The Fed may need to look beyond quantitative easing to spur inflation

For several months Fed watchers have engaged in a debate about whether or not the Fed’s repo market operations are equal to quantitative easing.

It’s a fun discussion but in the end, I don’t think it matters. What does matter is that the Fed appears willing to act quickly when faced with any potential economic threat.  Of course, this isn’t revelatory to those who have been paying attention over the last 10 years, but something has changed recently.

The Inflation Challenge

Both James Bullard and Jay Powell sound frustrated that they can’t bring about traditional inflation. There certainly is additional debate that suggests they’re looking in the wrong places, but that’s beyond this discussion.

The take away is twofold. The Fed appears hypersensitive to economic headwinds and they want to spur some inflation.  But does the Fed have the tools to achieve their policy goals?

In a recent discussion I had with CME Group Chief Economist, Blu Putnam, and CME Group Senior Economist, Eric Norland, both expressed some doubts regarding the overall efficacy of quantitative easing.

Blu’s contention was that the initial launch of QE in 2009 was effective because it targeted distressed assets in a particularly dire economic period.  Since then, however, QE has mostly served to boost risk asset prices.

I think that is a fair assessment.  Of course, it doesn’t matter what we think. If the Fed thinks that QE works, they are going to use it.  We have seen this attitude in both the European Central Bank and Bank of Japan as they’ve used QE liberally since the financial crisis.

Too Much or Too Little?

The Fed also has the discount rate, reserve requirements, open market operations and interest on reserves to use to navigate the changing economic picture and there are arguments to be made for each.

Traders tend to simplify things to the easiest and most understandable form. The questions that must be asked are simple: Will the Fed’s actions be too much or too little?  Will the Fed be able to spur controlled inflation or not?

The answer to these questions obviously affects those in the trading world, but also has ramifications beyond.  The Fed’s job is far from easy and is certainly not an exact science. All we can hope for is that they use their tools wisely.

Watch Angie Miles, Jim Iuorio, Blu Putnam and Erik Norland discuss the Fed Toolbox above.

Jim Iuorio is managing director of TJM Institutional Services and a veteran futures and options trader. Jim has spent his career brokering futures and options trades for large institutional clients in equity indexes, interest rate products, commodities and foreign exchange. His recommendations to clients blend macro-economic themes with technical analysis.

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