There is a lag between monetary policy shocks and the impact on the real economy. The lag is not precise, but it is good rule of thumb to use nine months as a base. This is not the same as a policy shock to financial assets which is immediate albeit persistent. The real effects through the lending channel is often slower moving. The cut in rates starting in the spring is why recession fears have abated.
It is relevant to look at money velocity because it provides the link with the nominal GDP. Now the equation, MV=PT is an identity, so we cannot draw definitive conclusions for the money GDP causality, but we can say that velocity has stabilized over the last few years. The Fed balance sheet has exploded over the last decade, but velocity has generally declined during the QE period. We can say that the power of a money shock on GDP has diminished.
Even though the surge in money took place before the repo crisis, the Fed has had to pour billions into short-term financing through repo auctions and the purchase of Treasury bills. The semantics of whether this is QE does not matter. Liquidity has been added to the system to solve a plumbing problem. The plumbing problem diminishes the ability of current excess reserves to support a level of GDP and lending.
The focus of investors should not be on the amount of liquidity, but whether the plumbing is under stress and what is the threat of contagion from this stress. Since repo is critical not for real lending activities, but for financing of speculative positioning and inventory management of dealer, the current stress is the disconnect between the supply of debt and the demand for what is being issued. Still, a problem with funding the flow of debt will create uncertainty and volatility which will spill-over to lending for the real economy.
It is relevant to look at money velocity because it provides the link with the nominal GDP. Now the equation, MV=PT is an identity, so we cannot draw definitive conclusions for the money GDP causality, but we can say that velocity has stabilized over the last few years. The Fed balance sheet has exploded over the last decade, but velocity has generally declined during the QE period. We can say that the power of a money shock on GDP has diminished.
Even though the surge in money took place before the repo crisis, the Fed has had to pour billions into short-term financing through repo auctions and the purchase of Treasury bills. The semantics of whether this is QE does not matter. Liquidity has been added to the system to solve a plumbing problem. The plumbing problem diminishes the ability of current excess reserves to support a level of GDP and lending.
The focus of investors should not be on the amount of liquidity, but whether the plumbing is under stress and what is the threat of contagion from this stress. Since repo is critical not for real lending activities, but for financing of speculative positioning and inventory management of dealer, the current stress is the disconnect between the supply of debt and the demand for what is being issued. Still, a problem with funding the flow of debt will create uncertainty and volatility which will spill-over to lending for the real economy.
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