‘It’s not the pace – It’s the size”

The quote has nothing to do with DSK's issues. The quote is the Fed Chairman's description of extreme measures accommodation and the Quantitative Easing process. July (and especially August) will be characterized by violent debate of this concept. Even if Ben is right - and we are not convinced he is - the process of debt issuance is certainly more difficult. In fact, the "stock theory" of money may become the backdrop for subsidizing larger transfer payments to the financial system than either QE or rate setting would.

We argued mightily - but to no avail - during the Greenspan Fed that Interest Rate Targeting was a highly subjective policy compass (and useless when telegraphed). Rates would oscillate but  credit availability would not necessarily track the movement. We showed that prior to Sept. 11, 2001 the Fed was "too tight" at 3.5% and in 2006, 'too loose" at 4.5%. The Fed, under the monetary regime, has arbitrarily picked a level of balance sheet and declared mission accomplished. Capital markets will remain highly volatile as participants debate the efficacy of an arbitrary Fed account balance and the Chairman's quote above.

Academically, policy very may well hinge on "size." Practically, when August will ring in 500B in rollovers and nearly 100B in new issuance, "pace" - or more accurately, process - may prove indispensable.


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