With apologies to Pynchon
After hovering just in positive territory for a long while, the equilibrium Fed Funds rate slipped beyond the zero yesterday in our model. This event, marked only by a handful of us with a solemn salute, solidified the systemic absence of monetary demand. Noah-esque liquidity is flooding a demand absent economy.
To us, the constant discussion of QE, LSAP and Taper miss the far more important evaluation of policy calibration. If the equilibrium (neutral) rate is negative nominal, then asset purchases are extremely necessary. However, the situation also highlights the impotence of monetary policy in igniting the credit cycle alone. Take your pick, Liquidity or Structural, the economy is Trapped. Capacity will have to be curtailed in some fashion or the deluge will continue to overwhelm future expectations of scarcity. "Forward Guidance" is the caulk plugging the gap and covering up the mistake. Policy makers of both fiscal and monetary stripe must shift focus to the demand side.
Until then, we have slipped, like Tyrone Slothrop (GIK), beyond the zero. Asymptotic extinction of a conditioned response to stimulus. In the words of Werner von Braun, "Nature does not know extinction, all it knows is transformation." The time has come for policy to change.