Kinda, Sorta, Maybe

For the time being, there is more concern about what a "highly accommodative" monetary policy, with the federal funds rate near zero for more than five years and asset purchases still swelling bank reserves, might mean for risk-taking and financial stability than about what it might mean for wages and prices. Charles Plosser

This is the heart and soul of the monetary policy debate in one clear statement. How "accommodative" is policy when LSAP activity is gone? How will "risk taking and financial stability" be affected by the adjustment? If, as many pedestrian commentators have opined, the market is only up because of QE, then it "might mean" something awful.

On the other hand, if (and members know we lean this way) LOW does not equate to "EASY" then the consequences of adjustment filter to an already anemic recovery quickly. The data cluster from the recent market activity is too clouded by year end, EM hot money and weather to say for sure. Q2 shapes up to be a big gateway to the path ahead. We are already seeing evidence that money is chasing some "stuff" other than financial assets. This may/may not/ prolly isn't "inflation" but certainly changes the narrative.

Unlike prior easy money experiments - oh say Greenspan - that tolerated financial institution growth and financial asset kiting with underlying GDP growth and low unemployment, the QE era has seen tons of the former and little of the latter. Sometime, in dark quiet moments alone, a Bond King may realize he was just lucky to coincide a career with a secular disinflation. The fighting in the Kingdom is a sign the times are changing.

Thus, Mr. Plosser sizes up the money question perfectly : Without LSAP, how accommodative is monetary policy? More importantly, how will we know before its too late?


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