Comment of the Day: Charles Steindel: Lael Brainard: Navigating the Different Signals from Inflation and Unemployment: "I was at the speech. The Q&A was dominated by people asking about reinvestment plans... http://www.bradford-delong.com/2017/05/must-read-once-again-over-the-past-30-years-we-have-had-three-business-cycle-peaks1990-2000-and-2007and-thre.html?cid=6a00e551f08003883401b8d2884e39970c#comment-6a00e551f08003883401b8d2884e39970c
...I got up, said since I don't work for a firm with a big fixed income portfolio, my question would be on the macro side. Anyhow, I noted that inflation continues to be below target and below forecasts. Given that, why is there the belief that rates are clearly below neutral? (the prime age E/P ratio could be another indicator, though I suspect Alan Krueger may have numbers on disabilities in that group that could account for that).
She did concede the point, and even acknowledged that in principle the inflation target is symmetric. However, she's only one member, and it seems clear that barring a horrific May labor market report, all systems are go for another hike this month. It's baffling, though, that FOMC members are running around saying they are sure there will certainly be more in the second half of the year.
As to the debate over reinvestment and the ultimate size of the balance sheet, I see it as strictly an inside baseball Wall Street concern. The firms are merely positioning themselves so they can profit from some crazed leverage bet on the precise timing of the announcement and the pace of the reductions. My suspicion is that the news, whatever it may be, will result in a brief, inconsequential wiggle in long-term rates. The Fed may be better off (literally) rolling dice to carry out these plans, though some characters would probably invest in a major research program on the types of dice sold in lower Manhattan. Thus financial markets would become ever more efficient, showering all of us with a better match of savers and investors...