A former US Federal Reserve official turned director of research for a quantitative hedge fund, DE Shaw, is calling for the Federal Reserve to be more transparent. In a video interview conducted by the Wall Street Journal, Brian Sack, former executive vice president at the New York Federal Reserve bank and advisor to the president, discussed exiting the quantitative easing trade he helped create.
Former Fed official indicates Fed funds rate could remain lower at new normal, they may hold on to their historic bond purchases
The reason the people should be confident the Federal Reserve can withdraw from a historic monetary experiment is because “The reason you should be confident they can do it (withdraw from stimulus) is the Fed staff has been developing the tools to help them to control interest rates,” Sack said. These tools and the blatant oppression of free markets, both of which occurred for the first time was done under this Federal Reserve administration, is now being unwound. Speculation from various Fed critics is that the Fed does not have an appropriate exit plan to exit the historic $85 billion per month purchase of mortgage related securities and debt across the yield curve.
“The only issue now is how to use those tools,” Sack said, discussing the financial tools he helped create. In the future, the Fed could maintain a larger balance sheet that has been considered normal, Sack said, hitting on a controversial topic. The key to speculation regarding the Fed unwinding has been how it will introduce the massive bond position into the market without impacting prices. What Sack seemed to indicate is that the Fed might not be sellers of the securities and may hold the debt instruments it has on its multi-trillion balance sheet.
Fed transparency: Drop in long term rates?
Why have long term interest rates come down so much over the past month? It could be due to a re-calibration of Fed policy going forward, Sack indicated, noting that the new normal interest rate for the US Fed fund rates might be lower than traditional ranges.
In other words, the Fed may engineer a market where interest rates need to remain low. This could happen until a point where the value of the US currency falls or US government bond debt requires inflation in which to properly manage the situation, according to Fed critics.
Former Fed official recommends Fed adopt more transparency
What does Sack recommend the Fed do to help market participants cope with the rate environment? More transparency, a similar stance taken by Federal Reserve gadfly and former US Presidential candidate Ron Paul.
In the interview Sack, now co-director of economic research at quantitative hedge fund D.E. Shaw, recommended the Fed “let the market know” about Fed decisions, and make available their thoughts to market players what they plan on doing regarding interest rates.
Fed clarity and transparency as it exits what is considered the world’s largest yield curve trade might be interesting indeed.