Whew. Those were a crazy couple of weeks we just wrapped up.
Morgan Stanley’s interest rate strategist Matthew Hornbach writes:
When the history books are written or market participants look at charts three months from now, the past two weeks may go down as the most important of 2012 – aside from how the US government handles the fiscal cliff (which may not occur this year anyway). The ECB introduction of the Outright Monetary Transactions (OMT), China’s approval of construction projects to spur growth, the German Constitutional Court decision that paved the way for Germany to ratify the ESM and fiscal compact, and the Fed’s decision to introduce an open ended purchase program – which may one day include Treasuries – represent a bazooka blast of monetary and, to a much lesser extent, fiscal policy support.
Hornbach isn’t the only one who thinks the world just saw something historic.
His colleague at Morgan Stanley Vincent Reinhart titles his latest US Macro Dashboard note 1492.
The longstanding problem at the Fed has been that while each policymaker more or less agreed that guiding policy by a rule made sense, they could not collectively agree on the rule. At its September meeting, the Fed effectively evaded the issue by setting QE off in a general direction, much in the same way Columbus pointed his three ships West and expected eventually to land in India
The history books admire the audacity of a man with a vision. Columbus sailed in the direction toward the known world’s end. Of course, he also sailed further than expected and landed on a completely different continent than planned.
And Greg Ip, commenting for The Economist in the wake of the Fed’s QE-Unlimited, wrote:
Between the ECB’s action last week and the Fed’s today, the world’s two most important central banks are bringing unprecedented resolve to bear on economic growth. The world may one day look back and conclude the first half of September was either a turning point for the global economy, or the final nail in the coffin of the doctrine of central bank omnipotence.
Ip correctly alludes to the risks of all this, which is that if things don’t get better, then you risk confidence collapse in all sorts of institutions, from the Fed to the German constitutional court.
Regardless, both the Fed and the ECB have done something that went beyond what people thought their institutions were capable of.
The Fed, which has previously intervened during periods of market weakness, has now fired its bazooka at a time of market strength, because of a lack of satisfaction with the jobs market. And it did something very un-central-banky, which is to hint that it’s not going to be worried about inflation for awhile.
And the ECB, which is narrowly tasked with “price stability” is now putting itself in the place of being (whether Draghi would admit this or not) the lender of last resort to the various Eurozone nations.
Now to see if this foray into uncharted water is successful is the new story we’ll be watching.