Where Are the Bond-Market Vigilantes?
It was a rare moment of silence at a conference known for its long and informative panels.
At a morning Milken Institute Global Conference panel on the overview for the United States economy, Milken Institute chief research officer Ross DeVol asked panelists whether “bond-market vigilantes” would force up U.S. interest rates in reaction to the federal government’s budget deficit.
“My own view is that maybe the markets give them to late spring. Or early summer next year. If something is not done on a bipartisan basis, maybe bond yields go up,” he said.
All eyes immediately turned to the chair furthest from the moderator, where San Francisco Federal Reserve President John Williams was sitting. Williams must be a very good poker player, because he hardly batted an eyelash.
Finally, it was former Chicago Mayor Richard Daley who broke the silence.
“John is the right guy to answer this but he’s remaining silent,” Daley said.
If the Fed is worried about so-called “bond-market vigilantes,” Williams wasn’t going to provide any insight.
Later in the panel, Williams opened up a bit more.
“John, since I have you here, I have to ask…” DeVol began before Williams interrupted.
“About QE 3,” Williams said. “I could give a speech about medieval art or the 49ers, and the first question would be: ‘Are you going to do QE3?’”
Williams was perhaps surprisingly open about what might prompt him to support another round of quantitative easing.
“If we see economic growth slow to the point where we’re not making any progress on unemployment, if unemployment gets stuck, or if inflation is consistently below our 2 percent target,” he would be likely to support more easing, Williams said.
This is somewhat consistent with what we’ve heard regularly from members of the Federal Open Markets Committee. Decisions on further easing will be based on data about unemployment and inflation. But the notion that it might not take an increase in unemployment to trigger quantitative easing—only a continuation of high unemployment at current levels—might be somewhat new.
Williams went on to explain that he is not currently expecting a slowdown that would justify further easing. But he did explain that further easing could either involve the Fed purchasing mortgage securities or another “Operation Twist,” in which the Fed sold short-term Treasurys and bought long-term Treasurys to push down long-term rates. Both, he said, are effective at helping the housing market.