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Most Recent Commentary

Tax Reform Has Released the Bulls
Donald L. Luskin
Wall Street Journal
Friday, January 12, 2018
P/E ratios may seem high, but policy changes augur much better earnings in the coming years.

Most Recent Media Appearance

Fed Should Unwind Its Asset Portfolio Quickly
Wall Street Journal Letters
Thursday, January 18, 2018

The Wall Street Journal editorial page has always been appropriately skeptical of the claims of former Federal Reserve Chair Ben Bernanke during the quantitative-easing era. So there’s no reason, today, to let his dubious rationales for QE be a basis for worry about stock prices now that these programs are finally being unwound.

In your Jan. 17 editorial “The Tax-Reform Stock Rally,” you say Ben Bernanke sold QE “as a tool to drive investors into riskier assets, including stocks.” But it isn’t true just because he said it. When the Fed buys bonds or mortgage-backed securities, it gives the seller, in payment, a cash deposit on the Fed’s balance sheet. In such a transaction, all that happens is that the duration-risk of long-term Treasurys and the prepayment risk of MBS is taken out of the market by the Fed, replaced with a riskless overnight deposit that earns the prevailing fed-funds rate. Whatever rationales Mr. Bernanke may have offered, the true boon of QE was simply to de-risk a market that was reeling from the worst financial panic in generations.

Nobody was driven into stocks, or into anything else. If for some reason an investor, who had sold his Treasury bonds to the Fed, decided to use the cash proceeds to buy stocks, then some other investor would have to sell those stocks. There is, of necessity, no change at all in the net ownership of stocks.

De-risking was important after the global financial crisis, so the Fed’s buying several trillion dollars of Treasurys and MBS may have actually made a difference, if only by calming things down a little bit. But the crisis has long been resolved, and markets don’t need to be de-risked any longer. In today’s more risk-tolerant environment, the Fed’s glacial runoff of its bond and MBS portfolio, through natural maturation, not outright sales, will drip a little risk back into the market one day at a time. Today’s market won’t even notice.

By unwinding its asset portfolio now, when the market can easily tolerate a little more risk, the Fed is not imperiling the economic expansion and the bull market in stocks, but prolonging them by returning to a more normal and predictable policy posture.

Donald L. Luskin

CIO, Trend Macrolytics LLC