Quantitative Tightening & Auto Sales - April 9, 2019
QT is “Unlikely to Significantly Impede Economic Activity”
The Trump-vs-the-Fed battle renewed last Friday when President Trump said in an interview that the Fed “has really slowed us down” and, in addition to dropping rates, Quantitative Tightening “should actually now be Quantitative Easing”. This flies in the face of Fed speakers who have described the Balance Sheet roll off as “the policy equivalent of watching paint dry”. The Fed, perhaps coincidentally, also addressed the QT debate last Friday. In “What to Expect from Quantitative Tightening”, Christopher Neely, St. Louis Fed Vice President argues that QT is “unlikely to significantly impede economic activity”. He admits that “removing unusual monetary accommodation will likely result in less real activity...” but argues that QT “was not responsible for bearish asset markets in 2018, nor is it likely to significantly retard activity going forward”. To support this claim, he points to the broad changes that have occurred as markets have recovered and summarizes that most of the effects of QE are “already undone”, “will not be reversed”, or will “disappear gradually”. For those looking for another Fed take on why QT isn’t a problem, James Bullard, President of the St. Louis Fed, recently published his views of QT in “When Quantitative Tightening Is Not Quantitative Tightening”. Bullard focuses on the effects of the ZLB and the value of QE as a signal of “credibility”.
“Customers Feel the Pinch”
In a dynamic eerily similar to the housing market, new car buyers are getting squeezed by “increasing prices and rising interest rates” according to a recent article from Breana Noble and Nora Naughton of The Detroit News. Noble and Naughton’s article followed the release of Q1 sales data from Fiat Chrysler and General Motors, which reported sales declines of 3% and 7%, respectively. Ford, which released results later, reported a 1.6% decline in sales. While other automakers, such as Honda and Subaru reported improving sales, Michelle Krebs of Cox Automotive said, “We’re seeing an affordability crunch in the whole market”.
Along these lines, Gillian Tett of the Financial Times wrote in a recent article that in regards to the auto loan market, “something peculiar is going on.” Specifically, subprime auto loans have “risen sharply” at the same time that “defaults on those subprime auto loans appear to have surged”. While Tett assures readers that “these new subprime loans are unlikely to spark another big financial shock”, “the data has left observers baffled” and, according to an article from the New York Fed, the rise in delinquencies “is surprising during a strong economy and labor market”. While “some suspect the numbers might be wrong”, we will be watching to see if the twin dynamics of higher rates and expensive inventory cause both car and new home sales to stall.