EFTA Document EFTA01388573

The limits of monetary policy Nrx:m Edi,:n I Msch::)Ef; And, we are hardly alone in this assessment. As Stephen Williamson, Vice President at the Federal Reserve Bank of St. Louis, noted in a recent review, taking a broader historic perspective: "The theory behind QE is not well-developed .. Evidence in support of Bernanke's view of the channels through which OE works is at best mixed... Much of the work on the quantitative effects of QE consists of event studies, whereby researchers look for effects on asset prices close to the date of an announced QE intervention. All of this research is problematic, as it is atheoretical. There is no way, for example, to determine whether asset prices move in response to a OE announcement simply because of a signaling effect, whereby OE matters not because of the direct effects of the asset swaps, but because it provides information about future central bank actions with respect to the policy interest rate. Further there is no work, to my knowledge, that establishes a link from OE to the ultimate goals of the Fed -inflation and real economic activity."'' Given such doubt, it is no wonder that the Fed is hoping for a return of more normal times - when it could count on well-understood tools to do the job. 3. Consequences for investors In 1976, the economist Robert Barro argued that an activist monetary policy gains much of its effectiveness from confusing people, clouding signals to market participants. That can secure tranquility for a while and perhaps provide a temporary boost to output. However, that stability comes at the cost of even greater variance later on" Eventually, you might expect inflation, GDP and also financial markets to become more volatile. Given how much OE appears to have relied on market expectations, it is hard to say if such a tipping point has already been reached. Over the past year, the investment environment has clearly been getting trickier. In the past, correlations across different asset classes were generally such that you could reap decent returns without taking too much risk, using diversification effects to mitigate the downside risks. Now things are different. This is especially true if we compare the period between 2010 and 2015 with the recent market turmoil. Lately, many unusual correlations have cropped up that you might not have expected. For example, major equity indices have tended to move in sync with the oil price. This might seem justifiab€e for the S&P 500 Index, but is less understandable for the German Dax, which does not include a single major oil producer. In any case, correlations between oil and the S&P 500 Index have historically tended to be negative, which also makes more economic sense. Worse still, many old correlations have been swept aside. Volatility is increasing. a Williamson, Stephen D., "Current Federal Reserve Policy Under the Lens of Economic History: A Review Essay", Federal Reserve. Bank of St. Louis Working Paper Series, Working Paper 2015-015A. pp. 8-9. https://research.stlouisfed.org/ wp/2015/2015-015.pdf Barro, Robert J.: Rational Expectations and the Role of Monetary Policy. Journal of Monetary Economics; pp. 1-32, January 1976; Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.The information herein reflect our current views only, are subject to change, and are not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0092205 CONFIDENTIAL SDNY_GM_00238389 EFTA01388573