This Fed is on a Mission

QE Unwind starts Oct. 1. Rate hike in Dec. Low inflation, no problem.

The two-day meeting of the FOMC ended on Wednesday with a momentous announcement that has been telegraphed for months: the QE unwind begins October 1. It marks the end of an era.

The unwind will proceed at the pace and via the mechanisms announced at its June 14 meeting. The purpose is to shrink its balance sheet and undo what QE has done, thus reversing the purpose of QE.

Countless people, worried about their portfolios and real estate investments, have stated with relentless persistence that the Fed would never unwind QE – that it in fact cannot afford to unwind QE.

The vote was unanimous. Even no-rate-hike-ever and cannot-spot-housing-bubbles Neel Kashkari voted for it.

The Fed also telegraphed that it could raise its target range for the federal funds rate a third time this year, from the current range of 1.0% to 1.25%. There is only one policy meeting with a press conference left this year: December 13, when the two-day meeting ends, remains the top candidate for the next rate hike.

This has been the routine since the rate hike last December: The FOMC decides to change its monetary policy at every meeting with a press conference: December, March, June, today, and December.

Even hurricanes won’t push the Fed off track.

The Fed specifically mentioned Harvey, Irma, and Maria. No matter how destructive, they won’t impact the economy “materially” over the “medium term” and therefore won’t impact the Fed’s policies:

Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.

This Fed is on a mission. There was zero surprise in the monetary policy decision today, which is key: The Fed wants to revive its credibility. It wants markets to take it at its word. But that’s not an easy job.

Starting in 2013 and into early 2016, the Fed engaged in feverish flip-flopping at every squiggle of the markets, first on tapering of QE and then on raising rates. I mused a few days ago:

During this period, they took their credibility out the back and shot it. And when that credibility seemed to still have any life left in it, they shot it again. And even after everyone saw that it obviously had no more life left in it, they shot it again, just to make sure.

Now markets don’t believe anything the Fed tries to communicate. They’re hoping that at the next market squiggle, the Fed will re-flip-flop, cut rates, and restart QE. Markets are dreaming.

“Low” inflation, no problem.

Fed officials see consumer price inflation below their target of 2% for the next two years and are OK with it. The Fed’s favorite inflation gauge, core PCE (ex food and energy), was 1.4% at the last reading. But no big deal. Fed officials lowered their projections of core inflation to 1.5% by the end of 2017, and to 1.9% by the end of 2018.

And yet – despite market rumors and hopes that the Fed would flip-flop – rate hikes keep coming, albeit at snail’s pace; and on October 1, QE will begin to unwind.

Why? Asset prices.

Fed officials have been mentioning asset prices explicitly since last year. Inflated asset prices make inflated collateral values, and the banks are on the hook. Deflating asset bubbles threaten “financial stability” via this mechanism of collateral. They take down banks because collateral values collapse. And they do terrible damage to the real economy. This Fed doesn’t want another big crisis.

In its Implementation Note, the Fed confirmed today how QE will be unwound. It starts slowly, picks up pace over the next 12 months, and hits cruising speed on October 1, 2018. The Fed will “gradually reduce” its balance sheet by letting maturing securities “roll off” without replacement, it said. And these are the amounts of its “balance sheet normalization”:

  • In October 2017, it will shed $6 billion of Treasury securities, to be increased every three months by $6 billion, to reach $30 billion a month by October 2018.
  • In October 2017, it will also shed $4 billion of mortgage-backed securities, to be increased every three months by $4 billion, to reach $20 billion per month by October 2018.
  • Combined, the Fed will unload $10 billion in October 2017 and raise that to $50 billion a month by October 2018.
  • The future size of the balance sheet has not been announced yet.

Here’s the schedule:

  • Oct – Dec 2017: $10 billion a month.
  • Jan – Mar 2018: $20 billion a month.
  • Apr – Jun 2018: $30 billion a month.
  • Jul – Sep 2018: $40 billion a month.
  • From Oct 2018 forward $50 billion a month.

So $300 billion over the next 12 months, and $600 billion a year, starting October, 2018. If this goes on for four years, the Fed will cut its balance sheet by $2.1 trillion.

This is the amount of money the Fed will destroy – just as it created this money during QE. It’s the reverse of QE, with reverse effects.

In basic terms, it drains money from the market like this:

When securities mature, they’re redeemed. Whoever holds them gets paid face value, and the securities become void and disappear. So when the Treasury securities that the Fed holds mature, the Treasury Department transfers the money to the Fed. If the Fed doesn’t buy other assets with the money, that money just disappears.

The Fed creates money, and it destroys money. But it doesn’t sit on trillions of dollars in a cash account. Here’s an explanation of Fed balance sheet accounting.

Since the Treasury Department doesn’t have the money to pay off maturing bonds – as the US government runs a big deficit – it raises this money in advance by selling bonds at regular auctions. In other words, the bond market gives the money to the Treasury Department to redeem the maturing bonds. If the Fed holds these maturing bonds, the Treasury Department gives this money to the Fed. And the Fed destroys it.

In this manner, the Fed drains money from the market – when at cruising speed, at a rate of $600 billion a year. This is the reverse of what happened during QE. The purpose of QE was to inflate asset prices. Now the reverse purpose commences.

Yet, the Fed re-emphasized that its monetary policy – despite rate hikes and QE unwind – “remains accommodative,” thus stimulating the economy. What it is doing now is merely removing this accommodation gradually. It isn’t actually tightening yet. So don’t expect this Fed to flip-flop at the next squiggle of the market.

Flip-flopping killed the Fed’s credibility. And that’ll be a problem for the markets. Read…  “You Should Take the Fed at Their Word”

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  196 comments for “This Fed is on a Mission

  1. Cookie says:

    Well they created this mess in the first place.

    • Tom Kauser says:

      What do the securities do when the head mistress is talking to the meany creditors about the future of the orphanage?

    • MD says:


      The mess was caused by the unbridled, sociopathic greed of financial speculators and their actions.

      Subsequently, a lot of time and money has been spent to convince us that the problem was government and regulation.

      It wasn’t.

      • Quite Likely says:

        Yep. For the last few years we’ve been in a position of desperately but not getting fiscal stimulus. Monetary stimulus is a poor substitute with some bad side effects, but has probably been better than nothing.

  2. Uncle Bob says:

    This is like paying $10/month on a $4,500 credit card. I’m highly skeptical the fed will ever reach “cruising speed” and it looks like the markets agree.

    • Wolf Richter says:

      Oct – Dec 2017: $10 billion a month.
      Jan – Mar 2018: $20 billion a month.
      Apr – Jun 2018: $30 billion a month.
      Jul – Sep 2018: $40 billion a month.
      Oct 2018 forward $50 billion a month.

      So the first 12 months = $300 billion total.
      Starting Oct 2018 = $600 billion every 12 months.
      At that rate, it will take 4 years to cut the balance sheet by $2.1 trillion.

      • d says:

        Correct me if I am wrong did not the FED put on at 80 B per month Plus other big QE intervention’s.

        With this sort of incremental.

        Junk market may start to tighten late 2018???

        • Wolf Richter says:

          Yes, close. QE3 — aka “QE-Infinity” … probably the funniest Wall Street hype misnomer in history — announced in December 2012, was the most aggressive QE program and amounted to $85 billion per month in Treasury securities and MBS purchases.

          The junk market is in total denial. See the Toys R Us bonds, that traded at 97 cents on the dollar until two weeks before the company filed for bankruptcy. Now they’re below 20 cents on the dollar. When I wrote my first article about the approaching TRU bankruptcy filing on Sep 6, these bonds were still trading at over 90 cents on the dollar. Denial is the junk market’s primary characteristic these days.

          I don’t know how much longer it will last. My guess is that the junk market will begin to wobble later this year or early next year. It might have some serious issues by late 2018.

        • Tom Kauser says:

          I am knocked out about “operation twist” go long , old fools!

      • M. Sample says:

        Who in their right mind would buy these bonds the Treasury will sell?
        That why all the propaganda lately is pro American economy talk?
        Also, if no buy side interest and have to force, what’s your opinion on enforcing 401k requirements to purchase?

        • Wolf Richter says:

          As I said, if yields rise enough on Treasuries, I will buy some of them – as will the rest of the world.

          The credit risk on Treasury bonds is near zero (outside of a debt ceiling fight, hahahaha) since they’re backed by a money-printing central bank. And so the US Treasury won’t need to default because the central bank can always buy those bonds if push comes to shove.

          There are other risks, though, including inflation. A big bout of inflation could wipe out the purchasing power of those bonds… but that would be true of all dollar-denominated assets.

  3. Trader says:

    Doubt it. Fed will reverse course, pressure from Trump will be strong to keep QE

    • Wolf Richter says:

      That’s exactly what I was saying: the market (which includes you) is still blowing off the Fed and is still hoping for a rate cut and more QE. It’s almost funny how relentless these hopes are. They’ve been proven wrong for 9 months at every step along the way.

      And therein lies the risk. When markets finally come to grips with what it means, the “adjustment” could be fairly rough.

      • Gary says:

        from what I understand, in the 1970’s inflation was very high, and then Paul Volcker did a shockingly large rate hike to counter it. Do you think such a scenario will play out again? Meaning, somehow things get to very high inflation again? (before the REAL rate hikes can happen)

        • Wolf Richter says:

          When Volcker finally cracked down with Reagan’s consent, inflation had been very high for a long time – for many years – and no one had been doing anything about it. I don’t see this type of inflation happening in the US in the near future.

        • nick kelly says:

          US inflation accelerated violently in 1979- 80, blowing past all post- war rates and going well into double digits.

          Everyone fled the US dollar for ANYTHING: gold, Swiss franc, D-Mark etc.

          At this time, it may have been the Hunts of Texas with the Sauds of Saudi Arabia, deciding to offer silver- backed bonds, a clear competitor to the Fed’s greenback, that provoked Paul Volcker to raise the Fed rate to 18 percent.

          In case this might not been enough competition for silver and the silver- backed bond, at the same time the Chicago exchange was instructed to stop accepting long offers for silver and accept liquidation offers only.

          This permanently damaged the Hunt brothers’ belief in the Universe ( they had previously been caught trying to corner soybeans, with their children having huge long positions)

          They reacted as though the ten commandments had been repealed and largely withdrew from market operations.

          Silver then collapsed, as did inflation but at painful cost to those who had come to believe in ever- rising prices.

          Volcker remains the iconic hard- ass gunslinger in modern Fed history and, note well, is revered within the institution.

        • Willy2 says:

          – This is VERY persistent myth and EXTREMELY hard to kill.
          – Volcker didn’t kill “Price Inflation” !!!! It was the corporate sector that killed that kind of inflation !!!!
          – When inflation is at say 6% then in the 1960s & 1970s employees received a 6% or more wage increase. It meant that producers were able to increase their price by the same amount (6% or more). The result was high price inflation.
          – Starting in the early 1980s that changed. Employers kept a lid on wage growth. So, if inflation was at say 4% then workers would only receive a say 2% wage increase. Thereby putting pressure on producers to NOT increase their prices with more than say 2%. That’s what killed inflation in the early 1980s. Not Volcker or the FED.
          – And the reason that US producers were forced to reduce wage-increase was foreign competition (think: Japan, China, South East Asia, etc.)

        • nick kelly says:

          Uh ya it is VERY persistent and wide spread, kind of universal in fact.
          All I’ll say about this different drum is about ‘competition from China’.
          This was 1979- 81.
          There was no competition from China. Exports were negligible.

      • QQQBall says:

        Well lets be clear…. wrong for nine months???? Over almost a decade the FED talked about raising aka normalizing rates… They have announced a schedule. BFD.

    • mick says:

      Trader. You assume the FED does not want to blow up the markets and world.
      You are mistaken, and will pay dearly for this mistake.

      • JZ says:

        The fed is saying :” i am going to drain those stuff on my balance sheet, and if guys dare to short anything, my other front shop in Asia/Europe will long the market until you will turn long again and those will NOT be on my books and nobody will audit me”.

        The truth is, nobody knows what a small group of powerful people will do. When they are saying one thing, they are doing 100 other things nobody knows. Only their friend knows, the rest will get fleeced.

        You can guess what ever you want from the public information, but you will never dare to put your money since you know it is a casino and you are not the house.

        I wish the market in an investment instrument as opposed to a casino as it is today.

        • Gershon says:

          The fed is saying :” i am going to drain those stuff on my balance sheet, and if guys dare to short anything, my other front shop in Asia/Europe will long the market until you will turn long again and those will NOT be on my books and nobody will audit me”.

          Concur. You can’t just look at the Fed in isolation, given the collusion and racketeering among and between the central banks and market movers like certain unsavory investment banks fond of pitching toxic-waste “investments” to the muppets. Central bank balance sheets are still growing by some $200B a month, and real inflation – or more accurately the loss of purchasing power due to the Fed’s debasement of the currency – is running a lot higher than two percent. Maybe the Fed recognizes its credibility is shot and that its provision in trillions of financial crack cocaine to these rigged and broken “markets” has created massive, dangerous distortions and imbalances, but I believe that the Fed’s basic purpose has remained constant since it’s misbegotten 1913 inception – namely, to serve as the oligarchy’s chief instrument of plunder against the middle and working classes. The chicanery, swindles, and racketeering by the Fed will continue apace. A real audit is needed to uncover the full scope of these activities.

      • thats good, and its a minor non-sequitur that there might be yin yang to this, that Greenspan/Bernanke would crash the market, while Yellen is not of that persuasion. I believe that 2008 was an engineered crash landing, due to credit creation in the private sector threatening the Feds control of the monetary base. This fed may allow things to get very bad before they act and not wanting to unbalance the global balance of power, while of course DJT wants America to win, so those two are due to collide on policy.

    • Willy2 says:

      – I wonder whether Trump ever will understand what’s going on.

      • Frederick says:

        Trump graduated from Wharton school of business and ran a development/ builder business in NY so I’ve got to believe he knows what’s going on pretty darn well

        • Mary says:

          Given that the Donald’s business history is pockmarked with bankruptcies and fraud (Trump University), his last real accomplishment seems to be graduating with an MBA.

          Want to talk about what he’s been saying and doing more recently?

        • nick kelly says:

          Unlike Japan where admission to the only university that counts (Tokyo U) is strictly via exam results. the US Ivy League and runners up can almost always be entered by kids of the ‘right’ family
          In the US this means money.
          These institutions invented the gentleman’s ‘C’ where an obvious fail is passed because of the above.

          Maybe someone can enlighten us how Trump (and for that matter Bush) graduated when Trump especially has the vocabulary of a not very precocious grade 8.

        • James Levy says:

          George W. Bush graduated from Yale and Harvard Business School. Does that mean he must have known and understood what was going on circa 2005-8?

        • MD says:

          LOL oh yeah. He’s so bright I gotta wear shades.

          I mean that Mexican wall thing – fuckin’ genius going on right there.

          Jesus wept. … No wonder we’re going backwards.

        • d says:

          in the warton management classes the idiot did well in nether macro or micro economics.

          you cant run a country the way you run run your own company.

          The idiot has never had an entity to work in that he did not have majority control of.

          That sort of business teaches you very little.

          He seems to have majored in corporate fraud and asset stripping.

          Nether of which are attributes that will help him MAGA for any but his corrupt section of the elite’s.

        • Lee says:

          So from the anti-Bush Trump camp:

          Let’s see: Bush was an idiot. Bush was a pilot in the Reserves so I guess that must mean all pilots are idiots if Bush could it.

          Trump graduated from Wharton where he supposedly couldn’t read – great endorsement for that school. Ran a business too. Must mean all those that do that are dumb as well.

          Let’s have equal opportunity bashing here for the anti-Clinton/Obama camp:

          And well the Zero and Clintons were lawyers – says it all. Most lawyers reputations are bad. They must be dumber than a rock and bombed out of their heads from all the substances used in past years. Wonder how they made it through the years they were President and/or running for office…………….

          And as far as university grades are concerned, please be reminded that as bad as Bush’s grades were, Gore’s were worse……………….

          Never hear much about that though as it would wreck that argument from the Bush haters.

          And as long as we are talking about grades, maybe someone could release Obama’s for us to see. They have to be the best kept secret in the world!

          With all the leaks in Washington we know about this FISA warrant, that FISA warrant, transcripts of phone calls, leaks from Grand Juries, Wikileaks, Manning, Unmasking, but not a peep about those grades…………….

        • chris Hauser says:


          how ’bout dem apples?

        • TheBloomIsOffTheRose says:

          Trump received a bachelor’s degree from the Wharton School of Finance and Commerce, which he attended for two years. He does not have an MBA from Wharton’s Business School.

      • Lee says:

        Yeah, all those Wharton grads like Trump must be real idiots.

        Maybe you should drop them a line and let them know.

        • nick kelly says:

          It is well known that after pulling the family strings to get into the Texas Air National Guard to avoid Vietnam (leapfrogging applicants who could ALREADY fly), Bush started being AWOL from that, being too busy with politics.

          The officer who initially refused to pass Bush because Bush hadn’t been present enough was coerced into signing off. He was hounded by both sides until he died.

          The movie ‘Truth’ starring Robert Redford dramatizes this but no one disputes its factual basis. It doesn’t use pseudonyms, Bush is Bush, and he hasn’t sued for libel.

        • Lee says:

          I knew it!!

          Yep, for over 70 years the US Air Force has been pulling the wool over Americans’ eyes by spending millions of dollars to train those pilots.

          Yep, Nick nailed it. Anybody can become a pilot. Even Bush.

          And no it was no different from what Mr. Gore’s friends did for him pulling strings:

          “So Ms. Byrne’s former husband, a member of the Guard, asked a well-placed contact to hold a spot for Mr. Gore.

          When the word came back that yes, they would hold a slot, we were so excited,” Ms. Byrne remembered. “But he said, “I appreciate what you’ve done, but I just don’t believe I can do this.’ He talked about how small the draft roll was in Carthage” — and how, if he did not serve, someone he knew would have to take his place.

          Source: NY Times

          (Although Mr Gore did have the guts to enlist and go to Vietnam.)

      • Gershon says:

        Trump has been captured by the same “monied interests” that he railed against during his campaign as a faux economic nationalist, and that Thomas Jefferson warned us would be the end of the Republic. He will do whatever his bankster puppet-masters and handlers direct him to do, which is most emphatically not in the best interests of the fed-up Deplorables who swept him to victory.

      • Ethan in NoVA says:

        During the debate he point blank said that everything is in a giant bubble.

        • James Levy says:

          Yes, and since the stock bubble has expanded wildly since he took over, he never ceases to point to that bubble with pride and say what a great thing it is and how it is a validation of his “leadership”.

          Why do people want to buy into frauds like Trump and the Clintons? What is it that leads otherwise intelligent people to overlook the obvious: these people are venal, self-serving, ego-driven nonentities with fancy diplomas and no insight or imagination (other than imagining themselves president).

        • chris Hauser says:

          you may send me some of your bubble assets you don’t like.

  4. GSH says:

    I understand the treasury part of the roll-off. The government has to sell additional treasuries to cover the maturing Fed-held ones. How does this work for the mortgage backed securities? Whose bank account is being drained?

    • Wolf Richter says:

      MBS work differently from regular bonds.

      1: When mortgages get paid down or get paid off by the homeowner, the proceeds flow through the bank to the issuers of the MBS (Fannie Mae and Freddie Mac) to the holders of the MBS. So over the years, an issue of MBS gets smaller and smaller naturally. The Fed has been using those proceeds to buy new MBS to keep the amount on their balance sheet level. It also took the proceeds from the maturing MBS and replaced them with new MBS.

      2. During the unwind, the Fed will not replenish all the MBS, as per schedule. So the MBS issued by Fannie Mae and Freddie Mac must be bought by market participants. In other words, the market needs to buy those MBS that the Fed used to buy. So cash from the market flows into these MBS. In the chain, the market pays the issuer (Fannie and Freddie), which pays the banks when it buys the mortgages from them. And the banks pay the seller of the home. That used to be the Fed’s cash. Now it’s the market’s cash.
      This drains cash from the market that would have been used for other things.

      • Maximus Minimus says:

        To attract the same amount of market cash, yields will have to rise. This will slow the credit in real estate. In investment terms: bonds down, stocks to follow, wealth effect down, cash in savings accounts up.
        The central banks have no idea how the cool aid distorted the economy, but will find out.

      • economicminor says:

        In theory, interest rates should go up?

        I wonder if this will eventually benefit savers?

        Probably not as banks take losses in other areas will continue to need all the money they can get to increase the pay of their execs.

        • Wolf Richter says:

          I’m already getting offers of a whopping 1.25% for money market accounts (Capital One) and savings accounts. Some smaller banks offer even more. Goldman Sachs is trying to attract savers too (1.2% online savings account). These are still miserably low rates, and they’re still below the rate of inflation. But hey, it’s up from where they were 2 years ago.

          Unfortunately, interest rates for savers are usually one of the last things to move up across the board.

  5. Kreditanstalt says:

    Worried about “asset prices”? The very same spending on “assets” that somehow doesn’t count in “official” inflation numbers?

    Has the Fed suddenly learned what “inflation” actually IS and didn’t like what it saw?

    • Wolf Richter says:

      Bosten Fed president Rosengren has been the most outspoken on asset price inflation with his focus on commercial real estate that started over a year ago. He has given entire presentations on it.

      • economicminor says:

        As all these high priced assets will only be repurchased with higher interest rate loans. Most all real estate should deflate in value.. Which would mean lots of existing mortgages on real estate would be for more than the new appraised values. This would be for both commercial and residential.

        It would seem to me that IF this actually happens, IF people are convinced that this will be the trend for years (still skeptical), that anyone with a functioning brain would try and sell to not become part of the collateral damage. Thus flooding the market. While any thinking potential buyer would wait until things bottomed out before buying.

        If the above happened, in our highly leveraged world, it would be a disaster. I think most of us understand this and that is why most people do not believe it will happen.

        • d says:

          “If the above happened, in our highly leveraged world, it would be a disaster. I think most of us understand this and that is why most people do not believe it will happen.”

          In our highly leveraged world what could and may in fact happen is that real estate values and rents go sideways (effectively down for the next century) whilst housing affordability returns for the masses.

          If housing affordability for the masses does not return, System implosion, must, and will occur.

          Crashing real estate values is senseless as it will harm the lenders the CB’S have just spent 9 years and counting recapitalising.

          Hence the FED will now try to impose the stagnation the Obama administration imposed on the street economy, on “assets” for a long long time as the “wealth effect” did not flow where the FED needed it to.

          The wealth effect did not flow as the FED required, as the Obama administration did not play its part “Monetary policy alone can not resolve the issues” and neither is the Trump administration playing its part.

          The FED does not have a Magic wand, if the administration policy and fed policy are not synchronized, then thing’s do not go as the fed plans.

          The FED. Tries to manage the US Economy For the good of the US.

          Not Manage the economy. To suit the Political Aspirations of the sitting administration which frequently are long term economically untenable.

          The US economy is still the strongest largest and most complex Economy in the world that the world has ever seen.

          Managing something like that in real time, with out a Modern Historical business model is Alchemy, at best. Mistakes are to be considered the norm, not an exception.

          china will implode before the US does unless the chinese succeed in imploding the US economy deliberately, which they are trying to do, and have been for some time. Their Korean dog, is a huge element in this activity.

  6. Camerons says:

    You have been adamant that the Fed will raise rates and unwind QE all along despite “Countless people, worried about their portfolios and real estate investments” relentlessly stating that the Fed would never unwind QE. Kudos!
    BTW, What happened to the Fed mandates? Low inflation, no problem. Rising unemployment, no problem.
    Also, what happened to the “don’t fight the fed” mantra?
    Looks like the Fed has painted itself into a corner and now watching that paint dry.

    • Gershon says:

      “Countless people, worried about their portfolios and real estate investments” relentlessly stating that the Fed would never unwind QE. Kudos!

      There are countless other people, like myself, who refused to speculate in these rigged, broken, manipulated markets or to buy into the insanely overpriced asset bubbles blown by the Fed and its central banker cohorts. We note that there’s no such thing as tapering a Ponzi, and note that the Fed’s engineered boom/bust cycles have been the most efficacious means of transferring the wealth and assets of the vanishing middle class to the Fed’s bankster partners in crime. We continue to view the Fed as the greatest swindle ever perpetrated on Americans and that facilitating the unfettered looting of the 99% remains its central mandate.

      • polecat says:

        How does one efficaciously kill a Taperworm, when it just keeps sloughing off bankster segments that forever feed para$itically off the host’s economy … without killing the host ?

      • alex x says:

        You should have. What was going on was obvious, as you’ve stated. Why let them have all the $$?

  7. Bobber says:

    I have to say, Wolf was the first to recognize the shift in Fed policy and comment on it. He’s been 100% accurate on this over the past year.

  8. Gershon says:

    The Fed since 1913 has had only one mission: to plunder the 99% on behalf of its oligarch patrons.

    • d says:

      Feel better now.

      There are Oligarchy’s and entitles with objective, like those you attribute to the FED

      The FSB and CCP clans along with their Globalised Vampire Corporate allies, and the Catholic Church, mainly.

  9. Bobber says:

    What happens if the markets don’t take this well, stocks fall 20%, and interest rates rise to a level that exceeds the Fed’s interest rate target?

    I assume the Fed will want to maintain its interest rate target. Would the Fed have to restart QE, or could the Fed keep interest rates low through some other mechanism (like Fed funds rate or repos)?

    • d says:

      “What happens if the markets don’t take this well, stocks fall 20%, and interest rates rise to a level that exceeds the Fed’s interest rate target?

      “A lot of speculators get their tail pieces handed to them for lunch. Especially if they have a lot of highly leveraged property or brokerage accounts that do not have a “no loss in excess of balance available policy”

      Which is long over due.

      The FED can maintain it interest rate target, however if the Spread/Margin grows to large between FED rates and Mortgage rates. Repos and FED funds will be among the first weapon used. QE is not really an interest rate weapon, its effect on interest rates is not its “Primary” “intent”.

      I dont see this as an issue for some time, as there is still a huge amount of liquidity sitting in junk, that is willing to buy Treasuries at 1- 2% > That is willing to buy into MBS at only slightly higher % that that if it can get them.

      20% is only a very long overdue correction.

      35% < in a short time frame would paint a different picture.

      The Tapering of the FED Balance sheet has been long priced in, only the blinkered they will never do it with throw a taper tantrum this time. Let them.

      What will be more interesting, is watching the health of those peopel and entities, who have borrowed short term, to finance stock buybacks, when they need to Refi.

      One thing that is not happening in this future economy, is a swift pickup in consumption in the west. Particularly of "Durable Good's/Autos". Which are more and more made in china, and not very durable.

    • The Central bankers instead of buying stock will simply buy and sell stocks exclusively amoungst themselves such as can been seen with penny stock pumps. This will be the rig job of the century when we see all the bankers buying and selling to the other bankers meanwhile all the stock prices rise just like you see with penny stock pumps.

      • Wolf Richter says:

        This would make an interesting topic for a novel – possibly a humorous work of fiction. But it has nothing to do with our reality.

        • nick kelly says:

          How about the Catholic Church being allied with the CCP?
          How’s that for politics making strange bedfellows.

        • d says:

          They are NOT allied.

          However they are two entities with the same objective.

          The same objective as the Muslim’s and Indians.

          Three of them use the same basic elements and share some tactics.

          The chinese have never deliberately used 1 tactic, the other three still do.

    • Frederick says:

      Twenty percent would be a mild correction and very much needed I’m thinking it will be more like 70 percent

  10. Kite fight says:

    Will US dollar get stronger or will it loose world reserve crown

    • Wolf Richter says:

      The dollar should have gone up just like long-term yields should have gone up this year based on the Fed’s policy actions. But the opposite has happened. This is part of the phenomenon of the market blowing off the Fed.

      My guess is that the market will eventually adjust, with the dollar and long-term yields rising.

      The dollar is the largest reserve currency, but not the only one. The euro was supposed to reach parity with it and was on track to do so when the euro debt crisis nixed those plans starting in 2010. So the dollar will remain the dominant reserve currency for many years.

      Over the long term, there will be shifts, particularly with the Chinese yuan becoming more important. But that’s not happening over the next few years. This stuff takes a lot of time.

      • Lee says:

        Maybe the entities that pushed up the A$ over 10% YTD will finally get the message………

        • d says:

          Did they push the Aud up or did the Usd fall against it, mostly, since June last year??

          Many peopel with currencies priced against the US complain their currency is rising when in fact it is the US falling.

        • Lee says:

          Traders have piled into A$ positions based on the idea that the Fed wasn’t going to increase rates and that the RBA would increase before the Fed.

          The Chinese also pushed up iron ore prices by some 60% in a few months and this ‘helped’ the A$ as well.

          (Those people just simply forgot that as the A$ went higher is reduced the amount in A$ terms that the producers were getting for their product!!!)

          The A$ went up on good news, went up on neutral news, and went up on bad news: low GDP growth – no problem, wages stagnating – no problem, Chinese data less good than expected – no problem, a dysfunctional government – no problem.

          IMO the move has been way overdone.

        • d says:

          “The A$ went up on good news, went up on neutral news, and went up on bad news: low GDP growth – no problem, wages stagnating – no problem, Chinese data less good than expected – no problem, a dysfunctional government – no problem.”

          Much like the US markets and $ at one point in this cycle since 08, no mews was bad new’s.

          With all the US $ EUR and OIL TANKER LOAD’S CNY/RMB thats been prinbted, things like taht happen.

          You ma\y have heard of “The great ball of chinese money” wherever it rolls to, it causes distortion and financial mayhem.

          Some of it rolled to AU, hence various market distortion’s, in AU. Particularly in “Real Estate”

      • d says:

        “I think you might be a few days Behind with the “Should have”.

  11. Stephen Mapes says:

    So who buys the bonds from the Treasury at these low rates thT Treasury uses to redeem the FOMC bonds that expire…foreigners who get more yield here than they can overseas?

    • Wolf Richter says:

      I will buy some of them if yields go high enough to where it makes sense :-)

      Your question makes an important point. In the end, yields will have to become more attractive to entice buyers. This is the plan. The Fed wants to push up long-term yields.

      • cdr says:

        Me to.

        If I can get an average yield of only 4% (I expect more), I can live the life of a retired country gentleman who can afford to pi*s away a large part of his monthly income because a new pile will be arriving the following month. As you say, current yields aren’t worth it, unless negative rates are on the way (they don’t appear to be as of today). Some high yield funds have >4% but capital gains risk is too high to buy any shares … the price will fall as rates rise.

        Still watching paint dry (the Fed in action) and living a slightly hunkered down life so as not to spend the capital I plan to invest in high interest funds.

  12. Mark says:

    So you would expect to see longer duration US Treasurys decline in value and yields rise? As the yield curve steepens, wouldn’t that be stimulative for banks to continue lending?

    Or, would rising yields on long bonds take wind out of the equity markets’ sails?

    Or, so long as other central banks continue their QE programs, money will continue to inflate assets here?

    • Wolf Richter says:

      Higher long-term rates would give banks reason to lend more, but borrowers would have to do the math a little more carefully. Some of the frivolous borrowing, such as for corporate share buybacks, might decline. But when you have a real project in the real economy and it’s a good project, it should work even when rates are one or two points higher than now.

      Asset prices overall are likely to decline over time. In the past, there was about a year or longer between Fed policy changing direction and markets reacting to it. So we’re really just 9 months into it.

  13. Kite fight says:

    Are we going to see real estate crisis, price crashing since Fed is not buying mortgage securities rather taking it back .

  14. Jest says:

    Thanks for the good explanation on how the unwind works..I get it!
    But, what I wonder is if they just destroy $50 Billion a month, who is gonna fill that gap? Or doesn’t the government (treasury) need it? Or is it easy to raise the $50 Billion from other sources or countries buying the US bonds?

    • MC says:

      At least for the time being investors need all the yield they can get and some: just remember today 10-years Spanish bonds yield 1.53%. Official CPI in Spain at the moment is 1.6%, meaning the interest is not even enough to cover official inflation, let alone the real one.
      As an investor, would you buy that junk?

      10-years US bonds presently yield 2.26%. Even with the currency exchange risks they are tempting to European and Japanese investors. An extra 100 bps (1%) would be hard to resist. A further 2% could make every issue massively oversubscribed, and exchange risks be damned.

      Like many non-US savers I am sitting on a growing pile of cash for the simple reason there’s nothing to buy. I am already exposed to equities enough and while junk bonds have their place in a varied portfolio, they cannot and should not replace decently yielding investment grade stuff.
      And I know my Swiss, Japanese, German etc friends and colleagues are in the same position I am.
      Give us something with an attractive yield and investment grade rating and we’ll hold our nose and buy it by the barrel.

  15. JB says:

    The feds know there is enough liquidity in the world to keep the balls in the air and to absorb losses. It is hard to believe that this was a unilateral decision by the feds. The central banks work in unison. The 2 % percent inflation meme was,
    along with other faulty economic assumptions, was just a smoke screen to continue the feds policies. Let’s see if the ECB dials back its stimulus. Good call WR. You provide unrivaled reporting .

    • cdr says:


      The ECB will dial back the stimulus when the world ends. the Eurozone will end when the ECB ends QE.

      ECB QE is a socialist project to print money to cover daily expenses for the Eurozone. It artificially lowers interest rates, which would be far too high if they reflected Eurozone risk accurately. The Eruozone can’t afford to be a socialist empire if it pays market rates or taxes as it needs to to support its lifestyle. Hence, ECB QE.

      FYI, negative rates are a form of Eurozone taxation. So it’s not a complete free ride with the printed money.

      So far, the world appears stupid enough to believe anything Draghi tells them about QE and they also believe any goofball story economists come up with to explain away any problems with ECB QE. Simple common sense tells the real story.

  16. Petedivine says:

    If long term rates increase won’t that create pressure on the housing market? Won’t we also see increaseing insurance premiums because of the recent spate of regional emergencies, and on top of that we could see increasing taxation to cover state and municipal pensions. There is a lot of tinder laying around. The Fed could be starting another housing implosion.

    • Bobby Dale says:

      Higher yields on Treasury(and other investment grade) bonds can help to stabilize or possibly lower insurance premiums as insurance companies are big investors in them.

  17. barnacle says:

    I’m trying to understand how to reconcile the fact that the US is over $20 Trillion in debt, yet this move by the fed should strengthen the dollar. This seems like a potentially precarious situation for the country to be in is it not?

    • d says:

      US Is still a net importer, also a strong dollar reduces global oil prices.

      But its not good for export manufacturing in the current unfair globalised system, which china and its globalised vampire corporate allies, play to their advantage. India is also trying to jump on this band wagon.

      Huge difference between free trade, what china wants, and free fair trade, which chian dosent want and actively regulates against.

      Goocd article the other day (Reuters I think) on European Fatigue with the china unfilled promise to open markets situation.

      Reciprocity will mean much chinese opening of markets, or many more restrictions on chinese trade in Europe, was the bottom line

  18. Willy2 says:

    – No, I expect a rate cut in the next few months.
    – And I also expect long term rates to gohigher within say 18 months. No, NOT as a result “Inflation”.

  19. Tom McCloskey says:

    Thank you for the unparalleled (and desperately needed) clarity, Wolf! I mean it.

    You nailed the Fed’s agenda several months ago. I’m glad I already subscribed to your argument then.

    With that said, what will the Fed do with the gobs of interim interest payments it continues to collect? I presume they’re a large chunk of change.

    • Bobby Dale says:

      Fed profits(after interest payments on bank reserves) are thrown into the fire, i.e. handed to the U.S. Treasury, where they are used to pay interest on the debt.
      Kind of depressing when I look at that in black and white.

  20. raxadian says:

    As I have posted on this site before, December will be an interesting month. And it will be a anomalous holiday season. Either people will cut back on expending or will actually waste more thinking they won’t be able to do the same next December, or both. Overall I think people will expend less but who knows?

    Who will crash and burn with end of cheap credit? Besides Retail and Uber I mean…

    A lot of unicorns will die like a roasted chicken instead of like a phoenix.

    Overall I think 2018 will be a worse year than this one.

    • d says:

      “Overall I think 2018 will be a worse year than this one.”

      For whom???

      what harms 1 sector, can and frequently does, feed another.

      • raxadian says:

        Of course someone is gonna profit. The winners of the hot potato games played with stocks, the ones that made tons of bucks with cheap credit and got rid of most of their debt, the “company hollowers” (as in they hollow companies by reducing assets and filling it with debt until there is nothing left) and others will have a good year. Not to mention the many companies that will take advantage of recent natural disasters to make big bucks. Construction is gonna go up with all that rebuilding.

        But if you are middle class or a worker? Hahahaha!

        • Guido says:

          Middle class fellow here. I listen to NPR, read NYT and WaPo, and watch CNN. They tell me everything will be ok for me. Just like when they told me that they did all the probability and stochastics in the world and there was no way a certain anointed one will lose an election. I trust them when they tell me I am employed even when I am not working anymore at the hollowed out company or anywhere else. I trust them because they know.

          Hahahaha right back in the face of reality. So there.

        • d says:

          Mainland chinese financier the other day, over lunch.

          Current public position on the mainland re CCP news entities (all news entities on the mainland are under some form of CCP control) .

          Reverse what ever they say, and you will be closer to the truth, than what they say.

        • d says:

          Thats better, It identifies your projected beneficiaries at least..

  21. Wilbur58 says:


    Seconding JB’s comment above, do you really view the Fed as being distinct from the banks? I always assume that the Fed is entirely under their control.

    That said, I think the real issue here is that the banks know that for all the interest income they get these days, (with private debt through the moon), that the party can’t last. All of us Michael Hudson fans are well aware that the private debts around the world simply cannot be paid at this time. It’s gotten too large.

    The only play left is to lower the commercial and residential real estate values. This way the rate of new money creation and debt slows down. The other positive effect of cheaper housing is that people have more money in their pockets, helping the real economy. Not that the banks care, but again, it creates a more stable flow of interest income.

    (I always find the annual reports of the banks kinda funny. Even though they’re all run by the Wall St gambler dumbasses, they still make most of their money from interest and bullshit fees. In other words, the Wall St dumbasses aren’t good at their jobs. They’re not trading geniuses. They just rob the bank of its interest income.)

    • Wolf Richter says:

      The Fed really doesn’t want another financial crisis. And it will try to prevent it. Many of the Fed heads are seeing the risks building up — and have said so. I think this is part of the new thinking at the Fed that started in late 2016. I think they’re getting worried. At the same time, if they move too fast, they could CAUSE a financial crisis. So they’re really careful in how they proceed.

      • raxadian says:

        To give you an idea of how low a 1% or 2% anual interest is, it was mentioned in the Conde Of Montecristo as a reasonable fee… for a private loan. So the FED current rate is equivalent of what was a reasonable fee for a private loan centuries ago.

        Crazy, don’t you think?

      • cdr says:

        Disagree about starting another financial crisis. That idea is a popular excuse many people recite without even thinking about it. It’s ‘common wisdom’ and also bogus.

        Raising rates quickly will cause the equity markets to fall and raise the rates for junk debt (debt for junk investment specifically, not debt for good projects from higher risk companies).

        Babies who rely on low rates, paper flipping investments, and their media shills will scream and act like the world is ending. They will shriek “Pity the poor saver in the markets … have you no heart?”

        In fact, only the stock market is falling. A percent of two in higher rates for working capital loans will not end the business world, only the junk investment world. The rest of the world will go on and barely notice, except for the savers who have been waiting for higher rates to return, as they have been for hundreds of years before the invention of QE and financialization. They will invest in debt that now provides realistic income and spend.

        This is called “fixing the world” not “ending the world”.

      • Wilbur58 says:


        It seems you really do see the Fed as being independent of the banks. Is that correct?

        Also, I’m with CDR, and a little more cynical. I believe we’re fully in a crisis, an asset inflation crisis. A living costs crisis. I think that raising interest rates fixes things and doesn’t hurt anything. It should normalize assets to an extent. And no one should give a flying F about equities as they have zero to do with the real economy of goods and services.

        Again, my view is that the banks know how much debt is going to default and see this as a way to mitigate losses. But I’m open to being wrong.

  22. bandini70 says:

    Are not most of these Fed assets generating income? I forgot the numbers I read, $10b month might be a wash?

    As well as nothing prevents another part of the government from sucking up liquidity. Or from what I remember in the past, isn’t there a Belgium extension of the Fed/IMF/BIS that was buying assets at one time?

    As with much of the Fed, its a shell a game. The corruption will continue.

  23. Kreditanstalt says:

    The Fed doesn’t know what it’s doing. They are hobbled by their outdated models, charts, curves, and formulae.

    One can always HOPE that one day they will come to the blinding realization that THEY themselves are the problem, that their raison d’etre is destructive and that the only solution is to close up shop.

    All the distortion we see is DIRECTLY related to expansion of the supply of money and credit.

    No, the system won’t crack up overnight, or suddenly. A change, a re-set, will occur slowly, perniciously, as it has been doing: greater economic disparity, fraying at the margins, more people falling into dependence and poverty, shrinking spreads, arbitrages and profits, fewer and fewer good investment opportunities, more and more speculation masquerading as “investment”…

    Bluntly? Counterfeiting has killed real economic growth off.

  24. Gershon says:

    Physical precious metals remain the ultimate hedge against the Fed’s debasement of the currency. One fine day, as the financial house of cards created by the Keynesian fraudsters at the Fed and central banks comes crashing down, the flight into safe haven assets is going to be epic. I think a major motivation behind Yellen’s belated attempts at pretending to be a responsible central banker instead of a Goldman Sachs adjunct is the Fed’s fear and loathing of gold as a sound alternative to the fiat currencies being relentlessly debauched by central bank money-printing. Key to predicting the Fed’s actions will be its response to any sharp rise in the price of gold indicating an unraveling in the misplaced “faith and credit” that is propping up the dollar.

    • cdr says:


      Gold nuts are jealous of bitcoin. You can at least make jewelry out of gold. Bitcoin is a greater fool concept but the bitcoin people are making real money, or at least will be making real money if they cash out of bitcoin and perhaps into gold, but filthy cash will also do nicely.

      Perhaps the great minds of gold can come up with gold backed bitcoins, and tie the price of gold to the price of bitcoin. Then they can finally recover from the fall in gold from 1800/oz to today’s value.

  25. Max Power says:

    I think one of the problems is that Americans in general have been taught to think in nominal rather than real terms.

    Think about it, how often have you seen a graph of real interest rates (fed funds rate minus then current inflation rate) published somewhere? Almost never! Pretty much all you see everywhere are graphs of nominal rates.

    Here we know the truth but it would useful if the MSM would talk about interest rates with the effects of inflation netted out as it would accentuate the fact that real rates are still insanely low in a historical context and hopefully help expose the how ridiculous the Fed’s excuse is that pretty much the only reason they have for not raising rates is because “inflation is low”.

    • Kent says:

      My understanding is that the Fed has been attempting to make the real interest rate negative. Their objective is to make the real interest rate match the “natural” interest rate, which, in economics land, is the interest rate at which maximum employment will be achieved with minimal inflation.

      I believe they think that the natural level of growth in the economy has slowed to a point that interest rates will be historically low until some point where folks will once again want to make significant capital investments in the USA again.

      • cdr says:

        Negative rates are a form of taxation. They close the loop of globalists using central banks and QE to monetize debt of all kinds, thus removing some of the ‘free ride’ aspects of money printing. Savers subsidize borrowers. They are a wealth transfer system from the poor and working classes to the wealthy who borrow money at low rates for quick profits. In the ECB, they subsidize socialism and open borders.

        Inflation debases the value of long term debt. This is a different concept from negative rates.

        Low rates also cause spending to be lowered. You interest expense is my interest income. I spend interest income. I spend nothing if I don’t earn interest income. Thus, permanently low rates are deflationary. Low rates lower GDP by crowding out savers, just like rates that are far too high end investment by crowding it out.

        • Kent says:

          “Low rates also cause spending to be lowered. You interest expense is my interest income. I spend interest income. I spend nothing if I don’t earn interest income. Thus, permanently low rates are deflationary. Low rates lower GDP by crowding out savers, just like rates that are far too high end investment by crowding it out.”

          Interesting thought. But I think it works the other way around too. Your interest income is my interest expense. Any money I don’t have to spend on interest is money I can spend. In that sense, it is neither deflationary nor inflationary. The same money is spent, just by different people.

        • cdr says:


          people borrow when they see a reason to use the borrowed funds to make money. Savers spending creates the need for investment to provide savers with more goods and services. It’s a virtuous cycle.

          People don’t borrow just to borrow. Some borrow to buy assets to flip and make money. Thus QE and artificially low rates (This is also how the skim occurs from the QE providers to their constituents.) These people don’t spend much in the real economy. Also, retail investors rarely cash anything out to spend. Some are tax-phobic. Others use advisers who make money based on how much is under management. These people have a million excuses why it’s never a good time to sell anything. It costs them money if you cash anything out.

  26. mvojy says:

    Does this foreshadow lower equity values on the market and margin calls? If investors are also forced to unwind to cover their margin calls that could lead to the 10% market correction that has been talked about for some time now.

  27. unit472 says:

    My guess is ‘monetary policy’ will only ‘tighten’ to the point it begins to collide with fiscal policy. Just as Draghi must buy Italian government bonds or see yields rise on them to the point Italy is forced out of the Eurozone ( or Germany agrees to debt mutualization) so to the Fed will have to resort to more QE when Treasury yields rise to the point Congress has to start cutting entitlement spending.

  28. DK says:

    Taking QE out of the system must create some deflationary effects. Equities, bonds and real estate seem like the most obvious targets as they’ve increased greatly in the last 5 years. As always, timing is the key. Junk bonds may be the canary/ indicator to set the new reality in motion.

    • cdr says:

      QE and rate management CREATES deflation. Removing it ENDS deflation.

      Higher rates promote spending because they promote savers who earn interest income. This spending creates demand. People who make junk investments love low rates. They spend little in the real economy.

      Since this is common sense, it raises the question about how the Fed and all other central banks got the idea that we needed abnormally low rates basically forever. It raises another question about why so few people seem to notice this, even those who are educated in elementary economics.

  29. minjung says:

    I was wondering: The Fed has announced that it will unwind its QE policies. Saying something is much different than being able to do it. Do you think, the Fed will be able to pull this off? I mean, isn’t the Fed already too far up the shit creek? For one thing, the Fed owns so many bonds, whose yields it cannot afford to go up, because that would drag the prices of these bonds down, which would tear great holes into the Fed’s balance sheet, would it not? Also, states are still heavily indebted, so it will be rather bad for them, if interest rates rise on the government bonds?

    What are you thought?

    • cdr says:

      If anyone else had won in 2016, we would be on our way to negative rates and expanded US QE. So, it’s too early to declare victory over that crowd. Who sits at the Fed will allow us to feel safe or not safe about the possibilities in the future. Those who have no issues with globalism are high risk. Those who prefer higher rates so that interest income is useful again are a good sign.

    • cdr says:

      Also, you don’t lose money if you let a bond mature. You only lose if you sell it at a lower price than what you paid for it, or intend to sell it sometime before maturity. Accounting rules cover gain/loss recognition of debt investments.

      Government debt growth is a different problem. It’s called living with one’s means. Letting various state debt burdens explode naturally is probably the best solution. I have no clue about the Federal debt.

    • Wolf Richter says:


      I’ll give your questions a shot…

      1. Will the Fed be able to pull off the QE unwind? It will start on October 1. So yes, it will begin. And it will go on from there. Their intention is to do this mechanically so that no decision needs to be made. They will keep doing it until something Big happens. I’m not talking about a major stock market decline or a routine recession, but something really BIG. If nothing BIG happens, they’ll keep doing it until the balance sheet is down to where they want it, which they have not yet said what that is. This could be about half the current size.

      2. Yields can rise to some extent without major problem for the economy. Sure, housing and other assets would take a hit. But banks benefit when yields rise. Yes, speculators that gambled on selling bonds at a higher price than what they paid for them will lose. But investors that hold bonds to maturity might welcome this (insurance companies, pension funds, etc.) since they don’t lose money on current bonds in their portfolio but earn a higher yield on new bonds that they have to buy.

      3. Losing money on its assets is no problem for the Fed. It can always create more money to fill the holes.

      4. Yes, all heavily indebted entities (states, cities, corporations) would see a larger interest expense burden. But much of their debt matures years down the road, and they only have to refinance a small part of their debt each year. So at first, this isn’t going to be much of a problem.

      The bigger problem for states and corporations is their credit worthiness. When investors become more careful, they will demand higher yields from riskier borrowers (yield spreads widen). This may push the weakest entities to default on their debts. This would be a good thing. It would weed out a lot of zombie companies, and states would be forced to deal with reality and pursue more responsible policies. Sure, those bondholders will take a licking. But that’s what the type of reckless investing that central banks have nurtured is all about.

      • QQQBall says:

        on #2. I heard on a podcast, that current USG interest payments on debt are below the levels of 1980 (I think). The future is not linear, so it will be the non-linear complications that cause a blow-up.

        Not a comment to you, but the FED has been wrong for a decade and to think these guys can unwind w/o creating more problems is laughable.

        So if a loss on assets doesn’t matter, why not just put the USTs in a big dumpster and burn them? The FED and Treasury are already playing pitch and catch…

        Wolf, Thank you for all the quick explanations and expanding on your thoughts.

      • Stevedcfc72 says:

        Great article and great replies Wolf.

        So from 1st October 2017 the QE unwind starts in the USA, looking at this from a global point of view what does it mean for the ECB if anything, if they do completely the opposite and keep adding to their huge QE?


        • Wolf Richter says:

          The Bank of Canada has already raised rates twice this year and will likely raise again in Dec. The Bank of England will likely raise in Nov. The ECB already tapered QE by €20 billion a month earlier this year and is likely to announce some more tapering or rate hikes (to less negative) this year. The Fed leads, others follow.

          That said, the Bank of Japan is in its own universe. And Chinese authorities have their hands full trying to keep their corporate debt problem from turning into a financial crisis.

        • cdr says:

          Wolf wrote “The ECB already tapered QE by €20 billion a month earlier this year and is likely to announce some more tapering or rate hikes (to less negative) this year.”

          Bet for bragging rights: No ECB tapering -ever- unless nothing left to buy. Temporary dip possible, but only because shortage of assets to buy – ignoring the provided excuses they state. Longer term – no real changes in ECB asset buying except possibly a small amount in magnitude. Asset buying forever, only the excuses might change and the magnitude a little.

      • minjung says:

        Dear Wolf

        Thanks for your answers!

        to point 3:

        I am not sure, if this is no problem for the FED. If yields go up and prices of bonds come down, this obviously means that they bonds, which are the FED’s asset will be worth less. It is true, that the FED does hold them to maturity, it will not sell them, so it will not realize the loss. But still the assets are worth less, it is just not accounted for because institutions can just mark their assets to messy (instead to market, if prices go down), so this must have some real effect, mustn’t it?

        And about the FED printing money.. I mean the FED does also have equity and by printing money to cover losses (even though they might just be book loses, they are still losses), it will have to issue new liabilities, but issuing new liabilites will not really pull you out of the mud. So by covering losses printing money, this could eventually lead to negative equity and I am not sure how long a central bank can go with negative equity?

        • Wolf Richter says:

          Losses, no matter how great, are irrelevant to the Fed. It can print money to fill the hole. A money-printing central bank is unlike any other entity. It cannot become insolvent. It just cannot. It can digest any loss of any size. “Equity” for a central bank doesn’t matter.

          That Fed carries the securities at cost on its balance sheet. It does not mark them to market… it does not adjust them up or down as market value changes.

          The Fed transmits its profits to the US Treasury Dept. every year — for 2016, $92 billion. In theory, if it loses money, it won’t remit any profits. So the US Treasury would feel those losses. But losses are unlikely.

          Since the Fed will get face value for the securities it rolls off when they’re maturing, it will only experience a loss if it bought the securities at a premium. The premiums weren’t big for anything other than long-dated bonds. For example, if a few years ago, it bought a 30-year bond that was issued in 2005 (30-year bonds were reissued starting in 2005), it would have paid a hefty premium for those. So that bond will mature and roll off its balance sheet in 2035. And it didn’t buy many, if any, of those. Most 10-year maturities it bought and that it still holds would have had only a small or no premium.

      • ASP says:

        “states would be forced to deal with reality and pursue more responsible policies.”

        That’s not gonna happen. Every local government I know is corrupt.

        They’ll try to raise taxes…property, utilities, sales taxes.

    • d says:

      “Fed already too far up the shit creek? For one thing, the Fed owns so many bonds, whose yields it cannot afford to go up, because that would drag the prices of these bonds down,”

      FED is holding until maturity then redeeming the bond’s.


      If the issuer can not pay in cash, then they are placed into bankruptcy or restructuring processes.

      So if the bond’s the FED has are the trash all the FED basher’s say they are.

      Then the American economy and a lot of American bond issuers are heading for big trouble.

      Not being a FED BASHER I understand the FED is a bank and lender of last resort. It dosent buy junk (with out good reason(Part of its lender of last resort objective)) and it dosent trade bond’s very often, it buys and holds to maturity. If it makes a profit on the yield, the Treasury ends up with most of it.

      It is not a stock and bond trading entity, with a depositors fund wing it can milk at will, like, Wells Fargo, UBS, Goldman, BOA if it suffers trading losses in a heads we win tails depositors loose Scenario. The trading entities claiming to be banks mentioned operate under.

      The fed is not , contrary to common FED Basher belief, playing lets screw Trump. so much more slow and steady work will be done through balance sheet reduction. Than interest rate inceases

      If the FED fed was out to harm the administration (WHICH IT IS NOT) FED rates would already be 4% or more, the US economy would be in recession, and the administration would be spending all its revenues on interest.

      The FED can do this very quickly, all that would happen to the FED is that the chairperson would be changed by congress. Which would have a little cry in an inquiry, then all would return to normal, after Trump was thrown out at the following election.

      In the construction of the FED, the intent was mainly to bring stability to the American banking and financial system.

      • Raymond C Rogers says:

        If the FED wanted to harm a presidency, it need not be blatant about it. The suspicion lies in timing and gradual changes that turn the tide.

        The stock market has been in concerning bubble for a few years now. Wolf has posted the graphs showing the less tha stellar earnings of the S&P as a whole. The P/E ratios are not indicative of real growth for the average American. This was pointed out in 2015. The FED didn’t do much in 2016. Personally, my belief is that they didn’t want to rattle markets before Hillary’s rightful assention to the WH. And let’s not rewrite history, nearly everyone thought she had it, and the last thing a candidate needs is a recession when someone of the party holds the reigns.

  30. michael says:

    My appreciation on your conviction on this topic Wolf. The announcement yesterday changes nothing and the FED has no credibility. They keep threatening to remove the keg while the drunken frat boys run about trashing the place. They have let this run on way too long and now nobody believes them.

    They want to ease back on the throttle and come in for a smooth landing from a full throttle position. I think the time for them to be the adult in the room is long gone.

  31. Petunia says:

    I hate the term asset bubble because it whitewashes what is actually happening which is hyperinflation. Hyperinflation is happening in many markets, some are national markets like healthcare, and others are niche markets like $1M crap shacks in California.

    Americans spending 20%+ of their income on health insurance is a hyperinflated market for healthcare. Average houses costing $1M in California is a hyperinflated market. Cable tv at $200 a month is a hyperinflated market. Cars at 50-100% of average income is a hyperinflated market.

    Hyperinflation is here folks. My grocery bill doubled in two years, please don’t tell me it didn’t. I buy basically the same stuff, I’m not counting the extra things we buy once in a while, that would make the bill higher.

    We moved to cut costs. The cable bill will be going soon. I am not the only person moving, cutting the cord, not going to the movies or eating out so much.

    The political class is tethered to Wall Street and totally disconnected from the voters. And they think giving local police rocket launchers is going to be enough.

    • Justme says:

      I will disagree mildly on the terminology, if not the facts. I think it is extremely important that the general population finally understands that increasing stock/bond/housing prices is a form of inflation, namely ASSET inflation, and that they learn this concept well.

      The word hyperinflation already has a well known connotation of a wheelbarrow of Deutsche Mark being needed to buy a loaf of bread.=, in post-WW1 Germany.

      So maybe we can start saying

      Asset (hyper)inflation
      Healthcare (hyper)inflation

      so as to inform the population and teach them the concept.

      • Bobber says:

        Good point. I like the term asset hyperinflation. It definitely implies something is wrong or distorted. Also, it’s a proven matter that asset hyperinflation leads to bust, so we could also start referring to the Fed’s actions as a “boom and bust” policy.

      • Petunia says:

        I don’t disagree with you that both terms are correct. But when people above the median income are struggling to keep a roof over their heads, buy food, and keep the tv on, I don’t think the term hyperinflation is out of bounds.

        There are many commenters here who didn’t live through the inflation of the 70’s or are too young to remember. That inflation was also occurring in niches in the economy, which are different from, the niches in which it is occurring now.

        The 70’s had high interest rates, high union labor wages, and high real estate prices in some markets. But there were also more jobs then and they kept better pace with inflation than they do now. Healthcare was affordable. We still had a middle class.

        Housing selling for $1K – $2K a sq. ft. is hyperinflation, even if it’s luxury housing. Gold selling at $1300 is hyperinflation. Lego sets at $800 is hyperinflation. None of this makes any economic sense, which defines hyperinflation.

        • Tom Kauser says:

          All they cared about in the seventies was getting out of Vietnam and on Television sometimes both at the same time? And the bankers oil embargo which came later to pay for America and save Britian!

        • cdr says:

          Hyperinflation is when a loaf of bread costs $1+ a slice. Housing for $1000/sq ft is just a greater fool bubble or desperate laundering of cash.

          Dystopia (or maybe pre-dystopia) is when normal income families can’t live in the average world.

          Extreme deflation creates dystopia and QE creates deflation if accompanied by negative rates, low wages, and open boarders.

        • Wilbur58 says:

          Petunia & CDR,

          Good debate.

          Personally, I see nothing wrong with calling the asset bubble “hyperinflation”, even if a loaf of bread can still be had at $2.99. Is this a question of semantics?

          For me, it’s critical to set wages against mortgages and rents, and then compare the ratios to historical. If we’re well above norms, we’re pretty hyperinflated.

          But then when you add FICA, healthcare, and utilities into the mix, we’re in very messy territory. Hyperinflation and dystopia aren’t mutually exclusive, right?

        • d says:

          For me, it’s critical to set wages against mortgages and rents, and then compare the ratios to historical. If we’re well above norms, we’re pretty hyperinflated.

          Which is housing affordability (House price – X many years salary) and disposable income.

          If you brake those down to percentages. And chart them.

          The man in the street is worse off than he has been in the last 150 + years, beyond 150 it gets harder to get the accurate numbers.

          We have passed the point where the average man starting from 0.Has no hope of buying and paying off his house in his working life time.

          So if your father dies and your step father cuts you off and throws you out as soon as he can. YTou are dead in the water before you start. Before you even think about borrowing for higher education.

          That is a problem.

          People with, who run the place, refuse to see it.

          People like barney frank and all the other Keynesians. Who pushed, housing, housing, housing, as an economic driver, until it fell over, then he drafted “Dodd frank” to “Regulate the finance industry”.

          Caravan parks/Trailer Home parks, are becoming container lots with family’s living in 1, 20 foot container, stacked 10 high.

        • Frederick says:

          You’re MUCH better off without that TV Petunia but I agree things are totally out of control for most of the country That’s the main reason I left Too expensive and frankly in my opinion anyway NOT worth the cost

  32. Professor Plumb says:

    Great article and thanks for spending the time to interact with your follow up comments, Wolf. One minor disagreement: Paul Volcker was appointed by Jimmy Carter in August 1979 right after the announced phased decontrol of domestic oil prices in June 1979. A oil price induced ratcheting up of inflation was baked in with the decontrol of US domestic oil prices. Volcker aggressively pursued a “tight monetary policy” in early October 1979 where the federal funds rate was increased by 1%, and the stock market swooned. However, the dollar rallied and the stage was set for a massive dollar rally because foreign capital flowed into the USA. How much Reagan had to do with the decline in inflation and how much sway he had over Paul Volcker will be debated for years. Reagan reappointed Volcker in 1983, but he eventually “fired” him in August 1987 when a more friendly Republican, Alan Greenspan was selected. Whether Trump will “hire” a more friendly Federal Reserve Chairperson when Yellen’s four year term is over with remains to be seen. Watch the dollar, commodity prices and oil prices over the next few months for clues.

  33. rn says:

    When the “QE” brain damage starts, equity’s drop, gold & silver rally, dollar continues to fall, bond prices explode and all manner of derivatives begins to melt down. You will see a flight to safety in decentralized crypto currency / block chain tech !

  34. The fallacy here is that the Fed is operating in a bubble, the domestic US economy. While the global Central Banks have been adding liquidity to the markets, and in the seamless web of international capital flows, SNB buys US stocks, yen carry trade schemes, etc, there is no way to figure this without a very wide lens. But Wolfs No1 Fed waits to see if something BIG happens is false. These people are not gamblers.
    The real problem is a breakdown in Central Bank unity, which in theory will never happen, unless some populist figure is elected and puts us on a sound money regime (but the DeepState quickly lulled DJT to sleep, and at debt ceiling crisis 999 he holds hands with Pelosi and they sing Kumbaya) to quote the interrogative cliche, Get It?
    The Fed has to raise rates while LIBOR is under pressure, they are already behind the curve on that count. So the FED has to play ITS part in the game (like bailing out DBs derivative mess last year) So forget your anemic GDP, CPI, its stable and stable is the Feds mantra. The next recession will be global (in order to spread the effects out evenly, you disperse risk, that’s how you handle it, and Yellen will get Central Bank authority to buy equities, most likely due to a crash in the stock market. The one thing that might go wrong is Donald Trump will awaken and remember who he is, but his base knows nothing about Fed or Central Bank policy, their ignorance is bliss.

    • Tom Kauser says:

      As short rates go up interest on excess reserves paid to the banks begin to cannibalize main street? The double effect of banks funnelling money to the federal reserve and the Fed increasing the drag on growth creates a quick sharp drop in money supply? The Federal reserve will continue on this death spiral until revolt surprises everyone!

  35. Tom Kauser says:

    And for the ones without cellphone plans the inflation must be unbearable? Get an I-phone and get addicted!

  36. Tom Kauser says:

    Asian contagion 2018!

  37. Anon in LA says:

    In Los Angeles on many trendy retail streets almost half the stores are vacant due to high rent…due to commercial buildings changing hands at astronomical prices. Even shops that sell $6 ice cream scoops or balls of rice can’t make it work, paying $20,000 a month rent. This is a huge distortion, something has to give.

    We have lost restaurants and small businesses that were there for decades, thanks to the criminals at the Fed.

    It’s amazing how these racketeering crooks in their private meetings 3,000 miles away can unleash destruction across the entire country and reaching into every little main Street.

    It’s like a tsunami of credit that has unleashed more destructive power than any of the recent hurricanes.

    • Tom Kauser says:

      Basel Switzerland is a bit further but same ball park!

    • junior_kai says:

      You see that same story all over the country. Business – and peoples lives – are gutted by the (((usual suspects))) and their worthless academic theories put into practice.

    • Petunia says:

      In the last couple of days I’ve been getting ads for an auction at Christie’s of vintage Hermes handbags. For the fashion challenged, Hermes sells very expensive handbags and is the epitome of fashionista status. The ads are highlighting a sampling of prices in the $5K – $75K range.

      This sale will be an interesting window into the luxury markets. At the low end, it’s a chance to buy for half price and at the high end we will see how much money is really sloshing around.

  38. Jack Cayre says:

    I want to believe the author that the Fed is trying to normalize their balance sheet , except he hears one thing and those that own assets hear another . What i heard is that they will reduce the balance , but if a shock to the economy occurs, that will begin buying assets again with printed money . Not one stooge reporter asked exactly what would constitute a shock to the economy . Would a 10 % stock market correction be enough to get them started again ? 20% ? Where exactly is the threshold , or would she just dodge the question so as not to give the impression that the market is no longer a free one ? ( As if we all don’t know that already anyway ) . i believe this will continue until there is political change brought on by social unrest .

    • Wolf Richter says:

      A 20% stock market decline is routine and not a shock to the economy. It might not even impact the real economy.

      The Financial Crisis was a shock to the economy – not because of the stock market crash but because the banks were collapsing and credit froze up, borrowing came to a halt, the supply chains seized, GE and IBM couldn’t borrow to meet payroll, etc. That’s what a “shock” looks like.

      • jack C says:

        All good except you are not on the Fed’s board, and I guarantee that after a 10.1% fall in the market we will have various Fed board members get TV saying that the balance sheet run offs will be put on hold.

        • Wolf Richter says:

          That’s exactly what the markets are hoping for. Nay, they’re not hoping for it, they’re certain of it.

        • d says:

          And it

          “anti gonna happen”

          As the FED knows the Obama administration wouldnt make it trickle down for their reasons and the Trump administration wont for their reasons.

          So the FED will have to use its limited tools, to attempt to balance the economy, before it implodes.

          “Monetary policy alone, cannot resolve the issues”

          9 years in, and still the administration is not willing to play it’s part. Or any part in trying to resolve the Economic issue’s at hand.

          Protectionism is simply protecting the haves. From the unfair competition.

          It resolves none of the imbalance. In the economy or society.

          And if wolf and I are wrong.

          God help America.

        • jack says:

          Well wouldn’t you be if that is EXACTLY what they are saying they will do ? They don’t define what quantifies a shock to the economy . Why not ? I thought they were all about being transparent ? You say a shock would be more than 20 % down . I say this market falls over 10% and they get on TV saying they will resume printing. Regardless, even taking 20% down in stocks they would maybe even begin to buy ETF’s. Im against it of course, but Im a insignificant dot in the universe

        • d says:

          “They don’t define what quantifies a shock to the economy . Why not ? I thought they were all about being transparent ?”

          A correction is up to 20 % of market level from the start of the moment.

          A recession is over that.

          A shock can be a sharp movement in either band, 10 % in a week is a shock, 10 % in a month is part of a correction movement. Or even a correction movement.

          These bands are all standard Market terms. Part of the vocabulary and knowledge set, of those who observe and are interested in these matters.

          Unlike Tech or Microsoft the financial industry does not go out of its way to create a Tech/Microsoft only language (its acronym’s are all standard accounting language).

          Only difficult people who are being difficult because they can replace start with “Boot Etc” but still use “Restart” just to accentuate the confusion level.

  39. Nick says:

    “In October 2017, it will also shed $4 billion of mortgage-backed securities, to be increased every three months by $4 billion, to reach $20 billion per month by October 2018.”

    Up to this point, wasn’t the FED replacing a maturing MBS bond with another MBS bond under QE?

    So if they stop doing this the real estate market will have $20 billion less each month to boost prices?

    Am I getting this right?

    • Wolf Richter says:

      Private investors will have to step in and pick up the slack, buying these MBS. But the additional private investors will have to be seduced by higher yields. So the theory is that MBS yields will rise to attract more investors, and that therefore mortgages that back them will have higher interest rates. So yes, it will impact prices via mortgage rates.

    • d says:

      Sort off.

      what will happen is that the US economy which has way to much cash in it will be 20 B US short.

      US money that is in total local or foreign junk will move into the space/gap left by the fed money withdrawal, eventually leading to a tightening in other places first before housing.

      As the chinese are printing 1000 times more than the FED is withdrawing and the ECB among others is still printing madly. The effect of 20 B less per month in the US is, less than negligible.

      Remember they brought at 85 B per month, after huge injections in QE 1, 2, Tarp Etc.

      After a year they expect to have reached 50 B per month. They expect 2 to 3 rate rise in 2018 another measly 75BP so buy end 2018 the rate may be 2.75%. And do not exclude the possibly of a rate decrease at some point in the cycle.

      If the US Economy cant handle that, then Americans should all be looking for another country to live in.

      There might be an up to 20 % correction in the speculation sector of the housing and stock markets at some point. Considering the insane values in those sectors 20 % is not anywhere near enough, but more than 20% in 1 correction will cause problems.

      So the FED is playing it telegraphed baby steps.

      This time next year the FED will have reduce by less than .25 T when they added at leas 2.5T, and foriugen money will have raced in to fill the gap if US residents are not fast enough in the move to quality

      That is what will happen now for years, a move to quality, as the fed releases it.

  40. mean chicken says:

    Haven’t rates been tied to LIBOR (recently revealed a fantastical farce) for decades?

    FRAUD is the cornerstone of financial engineering, sanctioned by your amoral CONgress and the amoral special interest groups they work for.

    • NOOO! Libor has diverged, or has the Fed. Libor is no more a fraud than FOMC interest rates, which the only thing between the FED and true Central Bank authority is your AMORAL congress. the only AMORAL thing about congress is your DEM CA Senator DF saying she wants to see president Trump succeed. so they make a deal on the debt ceiling and he stabs in her in the youknowhere first chance he gets. you can’t lay down with fleas and expect to wake up with a nice loyal dog. thats AMOR-AL

  41. walter map says:

    This program should be able to get the FIC into a somewhat less precarious state, but Fed won’t be able to follow through on it for more than a year or so at most. The models which describe the true situation are very clear about this. Once the engines of the FIC start sputtering the Fed will back off.

    What they don’t want is a repeat of the events of 1929 and the 1930s. They really don’t want a massive crash to undo their decades of planning. It’s taken them 70 years to undo the social programs which have limited and slowed the accumulation and consolidation of wealth, and that process still has a few years left to run. TPTB would obviously prefer to start optimizing the subjugation and exploitation of the general population sooner, rather than later, but haste makes waste.

    Can they pull it off? Probably not. There are too many large issues outside of Fed control which are very likely to adversely affect the program.

  42. Lune says:

    I agree with you that the Fed will do what they say i.e. raise the Fed Funds rate and taper QE. But I’ll wager it won’t change interest rates until they taper at least $2 tril. Mainly because the banks have nearly $2 tril in excess reserves sitting at the Fed. As the Fed withdraws QE and drains private liquidity, private banks will start lending against their excess reserves. The net effect will be essentially zero or a very mild increase in rates. We’ve seen this already: despite the Fed stopping QE (they actually began tapering very slightly last year) and raising the overnight rate, interest rates haven’t budged and have even gone down. Until excess reserves are also drained (by stopping interest payments on those reserves), banks still have plenty of low-cost dry powder with which to replace the Fed’s QE.

    BTW, IMHO paying interest on these reserves is the biggest form of highway robbery that the banks have engaged in: borrow from the Fed at the Fed Funds rate, then re-deposit the same money with the Fed which pays them a higher interest rate than they borrowed from. This has resulted in the Fed paying several tens of billions of dollars annually to the banks, for them doing nothing. Indeed, Fed payments on these excess reserves are likely to become higher than the entire profit of the banking industry. Those reserves were supposed to be used to lend to Main St. Instead, they’re a computer entry in the Fed ledger, paying out free, risk-free money for doing nothing. Why can’t the average American borrow from the Fed and re-deposit the same money at a higher interest rate? Oh yeah, cuz if Lloyd Blankfein does it, it’s God’s work whereas me and you doing the same thing would be socialism and welfare…

  43. MD says:

    Let’s face it – we’re all Japanese now. Economies ossifying under the weight of the financiers debt. Withering and dying.

    The Chinese meanwhile are doing very nicely – making and exporting stuff, funnily enough.

    Just like we used to do.

    And they have a sovereign money system which allows them to create as much money as they like, without having to borrow it into existence as debt and then pay interest on that debt to private banking concerns.

    So they’re using that money to – literally – take over the world.

    So far it’s working like a charm.

    Best tell the (grand) kids to start learning Mandarin. They’re going to need it over the next couple of decades.

    • Gershon says:

      A small number of people have gotten filthy rich in this process.

      The vast majority in this country will be suffering greatly because of the rapaciousness and larceny of the oligarchs and their Fed accomplices.

  44. Guido says:

    As the dollar strengthens, the other currencies will weaken. This will mean huge inflation in other economies whose Fed equivalents have danced in tandem with the Fed. In other words, we are exporting inflation to these countries while at the same time making oil cheaper here.

    Also, as the inflation goes out of control and political turmoil increases elsewhere, won’t that same money rush to the US and cause more bubbles, due to desperation on part of the foreigner to save his capital?

    Given that other reserve banks such as SNB are going full throttle, how will Fed unwind make any difference to the asset prices? What Fed doesn’t buy, they’ll.

    This is like watching Stephen Curry take a break. The rest of the team is still potent.

    • Gershon says:

      In other words, we are exporting inflation to these countries while at the same time making oil cheaper here.

      Oil won’t be cheaper once the petrodollar is destroyed, thanks to the clueless Keynesian academics at the Fed and their deranged money printing.

      • walter map says:

        What the Fed has going here has nothing to do with Keynes. At most it’s a perversion of Keynes, who himself would have been appalled. In no way does his memory deserve to be blackened by associating him with the mob syndicate running the Fed.

      • ASP says:

        Reading Gail Tverberg’s economic blog makes me think that oil can’t really go much higher.

        If the US economy goes down so does the rest of the world’s economy. Demand for oil already peaked a few years ago.

    • Frederick says:

      I’ve been watching how the dollar has reacted this week since the FOMC meeting and let me tell you it’s NOT getting any stronger The market ain’t buying Mr Yellens story evidently Even gold and silver are up this morning( Friday)

      • d says:

        US $ seems to have bottomed around 8Th sept its been on an uptrend since, It survived its first test on 20 Th.

        Next week it will be tested again, it was heading for a direction change anyway as it was heading into serious support closer to the 1100 level.

        It also happens to be at the bottom of a range it established end 2015 and hasent been this low since Trump became the default nominee. April may 2016.

        Its advance from the 2016 low stopped when Trump got elected.

        It is now at close to the bottom of the partisan political effects band. Serious economics fundamentals don’t suggest much movement lower. Without a black swan.

        FED actions (interest up, QE down), and Korea (fear) all say US $ up trend, from here.

        I have been wrong before.

        I am not a licensed Financial advisor. Anybody using/acting on this information, does so at their own risk, with no claim against the site, its operators, or myself..

        • Wolf Richter says:

          D, a reminder… please no more “orange” anything or what ever you call the other guy. It’s “Trump” and “Obama.” If you want to give it some extra pizzazz, you can add “President” before the name. Calling them by their names gives your comments more credibility. And it’s too much work for me to edit out all the pejoratives. Thanks.

        • d says:

          Neither of them are worthy of the respect that is indicated, by using their given names, or the Titles POTUS, President.

          They would have to be the worst Two Holders of that office. In US History.

          They both make “Baby Bush”, look good.

          8 years of Partisan gridlock under Bill.

          16 years of incompetence and racism, under Baby Bush and 44. Now followed by 4 to 8 years of: Petulant Tantrums at the level of a backward 3 year-old, international personal taunting, inconsistent insanity, and graft under 45.

          No wonder the world, is seriously starting to look to china, for Global leadership. Now Western nations have started looking, they will not stop, if they do not settle on china, Politically or Financially.

          Having Written another Book. Beating 44 and spouse to publication, even though they got the deal public first, HRC, could run again. Having said “Out”, she should stay out. A return would simply raise more credibility issues, for the woman the US media, loves to hate (As that position makes them so much money).

          So in 2020 and 2024. The US had better come up with something a lot better than, bernie “The closet communist” sanders. Even He probably couldn’t oust 45 as the incumbent.

          Right now “The closet communist”, is all the US has.

          These are all very bad signs. For the US, and the Planet.

  45. walter map says:

    All these years later, they never did fix the bloody problems that caused the last meltdown. All they did was contain it, at enormous cost.

    Expect a repeat.

    • d says:

      Take it up with congress instead of reenacting “Glass Stegal”

      They passed Dodd frank which is more Keynesian mess making.

      Never intended to resolve the original issues addressed by “Glass Stegal”.

      Just Blame the FED. much easier.

      • Frederick says:

        Why would those sellouts ever reanact Glass Steagal when they are nothing but waterboys for Wall Street? Expecting anything else from that bunch is absurd That much is VERY obvious

  46. Ev Last says:

    If the banks have parked $2T with the Fed, and the Fed destroys $2T, isn’t it a zero sum game since the money was never in the economy in the first place?

    • d says:

      It was/Is in the economy, as cash at bank (an asset) on then book’s of the bank’s.

      They lever against those deposits in the FED by 300% on average.

      What the banks haven’t been able to do is find other “Assets”, at prices that appeal to them to “invest” that cash at the FED in.

      Also bank’s must hold a certain amount of liquidity to cushion them from short term cash shocks, at the FED it pays them Interest.

    • Wolf Richter says:


      The modern world uses “double entry accounting.” Every transaction has a debit and a credit. That’s why a balance sheet “balances.” When the Fed created the money, the entries were equal on both the asset side and the liability side, increasing both sides by the same amounts. That’s an accounting rule. When it destroys that money, accounting rule specifies that both the asset and liability sides are reduced by equal amounts.

      Below is a link to an article on Fed balance sheet accounting. Reading it carefully will help you understand in greater detail why the answer to your question is “no.”

      • Ev Last says:

        What I was thinking was that the money parked at the Fed by the banks was essentially not part of monetary velocity in the economy, except for the interest paid to the banks, which was helping “recapitalize” the banks. d is saying that this money has already been leveraged someway. I was thinking that it was yet to be leveraged through regular fractional reserve banking, thus replacing the money the Fed absorbs as it unwinds it’s balance sheet, because the economy will require it and lending will be more desirable as rates rise. I have heard the money parked at the Fed referred to as “dead money”. If d is right then that would not be the case.

        • d says:

          Wolf will correct us, if the “Bank’s” are not allowed to show the “Cash at Bank” in the FED. As an “Asset”

          If they show it as an “Asset”. It is included in their leverage rations, unless some FED/Congressional regulation, forbids this.

          Again. This is a fine point wolf will clarify if needed.

  47. Gershon says:

    Even some corporate media commentators are sounding the alarm about the Fed’s bloated balance sheet.

  48. raxadian says:

    Since someone mentioned Reagan, you could look over “neoliberalism” over at the Guardian website. There are a few notes and articles that might be of interest. Mostly the one called

    “Neoliberalism: the idea that swallowed the world” that also has an audio version.

    And look up information about Milton Friedman and Arnold Harberger over various sites.

  49. chuck says:

    Really excellent and clear work. Thanks for the insight.

    Would be interested in your thoughts on the inverse multiplier effect on the way down

    Earnings multiples and expected bond yields


    • Wolf Richter says:

      My guess is that earnings multiples will contract, that longer-term yields will rise, that yield spreads between Treasuries and riskier bonds will widen, and that cap rates in commercial real estate will rise.

      I’m pretty sure the Fed has been expecting the same thing. But it hasn’t happened yet. The Fed would want any such adjustment to happen gradually, rather than all of a sudden. If it happens more or less gradually, my gut feeling (without any evidence to support it) is that the Fed will let it happen.

      • d says:

        “My guess ++++ happen.”

        Not only let it but want it to as long as it is a gradual process.

        Which is also an dhas been fro som etim emy c position.

        They key being gradual 7 years +.

        Thed only way to unwind the QE monster without causing shocks is “SLOWLY”.

        I also believe interest rate rises will slow, as the unwind speed’s, as both action’s have almost the same end result.

        Contrary to common belief held by the FED haters. The FED is not playing “lets make the current admin, look bad”.

        Interest rates much beyond 3% with that huge balance sheet are on the bring of unjustifiable, IMHO. They will also start to hurt the administration that must ultimately cover that coupon, somehow.

        3% is in the “Normal band, of old” for a FED rate..

        • Wolf Richter says:

          SF Fed governor just said, 2.5% might be “normal.” He’s a dove, so this is likely the lower end of “normal.” The upper end might be 3.25%. So your guess of 3% is probably pretty close to the sweet spot.

        • d says:

          Back in the darkness when I worked in banking our reserve rate was 3%> for decades.

          Savers were paid 3% on general savings accounts. Then came the madness.

          We were all in touch with the reserve rater as we were required to hold 30% of savers deposits, in Govt stock. The trade on our 100% Govt guarantee of depositors funds.

          Today there is no reserve requirement to hold govt stock, for our bank’s, nor is there any Govt guarantee on depositors funds, and our reserve rate is again around 3%>.

          Some old things were that way as that was what worked. Before the financial engineering madness took hold.

          If all the alternative lifestyle, Keynesian party boys, were taken out and shot, the world would be a better place.

  50. alex x says:

    I know this is a dumb question but – since it’s all just made up, funny money as it were, what would happen if the Fed just ‘forgave’ UST debt? In other words, the bonds mature and principal repayment is waived. I know this would have disastrous consequences…but could someone detail this scenario for me?

    • Wolf Richter says:

      That would be considered a ” selective default.” The most secure, collateralized asset in the world would suddenly become a junk bond or worse. I don’t think you want to live through the consequences of the global chain reaction this will cause.

      And there is no need to do this. The Fed can always buy more, and the US can pay interest by issuing more bonds, and the Fed can keep loading up its balance sheet… see Japan. The dollar via inflation would be the loser, but it would be gradual, spread out over years or decades, rather than all of a sudden.

      • alex x says:

        Got it. Thanks. Even if it was not a ‘default’, that is, the lender forgave the debt, this would be seen through obviously for what it is. And what would it do to the Fed’s balance sheet? All those ‘assets’ marked to zero, it’s liabilities would have to match. Which are…dollars? Boggles the mind…what a system.

      • d says:

        As long as teh US $ retains its premium reserve status.

        45 is permanently damaging that as well.

  51. Gershon says:

    The central planners and Keynesian fraudsters at the Fed will never unwind the Fed’s balance sheet to what it was when “Zimbabwe Ben” Bernanke started buying up toxic-waste mortgage-backed securities from his insolvent bankster partners in crime with “stimulus” conjured up out of thin air.

  52. raxadian says:

    The dollar has been the inflation loser since the gold standard was dropped and is getting faster, to the point when someone says “When I was young we lived with just X ammount of dollars a month” you have to ask what year it was to get how much it is in today dollars.

    So really Wolf, nothing really new there.

    And if we ever went to a virtual gold standard as in, prizes would be shown worldwide how much they cost in gold instead of dollars, the US will be screwed.

    • d says:

      “And if we ever went to a virtual gold standard as in, prizes would be shown worldwide how much they cost in gold instead of dollars, the US will be screwed.”

      First to do that you would have to undo the manipulated divergence between gold and silver.

      17 x 20 = 350 so currently gold should be no more than $ 350 an OZ the rest of the gold price is gold bug and producer state like Russia and china, manipulation.

      Silver is not being repressed, it has appreciated by 10 x + since the end of Breton wood’s when it was 1.55 – 2.00 OZ. it is in fact also being manipulated and dragged up by the, false, high gold price. Oil less than $ 50.00 Barrel, plus only 1.5 X Breton woods cost (APP).

      Whereas today’s $ is $5.68 of the Breton wood’s $ only plus 4.7 x.

      With gold at 280 – 350 an OZ where it should be, all the uneconomic Russian and chinese owned gold mines would have to close. The Russians, chinese, and gold bug’s (in concert but not necessarily working together), are responsible for the manipulated price of gold, not the CB’S, and certainly not the FED.

      The chinese brought England’s gold at browns bottom $282.40 OZ. Which tells you what it is really worth today. Which is around that.

      At 1200 – 1400 an OZ physically buying gold, is a folly for idiots. Just as it is to say at that value, it should be a financial standard. Or that at that value, the US $ should be valued against it.

      Gold is money. ONLY IF you buy it physically, at the CORRECT price.

Comments are closed.