“The very slow pace may still be contributing to a buildup of various financial imbalances.”
So we have the first Fed Governor and member of the policy-setting FOMC who came out and said that the QE Unwind that began last October with baby steps isn’t fast enough. And because it’s so slow it may actually contribute to, rather than lower, the “financial imbalances.”
In her speech, Kansas City Fed President Esther George pointed at the growth of the economy, the tightness in the labor market, the additional support the economy will get from consumers and companies as they spend or invest the tax cuts, etc., etc. And despite this growth, “the stance of monetary policy remains quite accommodative,” she said.
She cited the federal funds rate – the overnight interest rate the Fed targets. The Fed’s current target range is 1.25% to 1.50%, which is “well below estimates of its longer-run value of around 3%,” she said.
The Fed would have to raise rates at least six more times of 25 basis points each, for a total of at least 1.5 percentage points, to bring the federal funds rate to around 3% and get back to neutral. If the Fed wanted to actually tighten after that, it would have to raise rates further. So far, so good.
And then came her concerns about the Fed’s balance sheet.
Under QE, the Fed acquired $1.7 trillion in Treasury securities and $1.78 trillion in mortgage-backed securities, for a total of about $3.5 trillion. After QE ended in October 2014, the Fed then maintained the levels by replacing maturing securities.
But in October last year, it commenced the QE-Unwind and started to not replace some maturing securities. This has the effect of shrinking its balance sheet. Just like the Fed “tapered” QE by phasing it out over the course of a year, it is also ramping up the QE-Unwind over the course of a year.
But the pace of the QE-Unwind has been too slow, according to George – and this may be destabilizing the financial markets:
By the end of this year, however, only about a quarter of the increase to the Fed’s balance sheet resulting from the first round of large scale asset purchases will be unwound.
These holdings of longer-term assets were intended to put downward pressure on longer term interest rates. Many investors responded, as would be expected, by purchasing riskier assets in a reach for higher yield. As a result, asset prices may have become distorted relative to the economic fundamentals.
The reference to “distorted” asset prices is the same verse we’ve heard from other Fed governors: Asset prices have become inflated. Since assets are leveraged, they have become a risk to financial stability. Then she adds:
The very slow pace of our balance sheet normalization may still be contributing to a buildup of various financial imbalances.
In other words, because the QE Unwind is so slow, it doesn’t really work as an unwind but continues to inflate asset prices, which would be the opposite of what the Fed wants to accomplish:
While until recently, financial markets remained remarkably stable, it is not uncommon to see volatility rise when asset prices become inflated and investors struggle to find a new equilibrium.
And there she left us hanging at the edge of the cliff, without saying more about the QE Unwind and where it should go. Instead, she reverted to less treacherous territory of interest rates. But later, at the very end of the conclusion, she fired her final shot:
Given the current momentum in the economy, the FOMC will need to carefully calibrate its policy to lean against a potential buildup of inflationary pressure or financial market imbalances.
Let me repeat this: the Fed will “need to carefully calibrate its policy to lean against … financial market imbalances.”
Esther George has been one of the more hawkish FOMC members. So it’s probably her job to launch the first trial balloon about speeding up the QE Unwind.
The whole idea of unwinding QE was launched by trial balloon, one after the other, even as people said that QE could never be unwound, that in fact these assets would have to remain on the Fed’s balance sheet permanently. But gradually, it sank in that the Fed was seriously thinking about shedding those assets. In June 2017, it announced the mechanics. In September, it announced the amounts and timing. It took over a year to get there. And because it was rubbed in so gently, the markets barely reacted to it.
George is in a non-voting slot on the FOMC this year. So she is a safe bet to launch the first trial balloon. The markets won’t take her seriously – just another Fed governor talking. But this is how it starts. The Fed no longer administers “monetary shocks,” the way it used to in order to knuckle its monetary policies into the recalcitrant markets. Now it’s all jawboning and “forward guidance” and trial balloons.
But it does show that there is some thinking behind the scenes about speeding up the QE-Unwind. Once the pace is ramped up to full speed by October this year, the Fed will shed up to $50 billion a month in securities — up to $30 billion in Treasuries and up to $20 billion in MBS — for a maximum of $600 billion a year.
But any significant acceleration is impossible to achieve by just allowing maturing securities to “roll off” without replacement: In most months, there are only about $30 billion to $35 billion of Treasuries on the Fed’s balance sheet that mature. For example, in March, $31.2 billion mature; in April, $30.5 billion. MBS come on top of that.
So if she is proposing to increase significantly the pace, it would have to be done by outright selling securities into the market, which would further change the dynamics of the market, just when the US Treasury will be issuing a record amount of new debt to finance the growing deficits. In order to find buyers for all those Treasuries that would flood the market, the yields would have to rise to be very appealing, so that investors would buy Treasuries rather than other securities. When yields rise, by definition bond prices fall. This would ricochet throughout the market with a substantive repricing of all assets.
And it would come at the same time that the ECB will have stopped its QE purchases and that the Bank of Japan is starting to think out loud about an “exit,” as they call it. And this would make for an interesting confluence of factors.
Investors in the corporate bond market, particularly in junk bonds, are still blowing off the Fed. But not much longer. Read… Corporate Bond Market Gets Ready for Big Reset
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The low interest rates just allowed the largest creditor in the world, the U.S., to tack on another $1.5 trillion in official debt, which means it will $3 trillion more debt in the more likely scenario. Interest rates are too stimulative right now. Government debts around the world are exploding.
This will undoubtedly lead to unrest and potentially violence.
We need a Fed with a spine and some common sense.
Given that markets are de facto controlled by five or six central banks (EU, US, UK, Japan, China, Switzerland) and 25 or so mega financial institutions (because they have the capital to swing markets just about any way they want to) perhaps the Fed thinks that these markets are now “crash-proof” given the liquidity already in the system and so they are doing what they are doing for reasons we may not even know. I don’t think they take the “riots in the streets” predictions seriously, as they believe that they are the Masters of the Universe and can control or contain any potential meltdown. From their perspective, they did it already, in 2007-09, so why not again. Sure, a few million households lost all their equity in foreclosure, and several million more wound up is distressed sales and a fall in their standard of living, but they are the “little people” so who in Washington or at 33 Liberty Street cares?
The Fed isn’t saying anything is crash proof. A strong US economy puts the money printers at risk, assuming the Fed is leaving that game. The crash will be mostly ‘over there’. Our normalization will precipitate it. The US will probably profit bigger than big from their misfortune. Non-GAAP of today might even look like a reasonable forecast for then.
It’s fun watching the globalists pack up and leave.
Blackmailing its member banks? Buy back your sh-t or your kids futures are at stake ! (Marshall law, sheep and wolf’s laying together , fiat flooding?) Pull it! Audit the Fed?
(1) “In other words, because the QE Unwind is so slow, it doesn’t really work as an unwind but continues to inflate asset prices, which would be the opposite of what the Fed wants to accomplish”
On point and nothing but net. Trial balloon … Be still my beating heart. Rising rates, quickly, to something real people can live on … will that be the new normal? No more money printing and low rates to finance the globalists … with gusto? A return to the way it used to be is on the way with enthusiasm … please let it be so. Tea leaves and trail markings make it look like this might be sooner than later.
(2) “And it would come at the same time that the ECB will have stopped its QE purchases and that the Bank of Japan is starting to think out loud about an “exit,” as they call it. And this would make for an interesting confluence of factors.”
Neither will end exceptional support, ever, as it would end life as they know it. Those with lots of cash – especially those who look to catastrophe in euro land and have a long view – should see an AIG level event, or worse. Probably much worse. Time to think of making unthinkable gains. Japan will persevere and set the printing press from 11 to 1100. Think Monty Python re Japan..
“Think Monty Python re Japan”
Or, more likely, Benny Hill. (look it up)
Scary or comical – Japan managing the BOJ as if Benny Hill were running it. To me, it looks like an economic forecast.
At least if Benny Hill were running it we would have some great looking babes around to ogle
True. I was visualizing the obligatory chase scene with the kazoo music combined with BOJ QE as time progresses. History will show this as an accurate description. It will end only when the rest of the world makes it end and the BOJ accepts defeat. Expect lots of Benny Hill chases until then and for a long time. See Venezuela, but with a larger labor base to exploit.
Re ECB QE: Monty Python is more on point. I envision someone complaining about the dead parrot they bought while arguing with Draghi or his follow-on. Followed by the weight of all Brussels to support Draghi when he offers the parrot isn’t really dead. Imagine AIG trying to blow someone of with a ‘dead parrot’ defense. This will be the ECB before reality hits, but bigger. Way bigger. As long as the Fed normalizes.
quick question regarding: “So it’s probably her job to launch the first trial balloon about speeding up the QE Unwind.”
Why do they have to float the idea? Why don’t they just do it and then answer questions as it unfolds?
That would be a “monetary shock.” They used to be standard. Now they’re out of fashion. Markets are to be treated with TLC.
“Markets are to be treated with TLC”
Compared to the recent past, where the Fed was subservient to financial markets … as long as they supported the greater good of globalism where printed money replace capital from savings and asset bubbles replaced income from capital.
This is a very big change.
“So if she is proposing to increase significantly the pace, it would have to be done by outright selling securities into the market, which would further change the dynamics of the market, just when the US Treasury will be issuing a record amount of new debt to finance the growing deficits.”
This suggests the FED would only sells T’s and not MBS, Into the market.
Is this what you intended??
And if so, WHY?
What I meant to say was that the roll-off would continue, but if the Fed wants to increase the pace of the QE-unwind beyond the $30-35 billion of Treasuries that are maturing each month, it would have to sell securities outright, on top of the roll-off.
Fascinating trial balloon. Someone is thinking. Clearly.
And now the intro of “99 red balloons” by Nena.
They’re thinking alright about how they can most effectively fleece the middle class
… until Bullard comes out and opines QE4, QE5, QE6 and more with the lowest rates ever imagined and more Fed debt purchases than Japan, the ECB, and China combined. With salesmanship that would make a telephone solicitor stop and learn. Waiting.
Gutless and clueless AND IN CHARGE! ; they are blindly leading us into the slaughter…..
NOT accidental!
They aren’t blind at all, they know who their bosses are. Please avoid spreading this ill-conceived excuse. You need to reconsider this isn’t at all by accident or haphazard, you can be assured the horse always goes before the cart.
I agree with you m c.
As FDR declared many years ago, “In politics, nothing happens by accident. If it happens, you can bet it was planned that way.”
While the Federal Reserve is not politics per se, the same principle applies, and IMO even more so.
True, but we also have to allow for consequences unforeseen by the actors, arising from the complexity of events and structures, and sheer lack of imagination and intuition.
For instance, those financiers and industrialists and liberal politicians (and even Communists) who thought that they could control and discard, or merely profit from, Mussolini, Hitler, at will……
We are approaching a level of prosperity-erosion in the mass of the populations of the advanced economies -with few exceptions such as Germany – which could prove to be very dangerous and volatile indeed.
Not revolution as such, (where would one go with one’s pitch fork today, there is no visible Lord of the Manor?) but sudden and permanent jumps in crime level and mass drug-addiction (to deal with the pain of economic disaster).
Macron recently glibly listed those who have failed to benefit as ‘the old, the young, the workers, the middle class.’ Everyone!
That is a foretaste of a collapsed and very violent society. The decision makers are currently too insulated to even begin to suspect what might happen, or that it could impinge on them
I would say that with regard to financial policy, their first goal is to maintain the status quo, then help buisness, and help the investor class of which there is loads of overlap. Then mix in all the international monetary concerns. There isnt really any incentive or room to worry about policy purely made to help wage earners.
With that in mind almost everything that helps or hurts the middle class is basically accidental or at least a side effect of intent to do something unrelated. The policy that is there with an apperent intent to help working people is generally just a bit of sugar to help the medicine go down a keep the voter base from going ape shit.
So I would carefully rephrase that and say nothing in politics is done without a clear purpose in mind, but the mess that ensues is due to a mix of huborus or incompetence.
Let’s not for a minute believe that a lack of accidents means that Washington like every group of people including corporate organizations isn’t run by imperfect and sometimes incompetent people who have plenty of alterior motives driving their decisions.
It has the potential to break the Euro block and make sure it doesn’t compete with the $.
Internal Euro tensions unless Germans accept much higher inflation.
If next ECB president is Jens W watch the fireworks else Euro will be weakened on purpose to kéep it together.
US not stupid. Euro will be fracture line IMHO.
Best not to allow a tight labor market control the throttle!
Dow up over 400 points Friday based largely on only a 2.6 increase in wages.
Guess it hasn’t filtered in yet that Virginia settled its teachers’ strike with a 5 % increase for ALL state employees. And these aren’t
wages they are SALARIES. They are forever.
You know how these arbitrations work: next door states will use this one as a base line.
Is there any reason not to expect many states to raise salaries by 5 %?
(I’m in Canada and before oil tanked in 2014, Alberta drove public sector salaries through the roof in other provinces, courtesy of the leap- frog arbitration industry. After Nanaimo, BC firefighters settled for 95 thousand after 5 years on the job, the mayor said it seemed rich but there was no point taking it to arbitration because SOMEWHERE they were getting that. Don’t even ask about comparing public sector to private sector salaries)
Plus we have another Fed governor (non- voting so she is allowed to comment without spooking the markets tender feelings) saying the return to normal rates is taking too long and itself contributing to instability.
Everyone (except maybe Cramer) knows a correction is coming, but they want a soft landing, while at the same time wanting to squeeze a bit out of the most stretched valuations in history.
Do they want to jump from the first floor or the fifth floor?
Government salaries/compensation is the main way those in control have for moving inflation forward. Minimum wage increases, standard raises for Federal slackers (um employees). Most of the private sector doesn’t have that luxury.
Don’t get worked up. The economy is a zero sum game now. Everytime something goes up; something else has to go down. And at somepoint (perhaps sometime soon), people are going to wisen up and start stop paying taxes en mass.
West Virginia Not Virginia Big difference
You think 5% over three years is a rich settlement? When their wages are already sub-standard?
On the topic of “Financial Imbalances”:
“Buildup of various financial imbalances.” is the new Fedspeak that means “asset prices have become too damn high and we’d better act quickly to stop this speculative crazyness before the outcome becomes even worse than in 2008”.
This is financialization with hyper focus on the biggies and very little care for the electorate. In Canada for example the standard level of care for governance is “fiduciary” ie best interests. And then for everything beneath it is good luck with that
Why the banking entities are treated like prima donnas ditto the government’s wallets vs the taxpayers is puzzling and won’t be sorted out anytime soon. Just because the banks have adequate cushions does that mean everything else in the economy is hunky dorey…..including those underfunded pensions? Company pensions that is?
The only way rates increase is by the market forcing them upwards. The Fed is trapped. They let this insanity get way out hand, and there is no way to effectively deflate the bubbles without triggering serious asset price deflation, which will impair collateral and cause another banking/financial crisis. Equity markets are proving they think the Fed is all talk, and no walk.
Yep, until something breaks and the flood comes to deal with such “IMBALANCES”. Inevitable. Just as inevitable as the failing at timing the coming of the break.
“Is there any reason not to expect many states to raise their salaries by 5%?”
Yes, there is: the teachers in West Virginia are 48th in earnings among the states. Presumably the other public workers are in range of that, which means they’re playing catch-up to almost everyone else, not leading wages higher.
Thank you The question is can taxpayers in that poor state even afford this increase?
Those being enriched by coal and gas extraction, along with rent seekers, can afford it, and should be made to pay.
Like I have speculated before….perhaps the privately-held FED actually would like to avoid hanging onto that giant pile of bonds in the face of interest rate increases (loss of asset value) which are actually beyond their control to stem.
Maybe they can go to some other Reserve Currency for their holdings :0
Wolf, one small technical point: I thought the Fed, for accounting purposes, always did QE under the classification of “Held to Maturity”, because “Available for Sale, or Trading” would require Mark to Market. So in which case, then additional sales are not on the cards?
(i always thought it was a central bank truism that QE is “held to maturity” only, so by this logic, which i’ve only recently learnt, a cunning observer could have, in theory predicted that QE would run 10years after the first purchase of a ten year Treasury bond!).
You’re correct in that the Fed doesn’t use mark-to-market. It accounts for the securities it bought at cost.
The Fed “decided” to hold Treasuries to maturity and let them roll off when they’re redeemed in order to avoid spooking the market. That was the only reason. The Fed buys and sells short-term securities all the time as part of its efforts to target the federal funds rate. The Fed can sell any security is owns, if it wants to, no problem.
The Fed also uses special Federal Reserve Bank accounting principles. Here is the manual, if you’re into this sort of thing :-]
https://www.federalreserve.gov/aboutthefed/files/bstfinaccountingmanual.pdf
So if the Fed decides that it will unwind QE by outright selling securities, it can do that until the market breaks :-]
wow. solid.
UST3M = 1.7%, UST2Y = 2.27%. Where is the CPI ?
They move higher and spike, while the UST10Y = 2.9%, is below peak of 2.97%.
The smart money rush in, smelling topping.
Total Fed assets are automatically liquidated when rates are rising, even without doing any action.
Future inflation expectation on the rise, while the long duration, –
despite the Fed switching to issuing tons of long duration – pushing the 10Y
lower, indicating future deflation. Is the 10Y in direction to zero ?
The US treasury is the safest and the largest vault in the world.
No matter how loud Esther complain, selling her future inflation story , the smart money is not buying it.
That’s my last comment on your blog ….
?
The Fed needs ammo for the next recession . Of course there will be casualties.
The fed liked what it saw in the labor report today (wage inflation contained), but they know they have a problem in the “department of loose credit.” They can’t legislate, so they will step up the use of the interest rate lever they do have. The SEC is going to take the crypto problem to the wood shed, but there’s a lot more over-leveraged business models out there for them to be worried about. The more they tighten, the looser credit gets to compensate for higher rates. They will push on that lever more and more to try and slow down the speeding credit expansion train. But the train never just slows down gradually, it is always a wreck. Time and time again I have watched this happen. Battle hardened traders see a little more track ahead with today’s labor report, us mortals are selling into strength until we are at least 40/60 stocks/cash. The topping process takes months to play out.
yes. do rates rise to follow looser credit, or does looser credit follow rising rates?
both. yes, but….following historically low rates. yes, but,
discuss.
So the unwind will speed up, all that “imaginary” cash needs to be gone faster it seems.
Is the speed up of the unwind done to help pay the tax cuts? Probably.
2018 might or not be the year of the dollar but the FED does want a stronger dollar.
Wolf will you do an article explaining why the so called tax cuts are actually bad? Because let’s face it, all the government does is start taking money from somewhere else to compensate the loss.
The tax cuts aren’t necessarily “bad” (though people can argue over if they’re fair or effective). The resulting deficits, borrowing needs, and the ballooning debt are bad.
So for example, if you cut income taxes by $200 billion a year but raise $200 billion a year via a Btu or a gasoline tax, then there would be no additional deficit. It would just be a question of fairness and effectiveness.
But what we have now is a bunch of irresponsible lawmakers in Congress that want get the bacon for their districts and thus increase spending, and they don’t want to pay for any of it and instead cut taxes. This is to some extent bipartisan, and that’s why it’s now totally out of control.
Lenin predicted Britain would colonise itself out of existence, Germany would militarise itself out of existence, and America would spend itself out of existence. Darn those commies and their wise insights. Nothing so pleased the politicians as the discovery that they could bribe voters with their own money. So now the system has been corrupted to ensure it will self-destruct under the crushing weight of its own debt, and has set itself up to be taken over by its wealthy creditors.
Virtually all of history is a record of a small, wealthy ruling class dominating an impoverished and disenfranchised general population. As such, the recent period of middle-class, democratic peace and prosperity could only have been an aberration of history, existing only so long as decent people could fend off the predators and thwart their determination to corrupt it.
And so eternal vigilance is the price of liberty; power is ever stealing from the many to the few. And eternal vigilance is not only the price of liberty; eternal vigilance is the price of human decency. Human social dynamics always favor the predator, because decent people set limitations on themselves, while the unscrupulous do not.
Well said, Walter. The transition now from the last fig leaves of our aberrant republic into that of a fully-exposed and already decaying empire is all too evident. We have ALL discounted, ignored, and ultimately slept through our watches, our HISTORIC postwar prosperity wiping our collective memory as to how we originally got to this dance and fogging the lens through which we see ourselves functioning as a generally unified nation of decent people. Thanks for the cheer and may we all enjoy a better day.
wolf, , glad to put my 2 cents worth to you, : how about talking about ceo’s getting millions, yet companies suck shit in earnings, for instants, toys are us nov. 17 2017 went to bankcrupcy court and asked for 16 million in big shit ceo executive bonuses , yet 36 ,000 people are gonna lose their freekin jobs, what the hell is going on with ignorance in america stock holders and america in general , shit or get off the pot guys ? ya thinks, guess not !
Your example illustrates why younger people do not believe in capitalism
The US has the highest GINI coefficient of any developed country and the highest in the history of the country,higher than 1929.Among the differences between 1929 and and now is that people are armed to the teeth.Real wages have hardly in increased in 40 years.
Had the tax cuts been given with the U.S. running a balanced budget with little/no debt, that would have truly been a bonafide tax cut. But when you borrow $1.5 trillion, and then hand that money out to businesses and individuals, what you’re really doing is giving them a loan that will eventually need to be paid back, i.e. in the form of higher borrowing costs and likely inflation down the road. You can call it a “tax cut” ’till the cows come home, but it should really be booked as a liability on the balance sheet, just like any other loan. I wonder what company valuations would look like if the tax cuts were indeed booked as loans. By the way, it’s already happening…the rise we’re seeing in mortgage interest rates is already taking a bite out of those tax cuts individuals are receiving.
As you may already know, Congress’ approval rating is in the vicinity of used car salespeople – 20% give or take.
http://news.gallup.com/poll/210104/americans-approval-congress-unchanged-may.aspx
They know the public only has contempt for them. But the sheeple are powerless and, to a large extent, oblivious to what Congress does. No pitchforks coming any time soon. Not as long as they can still get their cheeseburgers.
I’m surprised Wolf didn’t moderate your “used car salespeople” comment. Just kiddin’! ;-)
Yes, as much as I personally like getting to keep more of the money I earn via the tax cut, I would gladly hand it back in exchange for policy-makers who would focus on SPENDING. Of course, they couldn’t get re-elected because what the electorate wants isn’t what the electorate needs. Everyone justifies their own version of wanting a free lunch.
This is not unique to government nowadays. In a way corporations are doing this too… by borrowing money to buy back their own stock.
On another subject Havent seen Gershon lately
Me neither. Maybe he never got over the fact that the Fed is actually raising rates and unwinding QE. That was one of his big themes — that they never would.
Gershon, are you out there?
I think George’s comment supports the idea that they really haven’t done either. The current 10 year real interest rate is sub 1%. With inflation buildup in the pipeline it might be negative as the hunt for credit intensifies. I don’t know if the Fed could stop raising rates because of LIBOR, which is the metric for a lot of US government paper. Then the EU unwind got unwound. Lets the Brits raise rates for us, and keep liquidity going, always always always.
I can’t believe the Fed is even debating the issue at this point in time. Asset prices have risen 300-400% off the lows. Housing has even risen 100%.
I don’t know what the Fed is waiting for. They must think they should keep stimulating until there is inflation, but they don’t see the huge inflation right in front of them. Inflation of asset prices is true inflation. When investments rise, it increases the cost of saving, which is a core necessity for people. People need to save for retirement, education, medical costs, and many other things. And these things are necessities. If interest rates fall, people need to save more of there wages to produce the income they’ll need from their savings. This is why you can reduce interest rates below zero and it won’t do much except increase asset prices some more and exacerbate the problem. People with wealth, who own 90% of it, aren’t fooled by the Fed’s interest rate incentives. They know this indicates future problems, and they save more.
The only people taking advantage of the low rates are speculators, who create financial instability, and short-term investors, who don’t care of the world blows up next year.
When housing prices rise, it obviously increases the cost of a core living expense.
Then there is the generational theft that QE creates.
Interest rates should be increasing at twice the rate they are now to make up for all the excessive stimulus of the past that clearly has created financial instability. Does the financial world have to explode and create a mega-depression for the Fed to see it? Does it take a revolution to produce evidence of a “financial imbalance”? How about the existence of five guys who have more wealth than 4 billion people? Is that not enough evidence? Better yet, how about I lay my balance sheet and W-2 on the table, so Janet Yellen can tell me how I can pay for my two kids’ education which is rising at 5-10% per year and my retirement costs (including medical) that are rising at 5-10% per year. If she says I should put in the stock market to earn 10-20% per year, she wouldn’t be much of a financial planner. I’d get better advice off the street in Vegas.
The Fed needs to adjust its models to reflect reality, or it will destroy this world.
aka, the fed is woke. an imperfect system, but i can’t see loaning uncle sam money right now at 3 a year for 10 years.
at 2 for a year, starting to look attractive. if i had it, of course.
Hate to inject a bit of reality here, but:
If Ester and the Fed are Soooooo concerned about asset inflation, then why are they only doing 3 teenie tiny rate increases this year? And why are they only doing teenie tiny rate increases at all? And why did they wait 9 years or whatever to do all this tennie tiny stuff?
Monetary policy is expressed in the real world glacially. By this time next year, it should be obvious if
1) the world is changing to something approaching a historical reality or
2) the US is still subsidizing the rest of the world and its monetization efforts for their own national benefits, in fear that unbalancing their scams will upset the US, or, in hope that the globalists will rise again someday and continue their quest for the lowest costs in the world, supported by the lowest interest rates conceivable.
“As a result, asset prices may have become distorted relative to the economic fundamentals,” said Fed official Esther George.
To me this is the relevant “trial balloon” statement. The Fed is actually admitting that equities and most “assets” are now over valued based on fundamentals.
If investors hear her correctly they should start selling now thus lowering asset prices which would make a faster QT unwind unnecessary. But if they don’t then higher interest rates are coming.
With so much debt out there it does not take much tapping on the brakes to slow things down, with lags of course. This dialogue could change very quickly to; where are we going to get our stimulus from? rather than; how do we slay this inflation monster? With the fiscal room being removed because of political manoeuvres and about 200 bp above zero for short rates I am not sure the Fed wants to “normalize” itself into dealing with a recession right now.
That’s why I believe this is all going to take place very slowly and very carefully.