QE may restart only if things get really ugly – think Financial Crisis.
“Patient” has become the Fed’s favorite word in recent weeks as just about all Fed governors slipped it into their speeches. Today the word made its way into the FOMC statement for the first time. During the Q&A at the press conference, reporters tried to get Fed Chairman Jerome Powell to nail down what “patient” actually means, how long “patient” would last. But they walked out empty-handed.
So what came out today was this:
The Fed will not change its target for the federal funds rate over the near term. It has been between 2.25% to 2.50% since December 19, and that’s where it will stay until the Fed runs out of “patience.”
The QE unwind continues on autopilot as outlined in 2017. The Fed has been discussing over the past three meetings how far to cut its balance sheet, and what the ultimate composition should be. But no decision has been made yet. So stay tuned, it said.
The Fed is pretty gung-ho about the US economy.
In the statement today, it said:
- “The labor market has continued to strengthen.”
- “Economic activity has been rising at a solid rate” (“strong” from the December statement was demoted to “solid”).
- “Household spending has continued to grow strongly.”
- “Growth of business fixed investment has moderated from its rapid pace earlier last year.”
- “On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent.”
Rates are on hold due to “cross-currents”
The slowing economy in China and Europe are on the Fed’s worry list, as are Brexit and the effects of the US government shutdown. Plus, “financial conditions” – yields, spreads, and other indicators that show that it is getting harder to borrow money as risk-taking abates – “tightened considerably late in 2018, and remain less supportive of growth than they were earlier in 2018,” Powell said at the press conference (video) – which is precisely what the Fed had set out to accomplish when it started the rate hike cycle.
These are “cross-currents,” he said. And until they’re sorted out, rates are on hold. The talk about “some further gradual increases” in the December statement disappeared, and instead “patient” became to leitmotif:
In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.
Powel explained why the language changed from “some further gradual increases” to “patient”: Facing this “somewhat contradictory picture” of a “generally strong” US economy and these cross-currents, “common sense risk management suggests patiently awaiting greater clarity.”
And “the case for raising rates has weakened somewhat,” for two reasons, he said:
- The risk of too-high inflation “appears to have diminished” over the past few months.
- And “the risk of financial imbalances appears to have receded, as a number of indicators that showed elevated levels of financial risk appetite last fall have moved closer to historical norms.”
So it’s best to wait and see “how the cross-currents resolve themselves.”
But the QE unwind continues on autopilot.
The FOMC announced in its Implementation Note that there is no change to the process, speed, or mix of the balance sheet normalization process. The Fed would continue shedding Treasury securities at a pace of up to $30 billion a month and mortgage-backed securities at a pace of up to $20 billion a month as they mature.
In a new twist, the FOMC also released an additional statement about its Balance Sheet Normalization. It explained that “after extensive deliberations and thorough review of experience to date,” it would be “appropriate” to inform the public what the FOMC’s plans are “over the longer run” and under what conditions it “could adjust” the current auto-pilot of the asset-shedding process.
A consensus has formed on the Committee. This consensus was explained in greater detail by Powell:
The Committee made the fundamental decision today to continue indefinitely using our current operating procedure for implementing monetary policy. That is, we will continue to use our administered rates to control the policy rate, with an ample supply of reserves so that active management of reserves is not required. This is often called a “floor system” or an “abundant reserves system.”
Under the current set of operating procedures, as outlined in the implementation note released today, this means that the federal funds rate, our active policy tool, is held within its target range by appropriately setting the Federal Reserve’s administered rates of interest on reserves, as well as the offer rate on the overnight reverse repo facility, without managing the supply of reserves actively.
As the minutes of our recent discussions have indicated, the FOMC strongly believes that this approach provides good control of short-term money market rates in a variety of market conditions and effective transmission of those rates to broader financial conditions.
Settling this central question clears the way for the FOMC to address a number of further questions regarding the remaining stages of balance sheet normalization.
The decision to retain our current operating procedure means that, after allowing for currency in circulation, the ultimate size of our balance sheet will be driven principally by financial institutions’ demand for reserves, plus a buffer so that fluctuations in reserve demand do not require us to make frequent sizable market interventions.
The two largest components on the liability side of the Fed’s balance sheet are the two that Powell mentioned:
- Currency in circulation (actual paper-dollars stashed under mattresses, much of it in other countries) has been rising over the years and is currently $1.7 trillion.
- Reserves have plunged from $2.8 trillion at the end of QE in 2014 to currently $1.6 trillion and continue to fall.
Both combined account for $3.3 trillion, but they’re falling due to the sharply falling reserves. Those two combined, plus some buffer, will indicate the minimum size of the balance sheet. But how far should the reserves fall?
“We will be finalizing these plans at coming meetings.”
Well, Powell said, we don’t know yet, and we haven’t decided yet, but we’ll let you know more about our plans over the next few months:
Estimates of the level of reserve demand are quite uncertain, but we know that this demand in the post-crisis environment is far larger than before. Higher reserve holdings are an important part of the stronger liquidity position that financial institutions must now hold.
The implication is that the normalization of the size of the portfolio will be completed sooner, and with a larger balance sheet, than in previous estimates.
In light of these estimates and the substantial progress we have made in reducing reserves, the Committee is now evaluating the appropriate timing for the end of balance sheet runoff. This decision will likely be part of a plan for gradually reaching our ultimate balance sheet goals while minimizing risks to achieving our dual mandate objectives and avoiding unnecessary market disruption. We will be finalizing these plans at coming meetings.
These explanations today from the Fed, given the hullabaloo in the markets about the QE unwind after having ignored it for a year, are “intended to provide some additional clarity regarding the conditions under which we might adjust our plans.”
QE may restart only if things get really ugly:
If the economy spirals down, the Fed will cut rates, but when cutting interest rates to zero is no longer enough, the Fed is willing re-start QE. In its note on balance-sheet normalization, the FOMC said:
The Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.
Powell confirmed in the Q&A that if the economy spirals down and things happen were “zero-lower bound” — with the federal funds rate near 0% — is not enough, QE is back on the table. But only then.
And NIRP is off the table.
Negative-interest-rate policy (NIRP), as practiced in the Europe and in Japan currently, appears to be totally off the table and didn’t deserve a single mention. “The zero lower bound” would be the bottom for the Fed’s target range for the federal funds rate, no matter what. And if that’s not enough, Powell said, “In those cases, the FOMC would be prepared to use its full range of tools, including balance sheet policy.” For forget NIRP.
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Things must be really dreadful. This is the result of deregulating to the extent that what is really going on, is no longer even reported. So even the Fed is in the dark, but there’s a tsunami out there.
Hahahha. I was gonna say “I told ya so”.
Fed just announced they are going to put interest rate increases on hold.
Recent taper tantrum by the stock indices gave the CBs the jitters, and so its back to LIRP (Low interest rate policy) / ZIRP and eventually NIRP.
Once again too, the perma-bears are wrong.
Maybe wait another 10 years to be right?
As the Wolf has pointed out in the past, this Fed board doesn’t seem to like “Shock” announcements. Thus, when they do hold their official meeting, the announced result is pretty much what has been signaled in advance of the meeting.
Fed is in the dark ? That is nothing compared to the Gouvernement,s “vanished” 21 Trillion Dollars.
NOBODY wants to hear or talk about it , but then it is only loose Change !
Did the recent Trump Shutdown effect the data available to the Fed?
I wonder if when Trump completely abandons democracy and starts ruling by declaring emergencies whenever he wants if he’ll declare a national emergency that controls the Fed?
We are in “the fog of war” and if you have information, that no one else has, or wants to use, then you may be able to leverage that advantage. The Fed is not at the front, they have no idea what is going on. Prez has no power, and Congress is split.
The croupier hath spoken.
The problem now is that the market is beginning to price in total Fed support of stocks at any price. Sounds like that would be a good thing. But actually it is not working. The market is still sluggish, and what a bailout like this does is to make everyone in the economy extremely nervous and cautious. You cannot say, We will support stock prices under all circumstances, without people asking, What circumstances? It is like your doctor saying, From now on you can eat whatever you want. That of course is a death sentence. I think Powell just said the economy is dead. Price that in, market. And it has begun to do so.
Exactly. Japan has been throwing everything they have at their stock market and it is still down a lot from its all time highs. We are following their path.
For me patient means “We are not raising rates just yet.”
Convince me why a 150% (via margin) investment in SSO would be a bad idea at this point. I’m seeing a -10% chance of any downside at this point. The Fed is on Put-o-Pilot.
I’m not a Fed guru, so a lot of this is opaque to me.
As a (retired) CFO, I’m very happy to see things returning toward normal. We could quibble about how far this went & speed to unwind, but as I said, I’m not a Fed guru.
Frankly, I am surprised to see how well the US economy is holding up, especially relative to the rest of the world. The hope here is, as the rest of the world digs their hole deeper, it appears our Fed is on the right track & far ahead of who ever claims to be in second place.
For the record, I understand there is a lot of global interconnectivity and if I fully understood that, I’d be a genius.
=>Frankly, I am surprised to see how well the US economy is holding up, especially relative to the rest of the world.
Okay. That said, the first question you have to ask yourself is: “What’s holding it up?”
The second question you have to ask yourself is: “What’s going to cause that to fail?”
The third question you have to ask yourself is: “When’s that going to happen, and what am I going to do?”
The fourth question you have to ask yourself is: “How do I get off this bloody rock?”
It’s really more complicated than this, because I’ve shortened it down from a string of twenty questions. Believe it or not, all of them have real answers. Not solutions. Just answers. They’re not pretty. Hey, you know me.
Of course, a lot of people come to this site looking for insights into investment opportunities, but really, it’s easy to suppose that most visitors are hoping for for insights into wealth preservation. The smart money has it’s opinions, but the really smart money knows that even billionaires are going to have a really rough time in the very near future with, well, wealth preservation.
Sucks, doesn’t it?
I’m still debating whether I should post the article where I finally spell it all out, but if I do, it won’t be here. But you won’t be able to miss it. I haven’t decided. We’ll see.
if you were here we’d turn it into a zine and i’d illustrate it for you.
I have doubts about the economy holding up. In a great economy, Debt/EBITDA should be going down, not rising.
For whom is it great?
Students in debt.
Those living paycheck to paycheck like so many Americans.
Debt is holding this up. What happens when the debt burden gets too big? NIRP?
No who has it great.
Wealthy and Congress.
It is interesting because all my wealthy friends love this but have no idea when I question them of what the Fed is and the problem with debt.
As a CFO I bet you get it.
It seems like the tough medicine the economy needed to take and markets have needed for decades stopped today. You have spoken highly of Powell in the past Wolf. Perhaps you should rethink.
Keeper Hill,
I reported about the problems boiling in the corporate credit markets late last year, with all kinds of things grinding down, including junk bond issuance, which had stopped entirely. This was a REAL tightening of financial conditions, and it was harsh and sudden. It was a snowball rolling downhill that was picking up a lot of momentum very fast. So I think the Fed talked the credit market back off the cliff (to mix the metaphors). And that was a good thing, imho
When the credit market freezes up, the Fed tends to go nuts — see Financial Crisis — and then it gets back into experimental monetary policy. So letting the air out “gradually” spread over many years rather than all at once is really a good thing, as far as I’m concerned. I don’t know that it will work, but they’re trying.
=>I don’t know that it will work, but they’re trying.
And if you, of all people, can’t assure yourself that it will succeed, then that’s real trouble. Hope is not enough, because failure is not an option.
The really bad news is that the very worst problems only have a derivative connection to finance.
Sorry.
Mr. Powell has accepted mission impossible in trying to reduce imbalances and unhealthy leverage without crashing markets and sentiment. He really has no choice but to play both sides with Fed speak and policy actions. It makes me think of a sports bookie trying to find the right point spread to get an even number of bets to balance the risk appropriately.
To me, the real question is how much real progress can be made on the balance sheet and interest rates before the next recession hits, because their window seems to be closing with little margin for error. In my view, the harsher criticisms on the Fed should be targeted on policy mistakes from Powell’s predecessors.
“So I think the Fed talked the credit market back off the cliff (to mix the metaphors). And that was a good thing, imho”
I think the reason why many don’t agree with that, is because the Fed only perceived a problem when Mr Market declined.
IMO the economy could disappear today and decline 100% and the Fed couldn’t care less.
But it that upset Mr Market and it declilned, only then would the Fed care.
The problem with credit freezing is that companies cannot make payroll because they’ve run out of funding in a credit-dependent economy. Everything comes to a halt. This was happening during the Financial Crisis. So you really don’t want to go there.
HYG made a new high today, a lot of things going up in concert, suggest the liquidity spigot is RISK ON. Does this look like a credit market ready to freeze up?
Everything bounced starting on Dec 26. EVERYTHING, including the credit market and bigly! The debacle was BEFORE Christmas. See my articles on leveraged loans, for example. Straight line to hell. Scary.
I agree with the credit market issue. I saw it too, you discussed it, and I figured he would back off.
But it means more continuing debt and debt payments too as well as malinvestment.
But the economy is big with many facets and I do not understand how all the pieces will come together. Uncertainty.
– I was betting that the FED wouldn’t hike rates. Because the 3 month T-bill rate remained flat since very late november last year.
– QE is only useful when asset prices go higher, NOT when they go down.
EVERYBODY knew the Fed wouldn’t raise rates one month after it raised rates. And the market priced this in as it always eventually does.
– “”Everybody knew ……………. ” ??
– Then look at 1994. Then the FED raised rates every time the board met. And NOT with 25 basis points but with 50 basispoints.
– Similar story in 2001. But now in the downward direction.
Patience, n. A minor form of despair, disguised as a virtue.
[Ambrose Bierce, “Devil’s Dictionary,” 1911]
Thank you for that, GuiriCateto!
:-)
Yes brilliant. Thanks.
“Deferred Asset” An asset marked to market based on it’s future value…
“Long Term Investment” : a day trade gone wrong.
The Feds monetary policy, regardless of the underlying rationale, further concentrates fiat-priced “wealth” in the hands of the Wall Street oligsarchy.
Dow Jones Industrials today: + 440.
Do you think the fore-mentioned Feds intention to use shorter term treasuries, is a counter, to the Treasury Departments increased issuing of shorter term paper? Will this help or hinder future short/long term rates?
Not sure about “intention,” but it would work out that way.
I think the purpose of the Fed is to make fortune tellers look legitimate.
Wolf,
Thanks, as always.
Sounds like just more jawboning to soothe markets. Little appears to have changed. QT continues, as advertised, on auto-pilot.
Regarding this part:
“The implication is that the normalization of the size of the portfolio will be completed sooner, and with a larger balance sheet, than in previous estimates.”
“Completed sooner”? Unlikely. Although a full-blown credit crunch might force them to taper QT (reverse taper tantrum)? On second though, perhaps there is trouble brewing. Anyone notice the Baltic Dry Index? Down 20% this week and over 48% in about 5 weeks. Hmm, not a word about it anywhere. Guess it’s probably nothing.
“With a larger balance sheet”? Yeah, tell us something we didn’t know, Jerome. The roll-off rate of $36B per month showed everyone that there was no way the Fed would get the BS ‘normalized’ by the end of 2020.
Fed donned its ‘good cop’ hat today. Probably switches back to ‘bad cop’ hat by springtime.
So all it took was US markets to ever so briefly see -20% and Powell folds like a cheap lawn chair. I give it about 2 trading days for long dated bond yields to start rising again and take the shine of any short lived market rally. Good luck restarting rate hikes w/o a major sell-off aka January 2016. For all intensive purposes 2.25% is now the new ‘neutral’.
“QE is back on the table”…
Was it ever off the table?
One had hope…alas, nothing has changed.
Wall St continues to parasitically feed off Main St.
The rest is just navel gazing whilst enduring death by a thousand cuts.
Tragic.
I do not know why people think QE is dead or has stopped.
In the next 5 years, the Fed will buy about 308.3 Billion in Treasuries on what is called Quantitative Tightening. That’s the amount to be RE-INVESTED in Treasuries.
The Fed is another GSE, a toxic waste dump for impaired securities. The banks are as well which has prompted some analysts to recommend buying their shares, which I seem to recall was the same pattern with FNM.
Iamafan,
It seems you’re changing the meaning of the word “QE” the way we know it.
QE means the Fed INCREASES on net the amount of Treasury securities and MBS combined on its balance sheet. So it buys more securities than mature, and the balance grows.
QT means the Fed REDUCES on net the amounts of Treasury securities and MBS on its balance sheet. So it buys less in securities than mature, or it buys none, and the balance declines.
QE and QT describe whether the balance of Treasuries and MBS combined on its balance sheet increases (QE) or decreases (QT).
Not sure if I am the only one who think that the world is in dire need of recession. We simply have way too many zombie company around
You are not the only one. But maybe we are the only two. :-(
Over on the blue collar side, there are many zombies working at those companies. So while you see it clearly I don’t think you are the only two
There’s a horizontal line to that there zombie graph that intersects the vertical line you describe.
To coin a phrase more than accurately quote the situation,
Hard to notice a recession during a depression!
The root word of depression is “depress” – a verb.
The root word of recession is “recess” – a noun that always harkens me back to my elementary school days.
Maybe that’s what the Fed is signalling. Recess but last night’s homework is still due when it’s over!
I understand your frustration but think about this: each time there’s a dip in economic activity somewhere in the world, a vast crowd of people from all walks of lives, ranging from CEO’s of large companies to small time construction contractors, take to the streets to beat on their pans.
As the mayor of a small French town once told me “The chief problem we have these days is my esteemed colleagues do not know how to say ‘no'”.
What is the usual result when people beat on their pans? The lunatic economic policies we take for granted nowadays, plus allowing certain people to behave like savages to “avoid spooking the economy”.
Do you really want to see a repetition of the past decade? I don’t.
Powell said surveys and market intelligence the past year have told the Fed current estimates of reserve requirements “are considerably higher than they were a year ago”…I’m just a new-bee listing to Powell, so to me that was the big take-a-way.
So….therefore I’m betting QE stops this year and at higher balance than previously expected, as Powell himself said it will be higher than the Fed itself expected.
And if Mr Market goes to 20k, I bet the Fed will slash – not cut – slash interest rates and maybe go into QE mode…regardless of the state of the overall economy, which IMO the FED does not care about at all. It only cares about Mr Market.
The Economic Historian Adam Tooze has been vigorously arguing that Mr. Market, i.e. the financial sector, now dwarfs the economy of making and selling material goods. It is now a mistake, he argues, to see economic swings as being tied to the physical economy–everything is capital flows. America is doing relatively well because it controls these capital flows to a much greater extend than anyone else, not because of some kind of bogus “manufacturing renaissance” or the policies of Obama or Trump. The US financial sector can basically turn “on” non-profitable mega-corporations like Netflix or Tesla or the fracking industry because it controls the capital spigot. No government or Fed Board is going to buck the men (they are almost all men) who have their hands on that spigot.
Regarding you view that America is doing well because of it’s bloated parasitical financial service sector, I suggest you:
1). Explain how student debt slaves who are living much below their previous generations, fit in to all that.
2). Start reading Naked Capitalism everyday. It’s well know amongst it’s readers that studies show large financial sectors damage not help economies.
3). Consider that USD as reserve currency is responsible for the benefits you mention – NOT the ungainly size of the bloated, parasitical financial services sector.
in other words, “let them eat financialization.”
Thank you as always, Wolf, for translating obfuscation into clarity!
The fed is playing a half court game .Bring it up slow
and have a good look around before a shot is taken.
My problem with your analogy is that it posits this as a competition. It is not. The Fed works for the Banks and the brokerages and the people who run and have controlling interest in those institutions. Secondarily, they serve the political elite. The idea that the Fed is going to independently hurl one up for the bottom 80% of the American people is unimaginable.
Wolf,
The FED doesn’t set the rates. The market does – the FED just has to follow. This is how Bob Prechter and EWI see it and to prove they post the charts where the market rates’ change happen before the FED. What is your opinion? Do you agree?
The Fed decides on a “target range” for the federal funds rate, and it uses its tools, such as the rate it sets for reserves, to manipulate the federal funds rate into its range. And thus it “controls” short-term rates, such as money market rates, very short-term yields, 1-month dollar Libor, etc., that follow the federal funds rate.
The 3-month Treasury yield will never predict anything that is further than three months away because that’s outside of its window.
If you trade maturities of three months, you’re not worried about what happens in four months because your security will mature in three months and you’ll be paid face value and interest in three months, and you’re off the hook. You don’t even care what happens 85 days from now because that has very little impact being at the end of the 90-day window. What you worry about is the close range, so one month or so. And this is precisely what happens: once the next rate hike moves into the 3-month window, the 3-month maturities will gradually price it in until it is fully priced in a few weeks before the rate hike happens.
All rake hikes by this Fed are telegraphed well in advance to give markets time to catch up. For example, early 2018, I was already saying the Fed would hike rates four times in 2018 based on what the Fed was telegraphing, while the markets priced in two rate hikes. But by November 2018, when the fourth rake hike approached, it was fully priced in. It just took markets a while to catch up with the Fed’s plans.
THIS Fed tries hard to NOT surprise the markets. It doesn’t do “monetary shocks.” Prior Feds did that, but they have fallen out of favor. Now the Fed does “forward guidance” and other things to jawbone markets to where it wants them to go in advance.
When folks overlay two lines in a chart, such as the 3-month Treasury yield and the Fed’s target range for the federal funds rate, in order to say which follows which – such as that the Fed is just following the 3-month Treasury yield — they are using a simplistic method that looks good on paper and doesn’t require any thinking but leads to wrong conclusions and silly results.
If people want to believe that the Fed just follows the 3-month Treasury yield, that is fine with me, just as it is fine with me if people want to believe that the earth is flat.
Great Answer! ;)
I’ve looked into that. It’s a reflexive system – the market rates are typically priced based on where it thinks the Fed will be – and the Fed looks at the market and then signals where it plans to be – and they dance. It’s because the Fed telegraphs how it sets rates that the market can anticipate and make it look like the market drives the Fed. But anyone who lived through the Volcker years knows the Fed *can* control the market when it chooses. The Taper Tantrum is a more recent episode of the Fed surprising the markets. There are more examples from other countries as well. But the Fed is also not totally independent; sometimes it can be constrained by political forces and by persuasion. But anyone who says that the market forces the Fed around and uses as evidence the sequence of market vs. policy rate changes is either clueless or deliberately misleading you, and in either case you should run away from any of their other advice.
The fed controls the money supply, and therefore it controls the price of money. However there is a boundary where money meets the real world economy, where fed control is understood to be outside of that economy. The idea of top town control is a perception that has to be accepted, and the fed knows this and so plans its activity on acceptance. In that sense the fed does set rates according to what it perceives the market will accept, using its own guidelines of inflation or employment as aim. The obvious example which lies at an extreme is loss of faith in a currency, where catch up in money supply by a central bank results in hyperinflation – you cannot deny that in that scenario the central bank is following market valuation and attempting to meet real wages of say government employees, or fx value on foreign debt. It could be said that that scenario was a purposeful scheme by a central bank, which I suppose would just underline that they actually never have any real control and are just arbitrary institutions of influence. The other extreme would be to make money incredibly difficult to come by, but that would also result in loss of faith in the institutions that enforce currency, resulting in the like of dollar auctions.
So it makes you wonder why central banks put themselves in the middle of all that, I wonder how they would think and plan if it were not for the money and influence, but you know, there is always some “higher scheme” to be taken cedit for. If bankers did not control the money supply, but were only responsible for correctly allocating it at eventual productive profit (or loss) , the equation would be very different. How are we to be sure that the current expansive socialistic monetary method of “no one loses” actually is not making certain that everyone loses? We cannot, and nor can the fed or government. Complex and/or top heavy systems have as many weaknesses as simple independent ones, but tend to aggregate them all under a single circumstance from which to find a common solution. I am not sure reality really works that way, or that that is no more than man playing at being creator.
The Fed just confirmed they are Wall Street’s lap dog. Their supposed “independence” is a complete joke. They went from 4 potential hikes to zero in a matter of one quarter, and now the balance sheet runoff is questionable.
Balance sheet normalization is no longer on “autopilot”, and anybody paying attention can see this. If the stock market tanked 30 percent next month, you can bet your ass they would stop the 50B’s.
The Fed is just as incompetent, clueless, and out of touch with the real economy as it ever was.
@Aaron Layman Properties
Spot on. Every word. I think many forget we went from 4 hikes to zero in 2 months time, with the economic data NOT supporting or rationalizing such an abrupt policy change. There is no data dependency. There’s strictly market dependency. The Fed is a complete and utter farce.
There was a lot of data in the credit markets to support that change in policy. Credit was beginning to freeze up for riskier companies. Junk bond issuance completely dried up. Spreads suddenly blew out. These are among the many “financial conditions” the Fed is watching. I’ve written about it. Those moves wouldn’t have been bad if spread over 6 months. But they happened in a span of weeks. That was very fast. If that had continued for a few more months at that pace, all heck would have broken loose.
This is all side effects of the “medicine” aka record low rates for record lengths of time. Given the side effects have made the disease worse (more debt, speculation, greed, arrogance) maybe it’s best to let the infection run its course and stop treatment? Let the meek and lowly (non debt-pigs) inherit the earth :-)
Did the Fed identify a root cause of this credit freeze for riskier companies? Did it simply come down to competition for yield now that you can actually get a real risk free rate of return that isn’t entirely eaten up by 2% inflation? It really is starting to feel (to a layman like myself) after observing the Fed over last 10 years, that the damage a recession could cause is so much more severe than it ever was in previous years that the Fed is simply to nervous about what a sharp fall in asset prices will do, they just won’t let it happen. Safe to say, the Fed will “do whatever it takes” to avoid a recession?
The “cross current” language just seems to vague and in a world that I can never recall being devoid of “cross-currents” it just seems like the Fed is giving itself way too much discretion here that does not have to based on actual “data”. I would much prefer, for better or worse they rely on objective data rather than trying to discount these “cross-currents”
You now TBAC also had a meeting and recommended basically no increases for auctions except for TIPs. They must have known that QT was on perpetual hold and ALL the maturities would be reinvested. Pretty big change if this happens. Let’s look at the forthcoming System Open Market Account Holdings of Domestic Securities tomorrow to confirm this. Besides the debt limit needs to be voted on.
Wolf-
What would the correct move be for Powell at this point?
I’m glad I’m not in his shoes. That’s all I can say.
If I were him, I wouldn’t want credit markets to freeze up, and that could have happened if what was going on in December had been encouraged to snowball out of control. On the other hand, there are a lot of excesses, and they need to be wrung out of the system. But how do you do it slowly so that it doesn’t cause chaos?
‘Credit markets may freeze up’
That right there is the indication that the financial system has no life in it. We read all these articles about how the fed did a great job and the system is up and running. If so, why all this circumlocution? To borrow another poster’s analogy, this is like doctor talking about what he might do, going forward, to cure the disease even though he claims it is cured.
10 years after bernanke’s shenanigans we are still talking about the same problems. That means none of their tricks worked. That’s all, folks.
If “gradual” doesn’t work, what then? Does anybody in hindsight fault Volker’s temporary destruction of credit?
Bloomberg stated yesterday that the federal funds rate turned positive putting it slightly above inflation for the first time in a long time. It looks like the Powell Fed found and crossed the zero line. This is/will be a moving target for the Fed and is difficult to know since the Fed only has past data to gauge their results. How do you hit a future moving target when all you know is where it was in the past? As for the balance sheet it is definitely influencing Wall Street. These guys fear the balance sheet run off more than Superman fears Kryptonite. It was my understanding that the excess reserves where there to handle future potential non performing assets and to maintain the banks liquidity if a surge in defaults occurred. It sounds to me like the the Fed still sees the possibility that some past problem assets are still in the system and may need to get rung out gradually. When the Fed started increasing the federal funds rate this may have brought some of them to the surface so to speak. If you check the January 24, 2019 H.4.1 you will see that the Maiden Lane balance is now at zero.
“But how do you do it slowly so that it doesn’t cause chaos?” Seems to me they WERE doing it with the balance sheet drawdown. They’ve now thrown a bone to the markets with the “patience” token, but bottom line is they will move forward with the process of reversing QT – with PERHAPS a different endpoint.
Confess that the economy is dead, and urge proactive measures to reverse social deterioration so that we don’t all die!
QT doesn’t seem to be having much effect yet. The 10-year rate is back at 2.7, although it should have risen by now. The US must be getting all the surplus money from every country in the world.
If long-term rates don’t rise, I see little reason not to continue QT, all the down to the level of currency plus reserves.
there is no other place in the world right now safer than investing in the US…..Western europe is sending all their cash here….When europe implodes it will start the domino effect….
I thought the FED was going to be unmercilessly vigilant about inflation.
We got another oil bust going on right now that is working its way into the inflation figures (bringing them down). This even made its way into the press conference. The plunge in energy prices took some pressure off the headline inflation numbers though PCE core remains near 2%.
Yep…the 5-year/5-year forward inflation number is ALL they care about at this point, IMO. And it collapsed in Q4 2018. Thus yesterday’s actions.
“In light of these estimates and the substantial progress we have made in reducing reserves, the Committee is now evaluating the appropriate timing for the end of balance sheet runoff. ”
This does not sound like the “The QE unwind continues on autopilot”.
We can all expect a positive surprise in the coming weeks or months regarding the cessation of the QE Roll-off.
While the FED loudly telegraphs negative news, it does not hesitate to surprise the market with positive developments such as the likely ,soon to be tamed, QE roll-offs.
Trader’s know this is an UBER dovish statement that demonstrates the Fed has caved to the market. Lever up the margin and party on!
I think you’re misreading that sentence: “In light of these estimates and the substantial progress we have made in reducing reserves, the Committee is now evaluating the appropriate timing for the end of balance sheet runoff.”
EVERYBODY knew from day one that QE unwind would stop some day, that it would be limited for a some very real and practical reasons, as I pointed out. Except the Fed hasn’t said where that limit might be. It still hasn’t said where that limit is, but it now has said that it will say where the limit might be.
It also said it might say how it will tweak the mix of the balance sheet, such as bringing down its average maturity and getting rid of MBS entirely. That would require a tweaking of how the autopilot flies that plane. And these changes are likely not favored by the markets.
So, how bad are things, really? If the FED is positive on the economy, why is it that rates are as low or lower than in the 1930’s….doesn’t make sense. Are “we” addicted to these FED drugs now forever? What are the true underlying risks here? Is there any way of determining the fair value of financial assets? It seems so many sad folks are in debt to their eyeballs. This is nuts! We are truly down the rabbit hole.
@Trinacrina
You answered your own question. Monetary policy is like quicksand. Once you are in it, you are stuck in it. If you try yo get out of it (Ie tighten and raise rates) you sink faster. There’s many reasons behind this paradoxical effect of long term monetary policy, but the main reason is that low interest rates encourage debt accumulation, and the longer the extreme monetary policy persists the more debt is accumulated. Raising rates becomes unsustainable, as it creates enormous drag on the debt laden economy in the form of higher interest expense. Eventually long term real economic growth and productivity slowly succumb to the gravity effects of excessive leverage and one is left with a very fragile economy that is highly susceptible to any sort of rate shocks, even mild ones. Inflation would be the deathblow to such an economy. Luckily we are in a global deflationary environment as of today. Let’s hope oil stays contained…..
Well that was fast. Spend your money quickly. Enjoy.
Malpractice by the Fed. By reinventing the Greenspan Put, when they no longer have the ammo that Greenspan used up, they are lulling a generation approaching retirement into a stock market ‘sure thing’ when in fact it can only have one end.
Apple’s profit up? So what? Apple does not manufacture in the US. It has little connection to the real economy. But it does make SOMETHING unlike Facebag, Snapcrap etc. etc.
The Fed in thrall to a Dot.com. 2 based on advertising?
Facebag posted record profit today. Stock is up 17% since yesterday. Snapcrap still multi-billion dollar company. Fed reconsidering QE, see next article.
Looks like the Fed is damned if they do, damned if they don’t amongst the Permabears…
Powell is doing a fantastic job staying data dependent and acting accordingly. The policy rate is now neutral, inflation is very low and unemployment is about as low as it can go. The US is in a good place economically, and the Fed has pushed interest rates are about as high as they can go given systemic deflationary forces that will continue to act. I doubt we will see the 10Y above 4-5% for a long, long, long time. Sitting in Treasuries or gold will continue to be a losing proposition in 2019.
“I doubt we will see the 10Y above 4-5% for a long, long, long time. Sitting in Treasuries or gold will continue to be a losing proposition in 2019.”
Aren’t you glad you’re not managing a pension fund?
“Sitting in Treasuries or gold will continue to be a losing proposition in 2019.”
I agree. Risk assets look better for 2019 right now.
It sure does feel like Jay Powell is making it up to Mr. Market … after freaking it out in December.
I feel that a rate hike will not show up as baked in the cake unless the S&P 500 sees a 50 DMA of 3000 or higher.
Conversely, i strongly doubt that a rate cut will show up as baked in the cake unless the S&P 500 sees a 50 DMA of 2500 or less.
So, Jay Powell, if you are reading this, i have just made your forecasting job easier and you can go ahead and lay off all your magic modelling PHD Econometricians in the Eccles building.
So far this year gold has not been a losing proposition. Even the moribund mining stocks are going up and they have not participated in any other gold rallies recently. The Fed threw the USD under the bus yesterday and the singing “Turning Japanese” is not going to help.
Elizabeth Warren was quoted today as saying “capitalism without rules is theft”. I would guess if Fed Powell could be honest to the world (without crashing the markets 50% instantly), he would state “capitalism without breaking the rules is theft”…as Powell knows a monster recession is going to devastate the bottom 99%, in terms of quality of living and recovery time, much more than the top 1%. I think he is trying to do “right” in a very short sighted manner, trying to slowly deflate the financial system sideways over many years without having it systematically collapse. Unfortunately in the process he will likely pump the markets to the final euphoria phase if he is not careful, and I do not believe this is his goal (did you see him “grimace” when he was told the DOW was up 500 points during Q&A today?). If Powell fails, we will get a very quick reversion to the mean, and a possible re-definition of our democracy via the 2020 elections. There is so much more at risk than just 401k balances, and Powell understands this. A simultaneous global depression could have unthinkable consequences, including actual wars.
I’m guessing some sort of mini-liquidity crisis happened in December 2018, as every person in power attempted to pump the markets back up as if the world was going to come to an end…yet the markets were really only down around 5% from beginning to end of 2018. I’m not sure any of us would sleep well at night if we really knew the intimate truth of how fragile the our entire civilization is, based around our “evolving rules” of financial governance. I would not want Powell’s job, would you?
I know very little about monetary policy, but as a student of history this decade has felt ominously like 1920s. This party is going to crash hard. That’s the only way it will be allowed to end.
I understand it can never be like the 1930s because the FED will never allow the shrinkage of the money supply. However, the concentration of wealth and low interest rates seems comparable to shrinkage in the money supply, nullifying the ability of the Fed to easily increase the money supply in the next recession. Thereby making in deeper and more protracted than expected.
“the concentration of wealth” (!) is too lightly passed over when those of us hoping to safeguard our money post here.
IMO, our money will go out with our society, because our culture is increasingly debased. Among other elements disappearing: charity. (Charity in the ethical meaning – not organizations like United Way.)
The notion that collective substitute sustenance programs can somehow be good enough for those falling farther and farther behind is, in my view of history, hopeless.
So, every business is aware that robots will soon replace most people in the lower levels of the workplace and they compete to get there firstis with the mostis.
And what will the displaced people do? Historically, what have they always done? What are the yellow vests doing now in France?
The truth is that a wave of debt defaults, deflation, depression or your preferred term for a severe economic contraction is needed to clear out the dead weight of unviable enterprises, debt and inflated asset prices and reset the economic model. Sure there would be a surge in unemployment, but what purpose do jobs at companies like Netflix or Tesla or the whole REIC serve, for example? Can the Federal Reserve prevent such a contraction? History says ‘No’.
Defaults have already started around the world, and the funny thing is they aren’t supposed to happen as monetary and credit conditions remain extraordinary loose throughout the world.
The Fed can afford to do like they have often done this past decade: sit on the fence and look what happens around the world.
China, Europe (EU + Sweden, Switzerland etc) and Japan all look trapped in their present toxic environments, and the Fed wants to see what will happen there, just like the Yellen Fed sat on the fence regarding NIRP and rightly concluded they are far more dangerous than useful.
Let’s just be honest the Fed doesn’t drive the economy nor really control it in anyway. The Fed feeds the government and we the people have to deal with whatever decisions they make.
Not one time in history did a person wake up and say I’m gonna keep my business closed since the Fed made this or that decision lol. The government has forced us and much of the world into a debt monopoly to keep us under their control. Don’t believe me? I once said I’m going to operate my life under a barter system instead of supporting this casino we call monetary policy. Well long story short all transactions in a barter system are treated as cash transactions. In other words like it or not we are all slaves to this monetary life.
Most recent wars were fought not to free the population but to enslave them to this monetary policy. Venezuela is no different, Maduro worked some deals with China and Russia for debt and oil swaps cutting the USD out of the trades and now we are forcing a regime change to force oil trades be priced in USD.
Liberty and Freedom can only be achieved if you play in our club, but if you attempt to escape then economic, legal, and even criminal pressure will be the outcome. If those don’t work the military will ensure countries see things the way we want them to lol…
The government has just transformed slave ownership into a much more humane and prosperous form. We are still slaves to the dollar for survival and as such they can never allow the system to fail. They will just print more money bail out banks, businesses and hope and pray it trickles down to the poor population.
The debt ceiling has been raised for the last 20 years and I’m sure we got another 20 years we can jack that ceiling…. Eventually someone will have to answer for this game but it won’t be in my lifetime lol…
Hello!
“Rate Hikes on Hold for “Common-Sense Risk Management”” or “We cannot tamper this PONZI SCHEME”…
I am sure you’ll love this:
The ratio of excess : required reserves is more than 8160 : 1
More than adequate. Of course the Fed pays interest to the detriment of remittances to the Treasury. If this is not enough to make one mad, then what will?
Really interesting, -and extremely valuable-, all this comments. It appears that reality is biting and everybody is starting to see it clearly. However my view is that too very good analysis miss a healthy balance of synthesis. Let me try to fill the gap:
Is it really so difficult to understand the difference between real money -wealth creator- and monetized debt -wealth destroyer-? Real money is unconsumed accumulated work -savings- which are valuable and key to economic growth. Fiat money -monetized debt- on the other hand is unlimited bank credit which is key to economic contraction since it loads with liabilities any valuable asset. In a healthy economy, interest rates depend on the amount of available savings, being high when there are few and low the other way round. In a fake economy, interest rates are determined by bank credit expansion, which basically means the stock market gets big and mechanical capital gains and governments can spend generously without collecting taxes, (deficits), and as a result, fixed income citizens loose purchasing power continuously although at very low rates, being forced to apply for credit.
This is, roughly, what Hayek told Keynes before he published his General Theory which has been the mainstay of Western Economies since WWII, and laminated all classic economy fountains. Followers of Austrian Economics, have been waiting the predicted outcome of Keynesian Theory ever since. Perhaps we finally get what we have been fighting for….
Best regards from Spain.
The “Commons” must be able to put all this monetary policy between two pieces of bread to make a sandwich. Otherwise in the medium to long term we will have global revolt. Period.
As I read thru the enlightening comments, I sensed that the Fed is posturing because of tax season. Fed does not want to upset the Corporate Applecart of all those repatriated taxes that need to be included as profits. https://www.irs.gov/newsroom/irs-issues-guidance-on-transition-tax-on-foreign-earnings
Remember “2018 Changes to the Corporate Tax Rate. The Tax Cuts and Jobs Act of 2017 changed the top corporate tax rate from 35% to one flat rate of 21%. This rate will be effective for corporations whose tax year begins after January 1, 2018, and it is a permanent change.”
So far, my base case is unchanged. Slower economic growth than recent with some inflation. The FED will have to accept inflation running at a higher level then what they would prefer because they have no choice. If they try to lower it, the economy will tip negative.
I am sticking with my heavy overweight position in Socal beach houses. Rents are steadily and will continue to do so unless the Fed decides inflation needs to be lowered.
When a reporter demanded a transparently clear explanation of what “patient” denotes vis-a-vis grabbing his tergiversating ankles for the petulant bankster mob, a spokesperson for Powell said that he was unavailable to comment, due to the fact that the financial oligarchy had not dismissed him from heeling on all fours nor released him from the choke collar & leash; however, it was reported that he had been given treats and lots of “good boyyyy” encouragement for his obedience training success.
Watched Powell’s press conference. I don’t know how it can be interpreted as anything but retreat – full capitulation and accommodation to Wall Street gambling casino.
Powell’s basic points in his opening statement:
1). Interest rate is primary monetary tool, and it is on hold.
2). Balance sheet normalization level is “recently” judged to be far higher than it was previously judged. This means much smaller QT, that ends sooner, and a much higher QE-type balance sheet.
3). He made a point to say more QE is on the table as a tool the help the economy in the future – not just cutting interest rates.
Powell said the balance sheet reserves are determined by “what the market demands” ….. Need anything more be said? Mr Market “demands” and Mr Market gets.
Nough said.
Remember when markets were free and unrigged, regulators and enforcers ensured the integrity of the markets, and reckless and greedy mega-speculators had no expectation of being bailed out by taxpayers?
Neither do I.
All of the Fed’s happy talk about our supposedly robust economic recovery is belied by the fact the Fed goes dovish as soon as its Ponzi markets start to implode under the weight of their own fictitious valuations, once the Fed punchbowl is taken away. Meanwhile, precious metals are surging as the flight to quality (and out of our rigged, broken, manipulated “markets”) accelerates.
With the Keynesian fraudsters at the Fed intent on debasing the dollar into worthlessness, and our national debt reaching staggering proportions, it is encouraging that some state lawmakers are moving to protect their populations by ending the unfair taxation on gold and silver – the ultimate hedge against the gang of counterfeiters and racketeers at the Fed.
I don’t know but judging how happy Cramer, Trump, and all the financial talking heads and pundits are, it sure appears Powell has openly acknowledged who he serves.
My guess is we are living through a new paradigm where many of us are still stuck in the old one. We think rates should be 5% or something typical of the pre-GFC days but those days are over. THe whole system seems as if it demands easy money, forever, with even the slowest rate hikes ever in an economic cycle resulting in apoclyptic warnings from the financial parasites who run everything.
There are no good investments left other than to pile into this 10 year bull market as everything else pays next to nil. Banks pay next to nothing, treasuries are a joke, and bonds are similiarly yielding minimal returns.
For us pions, the decision is whether to buy or not buy. I didn’t listen to the noise and put my regular buy order on the 24th. To me it was obvious that rate was stuck at 2.5%+- 2 BP’s.
Now of course I am thankful for that compared to last year. Easy decision. Just buy Treasuries and go to sleep. If you have real skin in the game, arguing is irrelevant.
“The Fed is the market’s bitch.” – Sven Henrich
Sven’s single chart linked below explains his statement:
https://ei.marketwatch.com/Multimedia/2019/01/31/Photos/NS/MW-HD056_sven31_20190131113702_NS.png?uuid=6feb6522-2576-11e9-a80b-ac162d7bc1f7
I’m reading Ben Graham’s book, the iintelligent investor. It’s clear he never anticipated a scenario where the Fed bails out banks, supresses interest rates, concentrates wealth, and decapitates younger generations. He needs a new chapter.
Powell: “the ultimate size of our balance sheet will be driven principally by financial institutions’ demand for reserves.”
Translation: when financial institutions fear of holding debt which can’t possibly be repaid without accelerated supply of new Fed reserves (i.e. money-printing) increases, driving driving financial asset prices down, we will buy the un-payable debt securities at artificial prices from our banker friends, handing them new cash (i.e. Fed reserves) to keep the game of elevated asset price musical chairs spiraling ever upward. Oh, and we care little about how this shifts the entire economic wealth pie to our friends, or how it will likely lead to a socialist revolt among the populace which will turn America into a third world hellhole as the economic braindead MMTers seize control of the printing presses and dole out massive quantities of new cash to all of their friends.