Fed Launches ‘Rate Peg Instead of QE’ Trial Balloon for Next Crisis

Wall Street hype artists and assorted QE mongers would be deeply disappointed.

This came packaged into the middle of a speech by Federal Reserve Board Governor Lael Brainard, on “How Does Monetary Policy Affect Your Community?” It was under the subheading, “Some Issues to Explore.” And it would be a huge shift in how the next crisis will be handled.

During the next crisis when short-term interest rates are already at zero – for the Fed, that is still the lower bound – the Fed might not do the type of QE it did during and after the Financial Crisis when it set a target to buy a fixed amount of securities every month.

Instead, during the next crisis, when 0% short-term interest rates are no longer enough to stimulate the economy, the Fed might announce a target for slightly longer-dated interest rates, such as one-year rates, Brainard said. And it would buy just enough securities with those maturities, to bring the one-year yield down to the target range. And if more stimulus is needed, it might target two-year rates, she said:

Under this policy, the Federal Reserve would stand ready to use its balance sheet to hit the targeted interest rate, but unlike the asset purchases that were undertaken in the recent recession, there would be no specific commitments with regard to purchases of Treasury securities.

“Such an approach could help communicate publicly how long the Federal Reserve is planning to keep rates low,” she added.

It’s an “interest-rate peg”: been there, done that.

The Fed would announce that it wants the one-year yield to be at 1%, for example, and if the Fed is credible in its announcement, it might not have to buy many securities to get the one-year yield to target.

This was just one of the “ideas,” Brainard said, and “there may be other good ideas, and part of the process we are engaged in involves looking around for other ideas.” Nevertheless, the trial balloon is floating.

The Fed already implemented a rate peg before – to help provide cheap financing for the US war effort during World War II. The Fed recounts that episode:

The interest-rate peg became effective in July 1942 and lasted through June 1947. The Reserve Banks reduced their discount rate to 1 percent and created a preferential rate of one-half percent for loans secured by short-term government obligations, substantially below the 3 to 7 percent that had been common during the 1920s.

The Bank of Japan has a rate peg.

In many of the central-bank strategies to control or manipulate markets directly or indirectly, the Bank of Japan has been out on the forefront. The BOJ has been doing QE – though it didn’t call it that – long before the Fed kicked off its QE in late 2008. Then in 2016, the BOJ started its program of yield-curve targeting, which it monikered “yield curve control,” a program by which it tries to control the entire yield curve including 10-year yields.

The Japanese yield curve became an issue in late December 2015 when the 10-year yield started tumbling on rumors that the BOJ would implement a negative-interest-rate policy. In February 2016, when the BOJ confirmed the rumors and announced its NIRP policy, the 10-year yield plunged further, broke through the zero line, and turned negative. And the already languishing Japanese banks were squealing.

In late July 2016, by which time the 10-year yield had dropped to -0.29%, the BOJ announced its program of “yield curve control”: it wanted the 10-year yield to be near but above 0%. The 10-year yield spiked from -0.29% to -0.08% and continued to head higher until it was above 0%. The BOJ accomplished this mostly by jawboning but also by carefully not-buying or perhaps even selling some long-dated securities. It was the reverse of the Fed’s Operation Twist.

This worked without drama until late 2018, when the BOJ – motivated by trade tensions, the global downturn in manufacturing, and the Fed’s “patience” – allowed the 10-year yield to drift slightly into the negative (data via Investing.com):

A rate peg has an “automatic exit”: Bernanke

There have been voices that have discussed a rate peg as an option, including Ben Bernanke in March 2016, after he was no longer Fed chairmen:

To illustrate how a peg could work, suppose that the overnight interest rate were at zero and the two-year Treasury rate were at 2 percent. The Fed could announce that it intends to hold the two-year rate at one percent or less and enforce this ceiling by standing ready to buy any Treasury security maturing up to two years at a price that corresponds to a return of one percent.

Since the price of a bond is inversely related to its yield, the Fed would effectively be offering to pay more than the initial market value. Think of it as price support for two-year government debt.

Timing details are important. Suppose the Fed announces on May 1, 2020 that it stands ready to buy any Treasury security that matures on May 1, 2022 or earlier at fixed prices corresponding to a yield of one percent. Note that, as time passes, the May 1, 2022, terminal date would not change (unless explicitly extended); thus, the maturities of the securities the Fed is committed to buy would decline over time, and the program would automatically end on the specified terminal date.

And here Bernanke explains how this form of QE would unwind automatically:

Moreover, any securities that the Fed bought under the program would mature by the terminal date, leaving no lasting effect on the Fed’s balance sheet. This “automatic exit” is an attractive aspect of the approach.

This rate-peg approach to QE would not be designed to inflate asset prices, unlike classic QE which was specifically designed to inflate all asset prices in order to create the “wealth effect.”

Instead, a rate peg of this type is designed to make borrowing cheaper along certain parts of the yield curve, while minimizing the amount of securities the Fed would have to buy to do this. And with the “automatic exit” feature, it would not cause the lingering issues classic QE is now causing. Wall Street hype artists and assorted QE-mongers that have been calling for QE for months would be deeply disappointed with this rate peg approach instead of proper tried-and-true QE.

The Fed shed $46 billion from its balance sheet in April, as total QE Unwind reached $580 billion, and its assets dropped to lowest level since Nov 2013. Read...  Fed’s QE Unwind Continues at Full Speed in April

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  87 comments for “Fed Launches ‘Rate Peg Instead of QE’ Trial Balloon for Next Crisis

  1. 2banana
    May 8, 2019 at 8:28 pm

    Prediction.

    Those closest to the near free money get rich. The banks, wall street and the 1%ers. Stock buybacks and investments in technology companies that will never make a profit just seem normal.

    Assets bubbles all over again. The rest of the population gets shafted.

    And economists will wonder why there is such a wealth gap.

    • WES
      May 8, 2019 at 9:14 pm

      2banana: Central banker’s still doing the only thing they know – create more credit and print more money out of thin air!

      That will fix all the problems they created!

      And when it doesn’t ……… ?

      • Erle
        May 9, 2019 at 1:12 pm

        How about an audit of the bonds that the FED took off of the balance sheet of the BK banksters?
        The FED claims that they are selling them off at par, but I am a disbeliever.
        Where is Linda Green?

  2. Petunia
    May 8, 2019 at 8:52 pm

    What I understand from this is the fed will guarantee that the banks will make a profit if they buy short term govt paper. They buy the bills and notes at issue prices and the fed will buy them back for more money.

    The banks who are supposed to own the fed have been captured by the fed. It’s a form of backdoor nationalization. The banks get paid not to lend and they get paid to pretend to buy govt debt.

    • JZ
      May 8, 2019 at 10:37 pm

      What I got from this is that when inflation goes to 2%, treasury will stay at 1%.
      This is negative rates.
      Forcing rates below inflation at any/all maturity is called “financial repression”.
      This is the step before inflation.
      I would rather they do inflation targeting and market buy/sell determine rate at something like inflation + 1%.
      Now they are saying treasury yields at 1% regardless of inflation.
      What’s your move? Move money out of US. Do it before they do capital controls.

      • Erle
        May 9, 2019 at 1:31 pm

        Jz, can you give a single year example where the middle class saw an “inflation rate” of one per-cent?
        They hate the producers and do all to wreck those that actually do so.
        Can you not see what the whole system is about? It is about the hagfish that gut the producers.
        BTW, I bought and installed machine tools that weigh far more than three million pounds. I never borrowed against them.
        Stupid jerks as me have hanged upon a rebirth of making stuff here.
        I could have been rich if I ditched the business and gotten on the faerie train to great wealth
        There might be a small pleasure in looking at the nouveau riche turds in the free FED money scam.
        When the debt goes to it’s true value we producers will not forget

        • JZ
          May 9, 2019 at 2:36 pm

          I do NOT know what inflation has been or what’s it will be. We can look up official PCE, CPI number and nobody believes it. Fake news.
          What I said was the market will NOT lend US Government with 1% if “inflation” is 2%. Therefore the market will always set the treasury yield at 1% ABOVE INFLATION EXPECTATION.
          What the FED is saying is, no matter what inflation is, we will set the treasury yield at what ever value we target. Corporate bonds, mortgages can go what ever they want but Uncle SAM never borrows above inflation.
          Let everybody’s salary rise 10%, let cost of everything goes up by 15%. IRS will collect all of those TAX and treasury will borrow at 1% targeted by the FED.
          Ladies and Gentleman, this is how we solve debt problems.

        • Petunia
          May 9, 2019 at 2:44 pm

          Erle,

          I thank you for putting America first against the enemies of the people.

          I didn’t bother replying to JZ because anybody still participating in these markets doesn’t understand he hasn’t lost, yet.

    • Laughing Eagle
      May 10, 2019 at 10:47 am

      Wolf, isn’t this going to create more demand for 1 yr US Treasuries and lower the yield? Seems lately its mostly JPM Chase buying most of Treasuries anyway.

      • historicus
        May 12, 2019 at 6:52 am

        We have 2% YOY CPI inflation. That is about 25% in ten years with compounding and aggregation. And this is with the lousy metric of CPI
        Now, add in some tariffs…..10% to 25%….and can we fear deflation?
        We have been importing “deflation” for years…cheap clothes, electronics, tools, etc….from the Pacific Rim.

        How will inflation be measured if tariffs come into play?

  3. Rowen
    May 8, 2019 at 8:59 pm

    Can the Fed target “making having children not so damn expensive” as a means to stimulate growth?

    • Erle
      May 9, 2019 at 1:42 pm

      You must have free medical care that is inflated by eight hundred per-cent in order to pay for breeders.

    • May 10, 2019 at 6:10 pm

      The current US model is that labor does not need to earn enough to support kids – we just import all our future workers from abroad in order to fix the demographic situation.

  4. GP
    May 8, 2019 at 9:34 pm

    It’s so frustrating to watch the central bankers, with their God complex and infinite knowledge, come up with new experiments.

    Why is there an itch to control when free markets can reach equilibrium on their own?

    Thought relevant. Kuroda said no negative interest rate (Jan 20, 2016: https://www.reuters.com/article/us-japan-economy-boj-idUSKCN0UZ0AN) right until he reversed that stance (Jan 29, 2016: https://www.wsj.com/articles/bank-of-japan-introduces-negative-interest-rates-1454040311)

    • Kent
      May 9, 2019 at 5:33 am

      Free markets tend to reach equilibrium by putting millions of innocent bystanders out of work. These folks then vote in politicians who do their best to put a bullet in the back of the head of Mr. Free Market.

      • mark
        May 9, 2019 at 7:34 am

        What “free market” are you talking about ?

        Nobody with a brain says “market” any more without quotation marks around it .

      • GP
        May 9, 2019 at 12:49 pm

        “Free markets tend to reach equilibrium by putting millions of innocent bystanders out of work” – I don’t know where to even begin responding to that assertion.

        Let me take a small example of free market setting interest rate. Say I approach you asking for a loan. You will do your due diligence (look at my credit history, reason for loan, duration of loan, value of collateral, my ability to repay the loan etc) and come up with an interest rate that you feel rewards you for the risk you take. Higher the perceived risk, higher the interest you expect. If I am happy with the rate, I will accept and we sign the loan agreement. If not, I will go to another lender. Similarly if you deem the risk is too high you will look for other places to lend (or invest) your money. No coercions, no obligations – just free market setting interest rate.

        We can extend this to banks and other institutes. Individuals/banks can decide how much they will charge to lend money. I contend this is much better than a board of directors or a group of bankers (remember LIBOR rigging?) setting prime rates.

    • Ididsa
      May 9, 2019 at 11:36 am

      See Dr Lacy Hunt’s work. No one wants to go through the “austerity “ phase to realize the eventual benefits of true price discovery. There will be massive deflation in financial asset prices, credit and liquidity volatility, and profitability will eventually affect the employment figures. Massive amounts of leverage will have to be shed by global corporations to sustain new equilibrium interest rates.

      Austerity is the way to go, but everyone wants to take the easy way out. It’s truly analogous to the procrastination of withdrawal from a drug. More debt will not help.

  5. Iamafan
    May 8, 2019 at 11:02 pm

    Did you hear what diMartino said about her in Hedgeeye? A lot of interesting things.

  6. HR01
    May 8, 2019 at 11:02 pm

    Wolf,

    Wrong answer from Fed Governor Lael Braindead.

    Next crisis, do nothing. Eat popcorn and watch the zombies die off. Let the banks go under and watch other banks emerge.

    Otherwise, they’ll just be repeating the same nonsense in another five years with an even bigger balloon to pop.

    • nicko2
      May 9, 2019 at 1:11 am

      The path of least resistance is to print more money….

      • Shizz
        May 9, 2019 at 8:01 am

        Least resistance eh? I suppose until resistance is encountered… Kinda like passing the event horizon, you are still capable of doing things for a while but all of the things you do have ZERO impact on the situation. The situation being you are being gobbled up by a black hole.

  7. Grantx
    May 8, 2019 at 11:16 pm

    I am confused. In layman’s terms what impact would this have on the major indexes?

    • May 8, 2019 at 11:48 pm

      None? As opposed to a lot as is hoped QE would do….

      • Wisdom Seeker
        May 9, 2019 at 2:29 pm

        Strongly Disagree with “none”.

        The Fed can’t change its rate as fast as the market needs. When the Fed’s rate is below the true market rate, which is to say when inflation is rising, demand for credit is increasing, and in general the economy is starting to pick up steam, the Fed will be forced to buy Treasuries hand over fist in order to maintain the peg. There may not be enough Treasuries, so they will claim that they have to buy other stuff too. A banker-induced crisis at just this time will feed QE-Unlimited, and this will stimulate the economy at the worst moment, when it’s not needed.

        Now look at the opposite situation, when the Fed’s target rate zone is higher than what the market demands. Now the Fed is going to be forced to sell with abandon (maybe even more than it holds?), in order to push rates back up. The market will be screaming in panic about an emerging recession and the Fed will be tightening in order to keep a high peg. This will be like December 2018 all over again, with the Fed tightening obliviously into a credit panic.

        In short, this proposed Fed policy is colossally stupid. But it will be great for volatility spikes at unusual times, and good for whoever front-runs the policy…

        • safe as milk
          May 10, 2019 at 10:27 am

          sounds like japan.

  8. nicko2
    May 9, 2019 at 1:09 am

    Don’t want to get political…. But so much of this prognostication depends upon who is sitting at the big desk at 1600 Pennsylvania in January 2021.

    • cesqy
      May 9, 2019 at 3:06 am

      Interest rates, trade, and immigration all depend on who’s sitting at the big desk in 2021. Place your bets.

  9. ExperimentsRUs
    May 9, 2019 at 1:31 am

    The monetary experiments will continue until morale improves.

  10. Michael Engel
    May 9, 2019 at 3:35 am

    The inflation expectation FEDRATE @ 2.42% have some mechanical problems. In Germany, all rates up to 10Y, including the 10Y, are underwater.
    The deepest is 2Y @ (-) 0.63%. It will get worse.
    Gravity with Germany cause the US yield curve middle to
    cave in.
    The US middle drag the long duration – the 10Y to 30Y – down.
    Yesterday the US 10Y was rising sharply, but today its back down.
    All US rates between 1Y to 10Y are < FEDRATE.
    The US economy is booming, unemployment is down, but global liquidity will send the DOW down.

  11. timbers
    May 9, 2019 at 4:46 am

    Umm… someone should tell the Fed that fiscal stimulus works much better, and that zero and near zero interest rates not only don’t work they make matters worse. Where has the Fed been these past 10, 20 yrs?

    • cesqy
      May 9, 2019 at 8:52 am

      The Fed would be giving the Treasury lower short term interest rates. The Fed controls monetary policy. The legislature controls fiscal policy and the higher and never ending debt limit of the last 30 years.

      • timbers
        May 9, 2019 at 6:05 pm

        Thx I do know this, but then why does the Fed Chair tell us Social Security & Medicare (incorrectly I might add) do bad things to our fiscal state of affairs? Why does the Fed comment on fiscal matters when it does suit it’s agenda?

    • May 9, 2019 at 10:42 am

      timbers,

      The Fed agrees. But it cannot do fiscal stimulus. That’s the job of Congress.

      But the Fed makes sure the government can borrow cheaply, which the government needs to do to fund the fiscal stimulus.

      • Erle
        May 9, 2019 at 1:54 pm

        Oh, and we are taught since childhood that the FED is independent?
        If the sainted porseffers of the universities would bother to get the comic books that the NY FED puts out, they could get a head slam on how it all works.
        That is too much to ask of these cretins.

        • May 9, 2019 at 1:56 pm

          The Fed is always the (indirect) “lender of last resort.” Its job is to make sure the US government will never go broke. And so the US government will never go broke. The Fed guarantees that. And you can count on that.

          What you can’t count on is the purchasing power of the dollar :-]

        • GP
          May 9, 2019 at 2:32 pm

          [Thank you for this well-researched and well-timed article.]

          Meaning of ‘lender of last resort’ has been stretched quite a bit.

          Lender of last resort would only lend against best of collaterals at very high rates. So that when situation improves borrowers would pay back in urgency to get off that high interest and free up quality collaterals.

          Past decade has been all about buying up toxic assets at face value.

        • May 9, 2019 at 2:44 pm

          GP,

          “Meaning of ‘lender of last resort’ has been stretched quite a bit.”

          Yes. Maybe it should be renamed “lender of any resort”

          :-]

        • safe as milk
          May 10, 2019 at 10:35 am

          not sure this is true but i’ve read that before. wwi, the fed balance sheet wasn’t allowed to include government debt. the need to pay for “the war to end all wars” is when congress forced them to start buying gov’t bonds.

  12. Jack
    May 9, 2019 at 5:47 am

    .. what works for Japan will Not work for any other market.

    The Bank of Japan ( the government) Knows their population well.

    This can’t be said for the US government nor ( by extension) the Fed ( note here that there is NO independent FED) .

    The Fed ( If Independent) would never argue for the current shambolic policies .

    What has driven this so far is the ( corrupt corporations of the US, which to large extent had a corrupting influence on the policies of the government on ALL levels ( this includes the WH). Sad but true.

    There will be repercussions though, the US population is Not as disciplined and compliant as the Japanese population, this will lead to great dissatisfaction with what goes around in short order.

    Where the resulting dissatisfaction will take us will determine the course of Not only the next 50 years of the US history, but the world history as well.

    Go Patience!

    • Petunia
      May 9, 2019 at 9:42 am

      Japan’s elites come from a warrior class, they understand that instability leads to the poor eating the rich, having been the instruments of internal turmoil historically.

      Unfortunately for us, the clown show on capital hill doesn’t share this knowledge or background. They don’t realize that the last two presidents were the voice of the people trying to implement change. The next attempt at change will not be the status quo, it will be much uglier.

      • safe as milk
        May 10, 2019 at 6:05 pm

        @petunia, i regretfully share you opinion. it’s not the left or the right, it’s the entire class of fools running things here.

    • Rowen
      May 9, 2019 at 1:39 pm

      The funny thing is that the BoJ didn’t realize that a significant part of problem was the population itself. It’s really hard to have “growth” with a declining population, especially once the rest of the world catches on to their export game.

      It took a while, but both South Korea and Japan are taking active measures to address their human growth problems.

      • d
        May 10, 2019 at 6:48 am

        Many many of those long term active measures in Japan involve Robots, not immigrants.

        Some few immigrants, mainly in healthcare, will be allowed short term, as a stop gap untill robots are perfected.

  13. David H
    May 9, 2019 at 7:28 am

    What would happen to a portfolio of bonds if this scenario transpired ? Say I had a large sum in a stable bond fund 70/30 government corporate with average yield to maturity of 8 years. Would it be negatively impacted ?

    • cesqy
      May 9, 2019 at 8:23 am

      The velocity of the money in the targeted years should increase; but where will the fund invest the redeemed money.

    • Calvin
      May 9, 2019 at 8:28 am

      Wouldn’t it be true that if the government artificially holds the interest rates down, then any previous bonds issued at higher interest rates become more valuable on the markets?

    • Petunia
      May 9, 2019 at 9:48 am

      Take a look at what happened to the bond holders in Detroit, keep an eye on the bond holders in Chicago, then extrapolate based on your holdings.

    • Anon1970
      May 9, 2019 at 10:18 am

      Did you mean average maturity? Average yield to maturity is a percent not a number of years. If you are looking for stability, buy individual bonds using the Treasury Direct program and construct your own bond ladder, but don’t go out too many years.

    • Iamafan
      May 9, 2019 at 12:36 pm

      If I were you I’d listen to Gundlach. He addressed this strategy during the recent Ira Sohn conference.

  14. Iamafan
    May 9, 2019 at 7:47 am

    This looks like the theater of the absurd. The Fed still has about $3.9
    trillion balance sheet (never been normalized) and here we are talking about crazy ways to increase it, no matter how we call it. Look folks, this is the month we will start to re-invest almost everything that is maturing. Perpetuate whatever monster we created. All we are doing is really loading up in more debt. We are well on our way to Never-Never Land.

    This is unbelievable. Instead of talking about how we can create more debt, how about a real discussion about how we can get out of it.

    • sierra7
      May 10, 2019 at 11:09 pm

      It’s a “Hamster Wheel” economy; the wheel must turn faster and faster until nature takes over: centrifugal force shreds the whole structure……in the not to distant future!
      We refused to sup on the “bitters” of the ’08 GFC and we will pay by having to drink the “Socrates Blend” in the near future. There will be no out.

  15. Hobbes
    May 9, 2019 at 8:26 am

    The US continues to plunge deeper into NIRP, or perhaps it should be NRIRP, as we are talking about Negative REAL Interest rates. The interest rates are currently negative to the inflation rate. And remember, the government lies on the ‘official’ inflation rate so they can continue to spend a fortune or weapons, death and destruction around the world. But even at that, the actual interest rates from the government would appear to be less than even the lying inflation rate. And remember, government statistics always become far less reliable as we move into the next election, which has already begun.

  16. Paulo
    May 9, 2019 at 8:33 am

    This article and comments reminds me of the chemistry kit I bought my kids when they were wee ‘uns. Mix a little of this, add some that, and see what happens? Market? What Market? The main fundamental these days is debt; not a good idea to build an industry upon, something that is needed, or a better way to do anything. Peak everything, including waistlines, hours spent working (oops treading water), and unhappiness. Consumption as religion, and the oceans full of floating plastic of what we discard.

    Not paying taxes was called, “sport”, just yesterday….by the President. (everybody does it in RE) Really? Really? Try it if you’re a little guy, or out of protest. Then, see what happens.

    After having my Mastercard ‘compromised’ for the third time in the last 3 years, (and I hardly ever use it, but I do check the statements line by line), I am losing faith in the ones and zeros digital economy. Last week I increased my funds of emergency cash. I bought $2,000 dollars worth of auto parts the other day for cash, and it was most welcomed by the dealer.

    There is nothing normal about any of this. Today’s article about future QE possibilities just adds to my disquiet that we are at an inflection point in almost all things. The sun rose today after another school shooting and more tariffs are being threatened, any minute. Trade policy is announced and undertaken at right wing southern political pep rallies. Or, by tweet. A new carrier group heads to the ME to confront Iran and NK is firing short rangers like distress flares. Not one adult is driving this ever increasing complex bus we call the modern economy, and it isn’t even fire season, yet. I did see Houston is flooding again. Already. That should be good for the highly vaunted 3.2% GDP economy, won’t it?

    Don’t mind me, last night I participated in a local disastor preparedness public forum as the emergency comm ‘guy’. Our biggest threats are forest fires, flooding, and the inevitable subduction zone ‘Big One’. This morning I meet to site a new HF antenna tower at our community hall, one of three local emergency centres for an area of 1100 citizens. Yes, three marshalling sites for eleven hundred people in case of an emergency. Being rural, we’ve always known there really is no ‘they’ coming to help or actually do anything in the event of something serious. I suggest the same applies for everyone. You want these Fed goofs and political operatives deciding your well being? Shoot, they’re just setting the table for another fleecing….oops banquet, and we’re the main course.

    • Petunia
      May 9, 2019 at 9:54 am

      Check out the flooding projections for the Mississippi River over the next week or two, historic. It is already causing bankruptcies of farms in the Midwest and concerns there will be no crops this season.

      • Nicko2
        May 9, 2019 at 10:22 am

        Perhaps the mounting consequences of climate change will persuade those good people in the South to change their ways.

        • Petunia
          May 9, 2019 at 10:26 am

          The last major flood of the Mississippi was in 1928, it created one of the largest migrations from the south to the north. I’m sure a carbon tax would have prevented it.

      • d
        May 10, 2019 at 8:52 am

        Get yourself a map showing the Continental US coastlines 66 million years ago pre the extinction event .

        That IS where the US IS GOING.

        NO FLORIDA OR BAJA PENINSULAR, CALIFORNIA, OR MISSISSIPPI DELTA. no NYC either.

        Just a nice big saltwater Fiord all the way from Louisianan to Minnesota.

        Our CO2 level match that period, for the first time in 66million years.

        Our average summer temperatures are rising and so to are our sea-levels, the speed of sea-level rise is starting to seriously increase as the land ice melts.

        Locate the 40 Meter contour line, above today’s mean high-tide line.

        That is the minimum low level where you buy close to a permanent fresh water source, after you consider tidal erosion of flood plains at the 30 meter contour line. which may be the worst scenario mean high-tide line, 80 to 150 years from today. If you wish to see you grandchildren raised in a place where they may be able to survive the changes that are coming without loosing their homes to permanent submergence events..

        • sierra7
          May 10, 2019 at 11:15 pm

          You are correct! I remember those times well! How we suffered! But we looked forward to a future that models told us were full of receding salted waters for fresh; more land to pollute and longer lives to do it in! Ah; fond memories! (And no Fed to worry about!)

  17. Zippy
    May 9, 2019 at 8:59 am

    The brilliant idea continues – greatly reduce the essential Darwinian effect within capitalism by making certain via central state planning and control of interest rates that well-deserved bankruptcies and associated extinguishing of debt do no take place. Thus, the slope of the debt growth curve is never reduced to a manageable one and instead continues to increase exponentially. What could go wrong?

  18. Gorbachev
    May 9, 2019 at 9:51 am

    I really thought with 3% unemployment

    and 3% GDP they would let the market sort

    some stuff out.The lesson for me is don’t keep too

    much cash uninvested .They are going to deflate it.

    • May 9, 2019 at 10:52 am

      Gorbachev,

      This is a plan for the next crisis, when the economy is shrinking, unemployment shooting higher, and credit getting squeezed. This is not for good times.

    • May 9, 2019 at 11:07 am

      They are already deflating it, which causes the rise in the stock market, when they deflate the hard currency (or the bonds which represent) it will synchronize the markets lower. JP will say, “how about a five for two tens?” and why would you want that money, when it represents a liability? You will say thank you.

    • Johnny W.
      May 11, 2019 at 3:03 pm

      Cash is king in a recession, or any deflationary event. Cash is also a surprisingly decent inflationary asset class as well.

      • Johnny W.
        May 11, 2019 at 3:12 pm

        As long as we’re not talking Hyperinflation, which we probably will be encountering at some point in the future. My bet is that the Dollar has one more chance as a “relative” store of value to allow one to enter the Equity Markets as they take an absolutely historically wicked haircut. Cash is a very misunderstood Asset Class IMHO.

  19. Trying to get answers
    May 9, 2019 at 9:52 am

    Is this who is buying 10yr treasuries for the last couple months, yield is down 1 pt since December after rising for 18 months straight.

    If it’s not the Fed, who’s buying this debt?

    Since yields are down, retail mortgage rates have dropped almost a point since December, and asking home prices in the IE are 50k higher in the last 3 months.

    So what gives, Trump make a deal with the Fed to keep rates low and the economy going until the 2020 election?

  20. raxadian
    May 9, 2019 at 10:19 am

    If the FED gets that predictable, then some people will get lots of monies taking advantage of that.

  21. Bobber
    May 9, 2019 at 10:41 am

    The best way to stimulate the economy right now is to reduce M&A and harmful consolidation.

    How about some more rigid anti-trust enforcement to limit the size of companies? The large behemoths are killing our economy by reducing jobs and stifling competition. Break up a few TBTF enterprises, then watch how the economy starts smoking because of new players added to the market. Executives will then have to earn their EPS by making competitive improvements, rather than pushing the easy M&A and stock buyback buttons.

    And don’t just stop the big mergers. Stop the big companies from buying up all the little companies and start ups. Apple was just gloating it acquired 20 companies recently, to root all competition for years to come.

    No side-effects would result from this, unless you think competition is a bad thing.

  22. fred flintstone
    May 9, 2019 at 10:50 am

    None of this will occur……demographics in the US have bottomed. The baby boom will continue to demand even in retirement while the millenials begin to demand more and more……next stop……inflation……and higher rates. A small recession first with huge infrastructure spending (passed after the election) to get us out. The US will pull the rest of the world out of its funk.

    • nicko2
      May 9, 2019 at 1:27 pm

      China is already spending trillions on infrastructure— domestically and globally.

      • historicus
        May 12, 2019 at 6:40 am

        Curious how countries with trade surpluses have money to do things…

  23. May 9, 2019 at 11:02 am

    They should peg the dollar makes more sense

    • historicus
      May 12, 2019 at 6:40 am

      What of free markets?
      Rates pegged by deciders behind closed doors…

  24. nick kelly
    May 9, 2019 at 11:36 am

    I am disappointed to hear David Rosenberg (Gluskin ) chiming in with Fed bashing: ‘Trade talks aren’t enough (to save us from a recession) There is no free lunch after a monetary tightening like this’

    A tightening from a zero base bringing the cost of money nearly to inflation. Isn’t a market that needs free money overpriced?

    Let’s ‘tune’ the idea of a soft landing, which for the herd of money- losing unicorns is impossible.
    Without free money or suckers (See Tesla selling bonds 6 levels into junk) they are dead sooner but will die anyway.

    How about that old saw from aviation: ‘A good landing is one you walk away from’
    Can the economy walk away from i.e., survive a bear market in stocks?
    It has before a bunch of times and the recessions were short.
    And it had better be able to, because stocks can’t always be in a bull market.

    As even Greenspan has all but admitted, keeping interest rates lower every time the market sneezed was a mistake.

    We have to face the fact that recessions are a normal part of the business cycle. The Fed can keep them short IF it has leeway to lower rates. But it can’t do that if market shills want emergency rates all the time.

    • historicus
      May 12, 2019 at 6:45 am

      Indeed. The Fed and the Central Planners have decided that cycles are bad….so they attempt to smooth them all out.
      But cycles are important. They flush excesses from time to time, rather than allowing massive excesses to build and systemic risks to appear.
      By ironing out cycles, the Central Planners create the MASSIVE cycle.
      The Fed, though not officially an agency, has self expanded their powers and mission just like the EPA and others…
      Chevron USA vs Natural Resource

  25. Ididsa
    May 9, 2019 at 11:42 am

    Wolf could you answer this question

    Would this be implemented after short term FFR rates became zero-bound? In other words, would the Fed follow the traditional path on the short end FFR first , and then fine tune the 1Y and 2Y rates to smooth out the yield curve?

    Thanks

    • May 9, 2019 at 12:33 pm

      Yes, that’s what it sounds like to me. In a downturn, first the FFR goes to near zero. When that isn’t enough, let’s see what else we have in our tool box.

      • Iamafan
        May 10, 2019 at 5:41 pm

        Standing Repo Facility (SRF) is being discussed. Very interesting scenario proposed by the St. Louis Fed economists.

        SRF will allow the Fed to reduce their Balance Sheet past October. Very interesting.

        • May 11, 2019 at 7:01 pm

          Thanks. Just read both of the texts I found at the St. Louis Fed. You’re right, very interesting.

    • Iamafan
      May 9, 2019 at 5:38 pm

      This is a very good question. Assuming the FFR still works the same (since IOER now sets the floor) then all the Fed has to do is make the FFR near zero. This immediately makes short term yields also go towards zero but NOT long term notes such as the 10Y and bonds like the 30Y.
      I assume rate targeting will be aimed at controlling the longer term rates since the short term is easily zeroed.

  26. tommy runner
    May 9, 2019 at 12:50 pm

    so its yield for ten years, then kick the loafers off and chew gum.

  27. Iamafan
    May 9, 2019 at 4:37 pm

    There’s a great article today in Bloomberg saying: Huge Treasury Market Would Make a Fed Yield Target Difficult

  28. May 10, 2019 at 7:39 pm

    “… would not be designed to inflate asset prices …”

    Hahaha…

    Okay so reducing the yield on all short term savings vehicles wouldn’t force yields down and prices up out the risk curve and pressure people into paying up for long term assets?

    TINA doesn’t live here any more?

    Did they really say this with a straight face?

  29. historicus
    May 12, 2019 at 6:38 am

    Free Markets! With rate pegging…..
    Maybe QE isn’t considered because they cant retrieve the previous “stimuli”……

  30. Dave B.
    May 18, 2019 at 7:21 am

    All about Elites “End Game”. They don’t and never did give a crap about “people”. Control, power, wages stolen !

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