The Fed’s Stealth Stimulus Has Arrived

It’s not so stealthy.

This is the transcript from my podcast, THE WOLF STREET REPORT:

Let me just throw this out there for us to kick around: The Fed has already accomplished more with its verbiage so far this year than it had in the past when it actually cut rates multiple times, all the way down to near zero, and did trillions of dollars of QE. We’re already seeing the first results. Here’s why.

The US government can directly stimulate the economy by borrowing trillions and spending them in the US on infrastructure, on its employees, armaments, etc. The Fed cannot do this. It can only try to manipulate the credit environment in a credit-based economy.

The way the Fed tries to stimulate the economy is to loosen up credit, meaning it wants to encourage banks and other entities to lend, and encourage or force investors to invest more by taking larger risks for less return, as they begin to chase yield. The hope is that this will result in easy access to borrowed money for businesses and consumers, that they can borrow cheaply, and that they will go out and spend and invest this money. This spending and investment stimulate the economy.

But when the Fed cuts its target range for the federal funds rate, its only moves an overnight rate that consumers and businesses don’t have access to. So it hopes that short-term credit market rates, such as the one-month Treasury yield and the three-month Treasury yield or various LIBOR rates will follow the federal funds rate. And they usually do.

But short-term rates have only limited impact as a stimulus. The transmission channel for these short-term rates to the real economy are loans that are pegged to LIBOR, for example, and those loans will be become cheaper.

But most lending is done over longer terms, with fixed rates, such as mortgages, bonds, and the like. And those rates are much more impacted by the 10-year Treasury yield.

So what the Fed really wants to accomplish by cutting rates is to encourage market participants to bid up long-term bonds and thereby push down long-term yields. The benchmark for this is the 10-year Treasury yield.

If you want to stimulate housing, you need to bring down mortgage rates, and the interest rate of the most common mortgage in the US, the 30-year fixed-rate mortgage, tracks the 10-year yield.

And if you want to stimulate business investing and business spending, you need to bring down corporate bond yields, from top investment grade bonds all the way down to the riskiest junk bonds.

And if you want to stimulate business investing and business spending, and consumer spending, you can boost the stock market and the IPO market. Companies with high stock valuations have more financial options and can borrow more easily.

For example, Tesla: it has a mega-stock price despite billions in losses, and investors keep giving it more and more money when it needs it. So Tesla sells more bonds and more stocks, and then takes this money and burns it.

This act of burning investor cash in a money-losing operation means that Tesla spends or invests all this investor money, and this is a stimulus for the economy. If Tesla could no longer borrow and could no longer sell new shares to raise more funds, it could no longer spend and invest all this money, and it could therefore no longer stimulate the economy with this money.

And this happens over and over again across the corporate sector.

High asset prices – such as record inflated stock market valuations – also are said to cause the Wealth Effect to where those that benefit from the high asset prices, including homeowners, bondholders, and stockholders, are now feeling flush and more secure, and so they’re spending a little more. They might finally replace the roof, or put solar panels on it, or repave the driveway, and they might redo the kitchen, or buy more clothes or that $90,000 4×4 crewcab, all of which stimulate the economy.

These are part of the “transmission channels” of monetary policy…. the channels by which the Fed hopes its rate cuts will stimulate investment and spending.

So, the last time the Fed cut rates, it started in September 2007. The Fed cut 50 basis points, from 5.25% to 4.75%, and then it cut, cut, cut as the economy and the financial system was spiraling down, and by the end of 2008, its target rate was near zero %.

So when was all this rate cutting at the short end transmitted to long term rates and the real economy? Let’s see.

By October 2008, when the Fed’s target rate was down to 1%, the 10-year yield was still around 4%. In other words, after cutting rates for an entire year, and cutting by over 4 percentage points on the short end, the long-term yields had come down only about 1 percentage point.

In late 2008, as Lehman imploded and as the US financial system was on the brink, the Fed cut its target to near zero percent. And briefly, with markets in a panic, the 10-year yield dropped from 4% to a low of 2.08% about the same as today. But then it snapped back, and just a few months later, by June 2009, the 10-year yield was back in the 3.5% to 4% range – despite the Fed’s near-zero rate and QE, where it actually bought Treasury securities and mortgage-backed securities.

And it took the Fed years and trillions more of QE to bring long-term yields down, but it had trouble keeping them down because, after they’d finally dropped, they’d suddenly surge again.

So where are we today?

The Fed’s target range for the federal funds rate is between 2.25% and 2.5%. The effective federal funds rate is right in the middle of that target range, at 2.37%.

Short-term Treasury yields have plunged, pricing in with near-certainty a rate cut in July, and more later in the year. The three-month dollar LIBOR has dropped in parallel to 2.4% from 2.8% at the end of last year.

The Fed still hasn’t cut rates, but already via the dropping Libor, the floating-rate loans are getting cheaper.

OK, the real action is with the 10-year yield. By last October and early November, it had risen to 3.2%. And it had driven the average 30-year fixed rate mortgage rate above 5%. And it caused corporate borrowing costs to surge as well.

But just by the market’s interpretation and imagination, the 10-year yield has now dropped to 2.08%.

This is lower than it was for most of the time when the Fed’s rate target was near 0%, and when it was buying trillions of dollars of securities under QE specifically to get long-term rates down.

Now the Fed is doing neither – in fact, it’s still unwinding QE and shedding securities.  And yet, the 10-year yield has dropped this low.

This has a very stimulative effect on the economy. Mortgage rates have plunged, and home buying has picked up, though it remains lower than last year at this time. Home prices which had been dropping in some of the most overpriced markets have stabilized in some markets and are rising in others.

Consumer spending has picked up in recent months.

Financial services, the largest sector in the US economy, are growing at a hot pace. Most other services are growing at a good pace.

Business investment is weak, it has gotten hit hard by investment in the huge US oil-and-gas sector that has dropped sharply due to the plunge in oil prices since last fall. This impacts in a big way manufacturing and other sectors that supply the oil-and-gas business. But investment in oil-and-gas depends much more on the prices of oil and gas than on interest rates.

Stock prices are at all time highs. So the “Wealth Effect” is active, stockholders feel flush and they’re spending.

Corporate investment-grade bond yields have plunged in parallel with the 10-year Treasury yield. The average AA-yield is about 2.7%. Junk bond yields have come down too. All this is very stimulative. Credit is easy to get and cheap, and companies are borrowing, and so are consumers.

Last time the Fed cut rates, and instituted QE, it took years to get these long-term yields this low, and achieve that kind of economic stimulus. There was a lot of discussion about the transmission channels back then, about the lag between cutting short-term rates and when long-term rates would finally come down, and when this would finally impact the real economy.

But now, the Fed hasn’t even cut, and it has already accomplished everything it could ever want to accomplish to stimulate the economy. And the economy is starting to show it. In other words, the Fed is already stimulating the economy more with its verbiage so far this year than it was able to do in the past by actually cutting rates multiple times and doing trillions of dollars of QE.

Which poses a question: As these low market rates are stimulating the economy and boosting economic growth, why would the Fed actually cut rates? And what would rate cuts accomplish at this point? I don’t know either. It just doesn’t make sense. And the Fed might just be kind of patient to see where this is going, while patting itself on the back for having accomplished all this just by deploying its verbiage. You can listen to and subscribe to my podcast on YouTube.

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  99 comments for “The Fed’s Stealth Stimulus Has Arrived

  1. Joe
    Jun 27, 2019 at 12:44 pm

    Let’s look at the books…
    Bernanke said years ago that if the government tried it, they would crash the system.

    • nick kelly
      Jun 27, 2019 at 7:43 pm

      A head guy at Pimco (via ZH) figures the ability of CB s to control economies is approaching exhaustion.
      The Fed came the closest to normalizing rates and balance sheet but by historic US standards it was pathetic. He figures rates should be 1 % higher.
      My take: by delaying normal brief recessions with injections of uppers, the scene is set for the Big One.

      • nick kelly
        Jun 27, 2019 at 8:44 pm

        Let me correct that: by treating normal stock market corrections as though they were recessions, the Fed has used up the powder normally used to counteract a recession.
        To the extent that the Fed is in thrall to the stock market (and worse the WH) it has ceased to be an independent central bank.

        • historicus
          Jul 2, 2019 at 6:50 am

          Exactly. As Central Bankers attempt to prevent all cycles, cycles that are normal in a free market and serve to flush excesses, they create pent up excesses that create systemic threatening events.

      • steve
        Jul 6, 2019 at 7:09 pm

        Really ? Japan has been doing this for 40 years. They’re fine, and the BOJ is still in full control of of the Economy…..
        Do not under-estimate the power of Central Banks and Fiat money.

        • Reality check
          Jul 6, 2019 at 9:31 pm

          Japan is economically dead. Its stock marked peaked at over 40,000 more than 2 decades ago and has never returned. Their debt to GDP is around 250%. Their economic growth is dead. Ouch!!!

  2. Jun 27, 2019 at 12:50 pm

    “the Fed hopes its rate cuts will simulate investment..” Is that a Freudian typo?

    • Ted Anderson
      Jun 27, 2019 at 3:05 pm

      By cutting rates they reduce income for the banking controllers and overlords. Even better copy JFK and government prints their own banknotes without the FED.
      Probably why the event occurred in Dallas.

    • Jun 27, 2019 at 3:26 pm

      Unfortunately not. That would have been fun. Just a transcription problem. I tried to clean up those things, but missed this one.

  3. bc
    Jun 27, 2019 at 1:12 pm

    FYI — Mortgage rates not falling very much: June 27, 2019 – 10 min read

    What’s driving current mortgage rates?

    Average mortgage rates rose yesterday, as we predicted. The increase was relatively large and returns us to the highest level since last Wednesday.

    • Jun 27, 2019 at 3:29 pm

      Yes, the 10-year yield jumped 5 bpts yesterday, closing at 2.05%, the highest in a week. Mortgage rates largely tracked that move.

      • Sinbad
        Jun 27, 2019 at 4:02 pm

        The last mortgage I had was 18.5%, that was just before, according to then Prime Minister Paul Keating, the recession we had to have.
        2% sounds like free money.

        • Prairies
          Jun 27, 2019 at 4:35 pm

          Because 2% is free money. I am pretty sure a few years ago I saw a clip of an older investor making such an observation.

          His model was to borrow at sub 2% levels and invest in stuff producing 4% or higher growth. Pay back the debt while pocketing the varying gains. Would be nice to have that kind of credit.

    • Lemko
      Jun 27, 2019 at 6:15 pm

      30 Year bond is the mortgage rate, nobody takes 15 year mortgages really, so the 10 doesn’t influence much mortgages… June 3rd 2.53, finished today 2.52

      The long end didn’t get smoked this month, it’s the front end getting bid like crazy

      • Jun 27, 2019 at 8:13 pm

        Lemko,

        Most 30-year mortgages are paid off much sooner than in 30 years: on average after ca. 11 years if I remember right (borrowers sell the home or refinance the mortgage). That’s why 30-year mortgage rates track the 10-year yield since that’s the relevant duration for lenders.

  4. Setarcos
    Jun 27, 2019 at 1:24 pm

    Jobs and wages have done a lot more to stimulate the economy than Fed jawboning. Unemployment at a 50 year low and wages growing the fastest in many many years. Employment reflects business confidence and the resulting investment in human resources.

    To Powell’s credit, he realized there is more than an accelerator and a brake. So rather than raise rates right into recession, like the Fed always does, he paused.

    However, in a rare bit of honesty, former Fed vice chair Stanley Fisher showed how political the Fed can be when he said there was a good chance the Fed wouldn’t have raised borrowing costs in December if Trump had been less vocal.

    Which comes first, Trump complaining about the Fed or a former Fed vice chair that admits the Fed is not above playing politics? Hopefully Powell is a cut above Fisher and his ilk.

    • James Levy
      Jun 27, 2019 at 3:50 pm

      If you check the disaggregated numbers, wage growth for 90% of employees is zero to tiny–all the gains are among managerial and professional classes, not the working class, except in those states that have raised the minimum wage via legislation. It’s like those who say “America is richer!” who miss out on the fact that the bottom 50% of Americans are actually have 800 billion less wealth than they did 20 years ago, but the top 5% are 21 trillion dollars richer.

      • Setarcos
        Jun 27, 2019 at 4:45 pm

        Good point James. Based on the Atlanta Fed stat’s, all wage levels have >3% growth, though the top quartile is rising quite a bit faster than the bottom quartile. Those at the top don’t have nearly as much competition for jobs and the lower wage earners are competing against the illegals.

        • makruger
          Jun 27, 2019 at 7:40 pm

          As the story goes: There are 3 sitting at a table, a billionaire, a working class man, and an immigrant. On the table are 1000 cookies. The billionaire takes 999 of them and then turns to the worker and says ” Watch out for that immigrant, he’s trying to steal your cookie”.

        • intosh
          Jun 28, 2019 at 3:42 am

          @makruger

          That one cookie left on the table fell on the floor — the working class man didn’t even want it.

    • Otishertz
      Jun 27, 2019 at 5:02 pm

      Check the EM ratio. Over 100 million not participating in the US labor force.

      • Otishertz
        Jun 27, 2019 at 5:08 pm

        … meaning the employment-popultion ratio. Tells a deeper story

  5. bc
    Jun 27, 2019 at 1:32 pm

    The mortgage story @ FRED looks complicated & basically ugly:

    https://fred.stlouisfed.org/graph/?g=ohra

    • Jun 27, 2019 at 3:33 pm

      The linked chart shows the SPREAD between 10-year and 2-year (the difference in basis points) as one line and the 30-year-fixed mortgage rate as another line. Not sure why you compare the 10-2 spread to mortgage rates. You should be comparing the 10-year yield and to 30-year fixed.

  6. Old Engineer
    Jun 27, 2019 at 1:49 pm

    The Fed central committee reduces interest rates and individuals, corporations, and governments load up on debt. But to get more growth, and to ensure the interest payments can continue to be paid, the interest rates have to go lower again. But then the borrowing goes up again. So interest rates have to go lower still. And repeat.
    But if that isn’t enough of a problem, the interest rates to individuals stay the same or go up while the rates only go down to banks, corporations, and governments.
    Since virtually no one has savings in the bank (most deposits are temporary, they last only from one paycheck deposit to the next) I suppose zero or negative interest rates won’t cause much of a disturbance as long as things go well. But you have to wonder about the security of a country where most people can’t afford to pay the 20% deductible when their roof is blown off by a tornado.

    • David W Young
      Jun 27, 2019 at 2:10 pm

      Once interest rates for savings accounts at a bank go below 2%, the official rate of inflation (5% to 7% more realistic), I personally will be taking all money out of banks. Do you know how your bank will do during the coming financial collapse?? Pay them to play on the railroad tracks of bank solvency??? Would never pay any entity for the privilege of owning their debt.

    • alex in San Jose AKA Digital Detroit
      Jun 27, 2019 at 3:04 pm

      Old Engineer – it’s like they want a Bolshevik style violent revolution. The Czars acted the same way and look what they got.

      And indeed, the lower 60% maybe 75% are not supposed to save at all, and a $400 emergency threaten them with homelessness.

      I have been trying and trying to save, and since I’m somehow too poor to have Medi-Cal and have to pay for medical needs either out of pocket when I can, or “F*ck you, try to get it out of me” for bigger expenses, I’ve not been able to save at all. I make just enough to survive and to pay my 20% of my gross income off to the IRS each year.

      The air quality where I am is like being a two pack a day smoker, and I have handed my boss an ultimatum: If I am still huffing dust and living this way in the 3rd week of September, 2020, I’m leaving. Travel restrictions start on October 1, 2020, so it will be my one window of time to escape back home to Hawaii. Probably to be a panhandler, maybe a dishwasher if I’m really lucky, but I’ll be home.

      I do not have high hopes for the 2020 election and it may be our last real election given who I think will likely win. Then things will get really draconian. I hope to, like Leo Szilard, be just one jump ahead in getting out.

      • Old Engineer
        Jun 27, 2019 at 5:07 pm

        Alex, it is interesting you mention a Bolshevist style revolution. The recent attempt in Congress to mandate that all US tax filing had to take place through third parties reminded me that tax farming was the straw that caused the French to finally revolt in 1789. I have always been comforted by the fact that we could, like the UK, have fairly radical changes of government via the polls. But the Supreme Court decision today on Gerrymandering makes peaceful change even more challenging.
        But the financial wealth of a growing number of people is declining into the desperation mode, you are not alone. And hopefully the problems will get resolved peacefully.

        • makruger
          Jun 27, 2019 at 7:51 pm

          Bernie suggests revolution is what’s needed, but I just don’t foresee that ever happening. The French people united in their revolt. Americans in contrast are many things, but united isn’t one of them. Besides, civil unrest in a police state generally doesn’t end well. Just ask the folks who”Occupied Wall Street”.

        • Cynic
          Jun 28, 2019 at 3:32 am

          Classic revolutions need to two things: a deep and sustained drop in prosperity for the mass of people – in earlier economies that also meant starvation – and a motivating ideology which interprets the decline as an injustice which can be removed by removing those currently in power and replacing them.

          Many revolutions have merely sought to go back ‘to the way things were’: for us, this would be a return to the golden days of the 50’s and 60’s.

          Revolution just isn’t on the cards as far as I can see.

        • economicminor
          Jun 28, 2019 at 9:25 am

          Cynic, Have you been in the poorer parts of many cities and seen the homeless encampments? Add in the huge numbers of others living from hand to mouth with no cushion. Then realize that many of our farmers are also on the brink. Add in the changing climate. A lot of our fresh food is imported. A disruption of any kind could make food shortages and hunger much more of an issue than most people think..

        • d
          Jun 28, 2019 at 9:57 pm

          What you dont have. YET. Is a Militant, Educated, Middle and upper Middle Class, that decides Revolution, is the only way for them to recover what they had. P 44 did a lot to create such. P 45 has returned some wealth to what is left of the US upper middle class, crumb’s that fell from his cony’s tables.

          Those are the peopel. Who direct those pitchfork waving, Guillotine carrying mob’s. As they did in france in the BLOODY TERROR. (Which ultimately resolved. Nothing. Instead of being dominated by “Ariosto’s” france is dominated by the descendants of the Scum who ran the Guillotines in the Bloody Terror, and pocketed most of the wealth for themselves. For the man in the street, france swapped bad bosses, for a worse set of bosses, that dragged it into nearly 200 Years of horrendous wars, every one of which it lost.)

          They are the people Lenin found in charge when he returned to Russia. This was not the “Revolution” he Trotsky Stalin Etc wanted. So they set about instigation the revolution THEY wanted. The rest is Sad history “Animal Farm” where all animals were equal but some were more equal than others. IS what happened in Russia. Ultimately it solved nothing, as Russia today is a fake democracy, just like iran. Tzar putin and his crony’s, have more power, wealth and control, than the old Tzar’s ever did.,

          America did not have a revolution in 1776, it had a rebellion, by the grandsons of the rebels who were allowed to found it. It was always a, When not an, If they rebel again.

          If America has a violent revolution, hopefully it will achieve something better that those in old Europe, Russia, Latin America, and the east have.

          The history of violent revolution, is not on the America peoples side in this.

    • ng
      Jun 27, 2019 at 10:01 pm

      Feels like driving car at 100 miles an hr without brakes

  7. David W Young
    Jun 27, 2019 at 2:05 pm

    Since we are headed back into recession, I don’t know what stats the author is looking at, the bond market via the 10-Year is reflecting a decline in loan demand at the consumer & corporate levels, while Government goes wild with borrowing. Would not pat the errant Fed on the back for jawboning the markets higher, esp. the bond market, bond buyers are just reacting to a sinking economy; few qualified borrowers left with debt service already at record levels. Rest assured that the service sector will start showing weaker and weaker stats in the months ahead, healthcare run wild won’t carry us into the next election. Or insurance, or financial service, or entertainment, etc.

    • Jun 27, 2019 at 3:51 pm

      David W. Young,

      “Since we are headed back into recession,…” That’s YOUR assumption.

      There are no signs of a recession yet. A recession, as defined in the US, means a number of things, including two quarters in a row of negative GDP growth (Q1 was a positive +3.1%), surging unemployment claims usually past the 350,000 level in a sustained manner, surging unemployment rate, decline in non-farm payrolls as companies are laying off workers, etc. We have seen none of these indications that a recession is approaching.

      NBER calls out official recessions, and they look at a whole big basket of data before they call one out.

      “….reflecting a decline in loan demand”: There is NO decline in demand for loans. I have no idea where you get this. On the corporate side, C&I loan balances jumped 7.4% in May compared to May 2018, and Bond issuance is strong. Consumer loans are rising too. Demand for credit is solid.

      “…bond buyers are just reacting to a sinking economy…” Two things: the economy is NOT sinking (GDP +3.1% in Q1); and junk bonds and stocks are hot, and they’re predicting nirvana and endless massive growth instead of a recession.

      • Nicko2
        Jun 27, 2019 at 4:07 pm

        Consumer debt levels in the US keep breaking new records; there will be a reckoning.

        • Jun 27, 2019 at 4:30 pm

          Yes, but I think the reckoning will hit corporate debt first ;-]

        • Raging Ranter
          Jun 27, 2019 at 4:39 pm

          Huh? Consumer debt levels in the US are much lower than a decade ago, and way loser than Canada. The reckoning will be in Canada and Australia. The US had theirs in 2008.

        • Setarcos
          Jun 27, 2019 at 5:10 pm

          Nicko, total US consumer debt only surpassed pre-recession levels a couple years ago. If you back out federal govt student debt, it is about flat versus a decade ago. Or, if consumer debt is adjusted for inflation, it has actually declined vs. a decade ago.

          The FED’s financial obligations ratio, consumer debt payments as a % of disposable income is pretty close to the lowest level in 25 years.

          Consumers have been relatively prudent with new debt in recent years. Metrics like credit card utilization show that consumers have been reluctant to load up on debt so far in this cycle.

      • Bolongy
        Jun 28, 2019 at 8:42 am

        Usually euphoria before the crash kind of like the old saying when the shoeshine boy tells you that the markets are the place to be it’s time to get out and right now I see the most financially uneducated are getting in and the smart money moving out

      • economicminor
        Jun 28, 2019 at 9:39 am

        Surely there is a level of borrowing/debt where the payments (the servicing of the debts) are so great that no additional new debt can be secured. When everything you borrow goes to pay previous obligations and no new stimulus is gained.

        I have read, maybe it was here, that around a third of the listed US corporations are effectively Zombies. This doesn’t take into count the PE Zombies either which I assume there are many that are not listed.

        You say we are not yet in a recession and that is obviously because of the stimulus effect of the Zombies being able to continue to obtain money to operate.

        So my first statement is relevant as to at what point does this fiscal insanity end. Does anyone have any guesses? Is there a magic number or will it only end when some other crisis causes it. A Black Swan?

  8. HR01
    Jun 27, 2019 at 2:14 pm

    Wolf,

    Have to disagree on this one.

    LIBOR is doing all the work for the Fed. Down nearly 50 basis points in just 6 months. This has much more immediate impact on economic activity than Fed Funds.

    As to WHY LIBOR is down, likely has everything to do with Brexit uncertainty. Boris likely takes the reins as PM this summer and Brexit finally arrives some months later. UK business leaders at this point just want the matter settled, one way or another. Remove the uncertainty and let’s see where LIBOR goes.

    Yet note that LIBOR inverted last week for the first time since 2007. Not supposed to happen.

    China appears to be in the midst of a severe credit crunch. Overnight SHIBOR hit an all-time low today of 0.96%. Lower than during the GFC. This might be why Draghi broke ranks with the other ECB members during his speech last week.

    We’ll see if this latest credit crisis can once again be swept under the rug.

    • psw
      Jun 27, 2019 at 2:28 pm

      ^this^

    • Jun 27, 2019 at 4:15 pm

      HRO1:

      No, we don’t disagree on this: You said: “LIBOR is doing all the work for the Fed. Down nearly 50 basis points in just 6 months. This has much more immediate impact on economic activity than Fed Funds.”

      This is what I said. My words:

      “But short-term rates have only limited impact as a stimulus. The transmission channel for these short-term rates to the real economy are loans that are pegged to LIBOR, for example, and those loans will be become cheaper.”

      But then I added:

      “But most lending is done over longer terms, with fixed rates, such as mortgages, bonds, and the like. And those rates are much more impacted by the 10-year Treasury yield.”

      The 3-month dollar LIBOR is unrelated to Brexit. It tracks the 3-month Treasury yield, but is slightly higher. The 3-month Treasury yield fell, and so did Libor. The Treasury yield curve inverted, and so did Libor’s yield curve. Here is the 3-month $ Libor versus 3-month Treasury yield. You can see how the $ Libor tracks the Treasury yield. No Magic there:

      And yes, China has some issues. But since the Chinese government owns the four largest banks in China (and in the world), and the largest bank customers (state-owned enterprises), and the largest market participants, and the PBOC, which is part of the government, it essentially controls the whole schmear.

      Some smaller banks will be let go, no problem, but depositors will be made whole. The large banks have been getting bailed out in the past, and they will be again because they’re part of the government. And the government, controlling everything, can assure bank funding for all banks, even small ones, no matter what, if it wants to because it IS the central bank and printing this kind of stuff is no problem. It’s almost impossible to have a widespread banking panic under those conditions.

      But if it gets messy and the authorities decide they have to print-and-bail-out left and right, the impact will likely be on the currency instead.

      • Cynic
        Jun 28, 2019 at 3:25 am

        Spot on Wolf: we may well see currency crises arising from what has been termed, by economist Tim Morgan, ‘monetary adventurism’ post-2008 following on from the ‘credit adventurism’ pre-2008.

        The great banks will be saved, many of the smaller fry will go.

        But the US $ still looks to be the last man standing in that event.

      • d
        Jun 28, 2019 at 10:03 pm

        LIBOR is supposed to be a condemned instrument should you not be looking a the replacement for it, SOFR, and perhaps quoting both?

        • Jun 28, 2019 at 10:28 pm

          Yes, but few loans are pegged to SOFR so far (boy that sounds bad). Most everything floating out there is still pegged to LIBOR.

  9. DR DOOM
    Jun 27, 2019 at 2:17 pm

    I have always thought that fixed rate 30 yr mortgages tracked the 30yr rate while variable rate , ballon or trickster mortgages were related to libor. I need to re-calibrate my thinking. I hope WR pops up again on Keiser Report because I like to listen to Max and WR. I am a fan of RT , does this make me a Putin stooge?

    • Lance Manly
      Jun 27, 2019 at 4:08 pm

      Mortgages track the 10 year, few people carry a mortgage for 30 years.

  10. bc
    Jun 27, 2019 at 2:18 pm

    Any one have thoughts on the following FRED chart, which shows the percent change of the fixed 30 yr mortgage. The recent trend is somewhat of a crash, with the rate falling 6.6%, which is highly unusual and alarming. Nonetheless, 30 yr mortgage rates don’t seem to be falling in a lockstep sort of way, with the 10 yr yield. I decided to compare that relationship and this does seem to be a dramatic point in time! If the 10 year falls further and mortgage rates follow, not really sure that stock valuations will play along with this imbalance??? If bond yields crash towards zero there are still coupon rate issues that would most likely effect equity valuations and probably cause major (debt) liquidity turmoil. Sorry for so many posts today, but this has my attention and has me very confused … This is like a paradox wrapped in a conundrum.

    https://fred.stlouisfed.org/graph/?g=oht1

  11. bc
    Jun 27, 2019 at 2:50 pm

    FRED: 30 yr mortgage, 10 yr yield and Libor (all) as a percent change, going back to about 2007. Happy Stimulus package or pre-crash?

    https://fred.stlouisfed.org/graph/?g=ohtL

  12. MF
    Jun 27, 2019 at 3:03 pm

    There’s also a lot of talk coming from President Trump about his disapproval of keeping rates up. I assume this affects long-term rates as well? Do buyers of 10-year treasuries think Mr. Trump will eventually get his way?

    • Jun 27, 2019 at 5:07 pm

      Seems all Trump thinks about 24/7 is getting re-elected in 2020 and his prized rigged ponzi fraud stock market.

  13. Scott
    Jun 27, 2019 at 3:52 pm

    What government can afford the interest on their huge debts to increase? I’m surprised there are not more negative rates.

    • Laughing Eagle
      Jun 27, 2019 at 7:51 pm

      Scott- Negative Rates good for government maybe but not good for savers and consumer prices. It will force the value of the dollar to fall and that means higher prices on everything. We will no longer have the highest interest rate in the world which keeps value of dollar up in this fiat world.

  14. James Levy
    Jun 27, 2019 at 3:57 pm

    I think the author is overthinking things. The numbers are better because the vast majority of the people at the top, no matter what they say in public, are very happy with a business-besotted Republican regime that hands them vast tax cuts, guts regulations, and indulges in huge deficit spending on the military/industrial/ surveillance State. When the rich are happy, the financial sector soars, as he points out. Does any of this “trickle down” below, say, the top 15% of wealth holders to the solid majority of Americans? I would argue, no, it does not do so significantly. And when the contraction comes, it is the bottom 75% who are going to suffer like hell.

    • Nicko2
      Jun 27, 2019 at 4:17 pm

      Nailed it. And the top 10% don’t really need to consume more than they do…they already have everyone they need.

  15. Michael Gorback
    Jun 27, 2019 at 4:40 pm

    The biggest stealth stimulus was Obama’s trillion-plus student loan program. Absolutely brilliant way to pump billions of newly created money into the economy.

    Unfortunately with predictable results.

    • Setarcos
      Jun 27, 2019 at 5:41 pm

      Michael, you are quite magnanimous in your assessment of the govt takeover of student lending and the extra $ trillion “loaned” out in the decade since. It was argued that this takeover would be a profitable enterprise with all kinds of societal benefits. Student debt now exceeds credit card debt by a mile and it also exceeds all auto loan debt.

      Reminds me of a young friend of mine who took $20,000 from his in-laws to do some remodeling. When I asked what they wanted in return, he shrugged. Well, as it turned out, there were a lot of strings associated with their “stimulus” to his household.

      But Student debt doesn’t have strings, it has chains …with a ball attached. And it has been a drag on the debtors ability to get on with their life financially. It would be great to see the economic impact of it all. Maybe it was stimulus for a while, but not anymore.

      • Rowen
        Jun 27, 2019 at 8:02 pm

        It’s so counter-intuitive because we’ve been inundated with neoliberal messaging for 40 years, but the best stimulus right now would be student debt jubilee, which apparently would have been less expensive that the recent tax cuts. Because debtors freed of debt, consume. The creditor class doesn’t consume, it extracts.

        But issues of politics, class/generational warfare, fairness, etc etc etc.

        • Setarcos
          Jun 27, 2019 at 10:06 pm

          Rowen, do you have assets your are willing to give away to “stimulate”? Serious question.

        • Cynic
          Jun 28, 2019 at 3:19 am

          Lower income groups tend to spend everything they earn -they have to, so any gift to them goes straight back into demand and consumption.

          The effect shows right away. They will also tend to live for the moment, and spend o some pleasure, rather than save

          By way of contrast, two old friends of mine are ultra-high net worth, or whatever the term is, (all earned not inherited ) and they live almost abstemiously, obsessed with socking it all away in Switzerland, real estate, etc. That’s when they are not trembling at the thought of ‘socialism’. :)

          One rich man can only eat so many meals a day, and today they don’t even have to change their clothes 4 times a day as per a century ago, and they wear things that any middle class person might buy. One of these guys wears a plastic watch…..

          So, yes, give it to the poor and tax the rich as heavily as is practical, they can take it. Just put in ear plugs to cut out the squeals of indignation.

        • Jun 28, 2019 at 9:11 am

          I think there are a lot of people who would “give” away assets to stimulate. Families often do this, a wealthy donor bought the student debt of the graduating class at an all black college. Truth be that the poor understand a “gift” much more than the rich.

        • Setarcos
          Jun 28, 2019 at 3:46 pm

          Ambrose, I would and have happily gifted money directly to college kids. But not to appeal to somebody’s floating abstraction concerning “stimulating” spending. In fact, if this student debt forgiveness ever happens, then I will have also gifted several years of wages putting my own kids through school. They definitely lived worse that their friends who loaded up on debt and also had jobs, etc. And I will have been a fool trying to live responsibly and teach the same.

          I really admire the guy you mention that put his own money on the line and gifted repayment of all the student loans. That’s what is needed, people who are generous with their own money, as opposed to someone else’s money.

      • Michael Gorback
        Jun 27, 2019 at 8:55 pm

        Setarcos, what I was implying is this was a way to pump money into the economy that bypassed Congress and the Fed. It was useless and unproductive unless you owned the University of Phoenix.

        It was never “about the children”, it was a sneaky way to pump money into the economy. The students were just collateral damage and the damage done to their lives was meaningless to those in power.

        • Setarcos
          Jun 27, 2019 at 10:09 pm

          Michalel, totally understood and agreed. I simply think the motive could have been more multi-faceted.

  16. James
    Jun 27, 2019 at 5:05 pm

    But this is just kicking the can down the road. What happens when the economy normalizes to 0% interest, massive QE rounds? More and more money printing? Is economic growth just money printing anymore?

    • Bobber
      Jun 27, 2019 at 5:48 pm

      Yes, the government has been kicking the can for decades. The government has over-promised my wife and I about $60,000 per year in social security plus what will likely be several hundred thousand of Medicare benefits after retirement in 10 years. I dont think the government can pay me those benefits, given the current debt and deficit situation, unless they sock it to the billionaires and CEOs pretty soon. The fat cats can’t kick the can much longer.

  17. Jun 27, 2019 at 5:53 pm

    there are two paths to generating wealth: either the REAL economy generates it through building stuff or providing services, or it is created out of thin air–ie, borrowing from the future.

    so while borrowing has become the favored way governments generate new wealth–since the real economy is actually shrinking, the only way to keep this train going is with ever lower interest rates; or the interest payments would blow the scheme up.

    hence the NEW way to become rich is to borrow, borrow, borrow. work and industry is so old fashioned. and anyway its clear governments have given up on actually generating or encouraging job creation.

    this is a completely bankrupt way to keep the world turning. truth is, people’s income depends largely on the “real economy” not borrowing forever.

    i say, the more you owe the less money you have. you can never retire on borrowed money. whereas a real job that generates actual cash can nicely pad the mattress for a rainy day or retirement.

    this is a fools economy. . .

    • Paul
      Jun 27, 2019 at 9:29 pm

      Sorry, but you are confusing real wealth and money.

      Real wealth must be created before it can be consumed.

      Flows of money control the flows of the real wealth.

      A good example would be the extortion of higher and higher wages and benefits by unions.

      Yes, some who couldn’t spell “UAW” without digging out their membership cards made big money, but that did not create any more real wealth.

      In fact, restrictive work rules, inability to get rid of bad employees, etc. reduced the creation of real wealth.

      The price was paid by everybody else, who had to pay so much for their cars that they had inadequate amounts of money left to buy their fair share of non-union produced wealth.

      • Jeff T.
        Jun 28, 2019 at 3:13 pm

        Sounds like Public Employee Unions today. We will be paying the price for a long time.

      • Jun 29, 2019 at 8:00 pm

        yes, well you are certainly better off paying the chinese to build what you consume.. . .no local unions or even employees, all that money going offshore and those who used to build your crap (and spending their paychecks here!) are now living on the streets. you must be very proud.

        how does that help ‘merica? except the creeps on wall street? using their saving to buy back their shares?

        if we had any brains at all we’d be giving all those homeless folks a thousand dollars month just to stuff the pockets of ‘merican retailers. . . . nothing like a poor person to spend every penny they have.

        and who would collect those “free” dollars, the local economy engaged in the free market–not the chinese.

        but as you say, better to make the china man rich than help the brother next door.

  18. Dan
    Jun 27, 2019 at 6:57 pm

    The banks don’t lend because IOER’s are way to make more and more. Why wasn’t this even mentioned?

    • Jun 27, 2019 at 8:01 pm

      Banks DO lend. Debt is growing all around. In fact, in many areas there is TOO MUCH debt. Where do you get this idea that banks “don’t lend?”

    • Iamafan
      Jun 27, 2019 at 8:27 pm

      Banks lend money they create from thin air. They do not and cannot lend out reserves at the Fed.

      • Dan
        Jun 28, 2019 at 6:44 am

        I meant not as much as they should and was being sarcastic. Why no mention of IOER?

      • Jun 28, 2019 at 9:17 am

        You mean the shadow banks originate the loans (circa 2007) and the majors take their paper, and then slice and dice it before they get burned. This is whats behind the Feds plan to have the majors run QE (which is what is happening in China). The Fed has extended its GSE status to the charter banks, and through RRPO to everyone else. The banks are safer than ever, less profitable, and do less business. Fannie Chase and Freddie Goldman.

  19. Paul
    Jun 27, 2019 at 7:22 pm

    We all know how fractional banking works, or do we??????

    Last time I looked, the fractional banking “multiplier” was 0.86 or so?????

    Do stimulants make a dead horse run faster?????

  20. WES
    Jun 27, 2019 at 7:28 pm

    I just have to wonder if this is what the financial world looks like when the central banks have near total control of the market.

    The market is now only free to do what the central bankers say.

  21. Rowen
    Jun 27, 2019 at 7:55 pm

    The Fed can’t outprint the political-economic infrastructure that extracts all wealth to the top 0.1%

    Need moar antitrust!

    • Silly Me
      Jun 28, 2019 at 4:40 am

      The Fed doesn’t print; only the Treasury can. The Fed, a private banking conglomerate, has had the right to issue dollars, mostly in the form of government (aka. taxpayer) debt. However, it also issues the money printed by the Treasury.

  22. Laughing Eagle
    Jun 27, 2019 at 7:57 pm

    Fed is concerned about the stock market for the rich and also foreigners buying our Treasuries to fund the government. But lately foreigners not buying enough to keep deficits under control and if we go to ZIRP they will buy even less. Deficits will become higher and taxes may have to rise.
    If the Fed continues to print, print, the value of the dollars purchasing power will continue to fall and prices will rise.

  23. bc
    Jun 27, 2019 at 10:38 pm

    “At one point the market may start challenging central banks about the effectiveness of their monetary policy,” said the chief investment officer. “They may start pricing in credit risk, and that’s going to push yields higher.”

    https://www.bloomberg.com/news/articles/2019-06-26/trillion-dollar-monster-lurks-as-bonds-price-out-duration-risk

    • HowNow
      Jun 28, 2019 at 4:24 am

      Good article, bc. Thanks.

  24. FDR Liberal
    Jun 28, 2019 at 12:53 am

    The FED has only provided lip service. The EFFR as of today was at 2.38%. They have added to their SOMA purchases of treasuries which has had a mixed bid to over ratio when the FED adds to liquidity for their owners – the primary dealers.

    The market whether it is the Eurodollar or treasury is causing rates to head south.

  25. Gandalf
    Jun 28, 2019 at 1:57 am

    Wolf,
    The 3-month 10-year spread has been inverted now for the entire month of June.
    Dunno why you think the 10-year rates are being talked down by the Fed when a prolonged 3-month 10-year inversion has been a reliable signal for an upcoming recession within the next 2 years for the last six or so previous recessions.

  26. andy
    Jun 28, 2019 at 2:42 am

    Lower interest rates stimulate borrowing and speculating on asset price inflation – the trickle down effect.

    But the other side of the coin is lower economic demand from savers and investors who see a cut in interest income.

    They net each other out reducing impact on economic growth.

    Bernanke got us all to focus on the former but ignored the later.

  27. Silly Me
    Jun 28, 2019 at 4:46 am

    How about the people who own the Fed are already shorting it? [sarc :)]

  28. Jack
    Jun 28, 2019 at 6:00 am

    It doesn’t matter how you flip it anymore, the treasury knows it, the Fed know it.

    The Market will have its verdict, and Hooverville is just around the corner now.

    The average American will be screwed BIG TIME. There is no way around this, and since this same average American have been programmed now to look outward for a reason of his/ her quandary, it will be very easy to pass Foreign threats/ Foreigners as the actual enemies and the US is doomed to commit the Seppuku that extinguished the Romans,Spanish, Portuguese and the English Empires.

    Trump wants to force Japan now to Forgo it’s 10% Workfoce in the Automotive industry!

    If this Not a war , I don’t know what is?!!

    Sad but true.

  29. Gershon
    Jun 28, 2019 at 8:29 am

    “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” – Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809)

  30. Jun 28, 2019 at 9:43 am

    Fed is a “rogue” operation. Under different circumstances that would classify them as independent. By abdicating responsibility for fiscal policy, and dollar policy they have set themselves up as a blameless entity. That leaves the door open for them to become agents of fiscal policy, providing Congressional access to direct stimulus, to serve as director in a revaluation in the dollar, and to write checks for illegal or unsanctioned activity. By removing accountability they will also achieve true central bank status. Going rogue sets them up for their role in an off balance sheet government budgetary scheme. We no longer need an “economist” to run the Fed. Yellen was known as “the beard.” Powell is more of the same.

    • historicus
      Jul 2, 2019 at 6:57 am

      The Fed has self authored, self expanded their role. They have continually ignored two of their THREE published mandates.
      #2 Stable Prices….promoting an inflation rate, any inflation, is wrong. And 2% compounded gives circa 25% higher prices in ten years.
      #3 Promote moderate long rates. Well, moderate means “not extreme”, and record low long rates are therefore NOT moderate. Sell off the long term holdings in the balance sheet, have the Treasury borrow more out at Ten Year and 30. This will relieve the inverted rate curve.

  31. sierra7
    Jun 28, 2019 at 12:49 pm

    Always interesting comments; nice to see so many opinions on solutions!
    Thx for another good article Mr. Richter.

  32. raxadian
    Jun 28, 2019 at 10:48 pm

    I been saying it for a while, no rate cuts this year.

    Besides, the FED does want this overinflated stoxk market to get closer to reality, and doing rare cuts goes against that.

    • historicus
      Jul 2, 2019 at 6:59 am

      Cutting rates after the Dow goes from 14K to 7K is one thing…
      cutting rates with the Dow at 27K and SP500 near 3000 is what, exactly?

  33. gametv
    Jul 3, 2019 at 9:36 pm

    You have missed the whole point. It was not the Fed that jawboned the markets, it is Trump. The markets figure that Trump will do ANYTHING to pump up the economy before the election.

    • Jul 3, 2019 at 9:59 pm

      I’m afraid you have a point :-]

  34. CerpherJoe
    Jul 6, 2019 at 5:48 pm

    I believe the Fed is causing the drop in the 10Y, but not in any way they expected. I believe there is so much money floating around that it is going EVERYWHERE including into equities and bonds at the same time. Financial asset inflation.

  35. Dean Bainbridge
    Jul 6, 2019 at 8:45 pm

    All this borrowing is simply taking wealth from the future. At some point, we’ll get to the future and have to pay it all back. I suspect that point is not very far away. Cutting low rates even lower, whilst the markets hit record highs and unemployment record lows, is just crazy. Pumping more money into an economy that is already overflowing with cash is crazy economics.

    Add in Trump’s inflationary tariffs, together with tariffs placed on US goods in retaliation, and the US is getting close to tipping point. Add in an utter moron as president, who only measures success by the Dow Jones.

    Just as Obama inherited Bush’s disaster of an economy, so the next – hopefully Democrat – president will have a full-on economic reckoning to deal with. And with rates at close to zero, it’ll be a tough job to help the economy, which will already have too much debt to service, with not much to do except zero rates & QE. I suspect an enormous Keynesian investment in US infrastructure would do the job…….?

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