The reasons behind the Fed’s No-NIRP stance: It doesn’t work and kills bank stocks. One of the most revealing statements.
By Wolf Richter for WOLF STREET.
Over the years, the Fed has waffled on all kinds of things, from what represents “price stability” to what it will do with regards to asset purchases. But there’s one theme that it has been relentlessly consistent about: a negative interest rate policy (NIRP).
There has been a lot of clamoring for negative interest rates, ranging from bond-fund managers and hedge funds – when rates fall, bond prices rise – to the White House. Last week, futures markets had started to price in negative rates for the federal funds rate, which is the rate that the Fed targets with its policies. The absurdity is just too tempting and juicy: Who wouldn’t want to be paid to borrow money?
So Fed Chair Jerome Powell came out today and hammered down those hopes, as he and other Fed governors had done so many times before. And he mentioned the reasoning behind it – including the banks!
“The committee’s view on negative rates really has not changed. This is not something that we’re looking at,” he said during the Q&A after his presentation at the Peterson Institute for International Economics. “We chose not to implement negative rates during the Global Financial Crisis and the recovery, and instead we relied, as you pointed out, on forward guidance and asset purchases when we were near the zero bound.”
“And we’ve said that we intend to continue relying on those tools which are tried, and they are now a part of our toolkit. In fact, just back in October we revisited this question, and the minutes said that all FOMC participants – and that’s not a sentence you get to say very often – that ALL FOMC participants currently judged that negative rates did not appear to be an attractive monetary policy tool in the United States,” he said.
What the FOMC minutes said.
The minutes from the October 2019 FOMC meeting – and this was in the middle of the repo market blowout – said this: “All participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool in the United States.” The reasons cited were:
- “that there was limited scope to bring the policy rate into negative territory,
- “that the evidence on the beneficial effects of negative interest rates abroad was mixed,
- “and that it was unclear what effects negative rates might have on the willingness of financial intermediaries [the banks] to lend and on the spending plans of households and businesses.”
The minutes added: “Participants noted that negative interest rates would entail risks of introducing significant complexity or distortions to the financial system.”
Powell spells out the reasons behind the no-NIRP stance
“So I would say there are a couple of reasons behind it,” he said.
“One is we do feel that our tools work. The tools that we have used, forward guidance and asset purchases, work,” he said. “We’re now doing these 13-3 facilities.”
These “13-3 facilities” are the alphabet-soup bailout programs, many of them via Special Purpose Vehicles (SPVs) that the Fed sets up and lends to, and that then do whatever the Fed directs them to do, such as buying “eligible” junk bonds.
The moniker “13-3 facilities” refers to the revised Section 13, paragraph 3, of the Federal Reserve Act, as revised in 1991 and in 2010 with the Dodd Frank Act to put some limits on it.
“We think they [the 13-3 facilities] work too. So we think we have a good toolkit, and it works, and we have evidence that it works, and I think that’s what we will be using,” he said.
But those 13-3 facilities, after the initial burst in March, have languished through the balance sheet as of May 8. What the Fed has done mostly with it is jawboning.
And Powell also addressed the strategy of jawboning today. It’s the item in the Fed’s toolkit that he called “forward guidance.”
The Fed has used this for ages. It’s one of its most powerful tools to distort markets. In the Q&A, in reply to the next question, which was unrelated to NIRP, Powell addressed the success of jawboning. The “announcement effect,” he called it. Concerning the 13-3 facilities, he said:
“We frankly have helped already through the announcement effect. Markets have really loosened up and started to function much better than they were just a couple of months ago at the early part of the crisis when markets were not functioning well. So we see that. And that has enabled many companies to finance themselves now. And that’s a good thing. And it may mean that we actually aren’t needed.”
Yes, I got that last part.
“And it may mean that we actually aren’t needed.” In other words, the announcement effect – the jawboning – was so successful that the Fed may not have to actually do all that much, if anything, in terms of lending to big companies and buying their junk bonds, leveraged loans, CLOs, and other corporate stuff. The Fed might just dabble in it to maintain its credibility, and to show that it can do it without having to actually do it, as long as the credit market doesn’t refreeze.
And besides, NIRP doesn’t work and kills bank stocks.
“Also, the evidence on the effectiveness of negative rates is very mixed. There’s research that says that they’ve been effective, and there are plenty of doubters,” he said. And looking at the economies of Europe and Japan, clearly, NIRP has done nothing for the economy. “So it’s an unsettled area I would call it,” Powell said.
“And the issue really is the concern over interrupting the intermediation process [what banks do] and reducing bank profitability thereby reducing the availability of credit in the economy,” he said.
This was about the banks. While the Federal Reserve Board of Governors, of which Powell is chairman, is an agency of the US government, and Powell a federal employee, the 12 regional Federal Reserve Banks – the all-powerful FRB of New York that does nearly all the asset purchases and swaps, plus the FRBs of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco – are private corporations whose shareholders are the financial institutions in their districts.
This is a critical distinction between the Fed and NIRP-infested central banks, such as the ECB, the Bank of Japan, or the Swiss National Bank. None of them are owned by the banks. And they couldn’t care less about bank stocks, as long as the banks themselves don’t topple. And bank-stock indices for Europe and Japan have plunged to multi-decade lows.
Concerning the impact of NIRP on the banks, Powell also took it to Congress. In congressional testimony (transcript) on February 11, he said that there was “some evidence” that negative interest rates “wind up creating downward pressure on bank profitability, which limits credit expansion.”
Since the largest part of the Federal Reserve System – the 12 regional FRBs – is owned by banks, bank stocks are hugely important to the FRBs. And thanks to the Fed’s actions after the Financial Crisis, US bank stock indices largely recovered from the Financial Crisis – well, until the violent sell-off that started in late February and continued today.
“I know that there are fans of the policy but for now it’s not something that we’re considering. We think we have a good toolkit and that’s the one we’ll be using,” Powell concluded, with an eye on US bank stocks that have already been hit hard in anticipation of big losses – with the Dow Jones U.S. Banks Index having plunged 45% year-to-date. And the last thing the banks need is NIRP.
Loans outstanding to “SPVs” declined to lowest since March 25. Read… Fed Cuts QE Helicopter Money for Wall Street Further. Still Hasn’t Bought Junk Bonds or ETFs. Was Just Jawboning
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Excellent info as always Wolf, you’re the only site that I became aware of this below pretty important point. Even today as I was reading another MSM article about Powell push back on negative rates, not one mention of this factor and you still hear pundits as recent as couple of days ago screaming we’re heading to negative.
“This was about the banks. While the Federal Reserve Board of Governors, of which Powell is chairman, is an agency of the US government, and Powell a federal employee, the 12 regional Federal Reserve Banks – the all-powerful FRB of New York that does nearly all the asset purchases and swaps, plus the FRBs of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco – are private corporations whose shareholders are the financial institutions in their districts.”
Bigger question is, Powell can hold out for now but if SM nosedive again and jawboning won’t work as well next time, will orange clown just replace him with someone that will do his bidding like Barr is now?
I think the FRB is pretty clear that, although negative interest rates are off the table, there’s nothing stopping massive QE.
If the stock market declines again and gets anywhere near the March lows, the plunge protection team will start with “Forward Guidance”, move into massive purchases of treasuries, and they will buy some bonds to show support. If the bond markets fall, the fed will respond by purchasing bonds more broadly until it “stabilizes” but Powell would prefer to do most of his purchasing in government backed securities.
I wish this told me where stocks are going in the next few weeks … I’m still fairly confident in precious metals but I could easily be wrong, timing is everything after all.
Yes. One viewpoint is that it is negative rates or massive QE. Deutsche Bank estimates 3.3 T more QE needed – quickly.
Good points. Trump is a significant wild card here. If he doubles down on his pressure for NIRP, all bets are off.
Trump referred to negative rates as a “gift”…
and from whom is this “gift”, and at what cost…?
Politician….seeking reelection, a hater of interest rates at any level..and of the Fed who put him out of business in 1981
Which comes first the chicken or the egg? We had very low growth the last two years and the most extreme fed policies.
In reality we would probably be much better off if we used simple Taylor rule and just let recessions happen.
Should have said 2 decades.
Although, I would say per person America is poorer today, then 2 decades ago.
per median working person, definitely. We are poorer per wage slave.
It seems to me that the aberration might have been the widely spread financial benefits of the post-war half century. I didn’t used to think that but I’m older and, on this, I think, wiser.
All European countries including Germany and we all know the reason for the loss of millions of jobs.
Could not agree more. That should have happened after the dot com bubble. I fear it is way too late in the game for that approach to be politically acceptable. So we will muddle on with zombie corporations and a zombie economy until who knows when.
I am too lazy to google “Fed vs BOJ monetary policies”, but BOJ in 2020 seems to prove that FED could continue its play for 10 years more at least.
Well, Covid19 could be a game changer.
Taylor rule, indeed. But the Fed does not play by any rule…
Rules are an encumbrance ….
They promote inflation in violation of their stable prices mandate.
They promote all time lows in long interest rates when they are mandated to keep these rates moderate, not extreme.
@Old-school you suggest using Taylor rule, which leads to a continuation of central planning administrators to print $$ in order to maintain some the rate the taylor rule suggests.
How about instead we actually try freedom and “gasp”, capitalism? Let’s abolish soviet style central planning of interest rates, abolish money printing, kick the govt and it’s Fed cronies completely out of money management. It’s none of their business and only gives the elites tools to quash competition (and bailout their losing companies), maintain the status quo and influence politics.
Want to see real entrepreneurship and innovation? New companies? End the Fed and the fractional reserve banking system.
AGREE,,, SO much RT,,, as a 75 year old who has been a devoted capitalist since selling newspapers on ”my corner” since summer of ’51, (and doing my best to be there first,,, etc., etc.) I want every kid who wants to be able to do so to be able to do his or her thing, selling, hawking, mowing, washing,,, what ever the kid needs and wants to do to be able to buy what ever the kid wants,,,
Just today, again, feeling so sorry for my grand children who will never get the thrill of ”selling out” all their inventory, likely at any age, but certainly not at age 7… And that folks is the ”real” reason USA has been and is going to the ”dogs.”
All the rest of this is just pure BS piled on top of the fascistic control of our freedoms by the nanny state folks who apparently will not be happy until we stay 24/7 in our safe and secure cocoons by any name, going nowhere, ”ordering in” every need and want..
I started to say let the market set interest rates. I guess I read the Taylor rule a log time ago and it seemed to be a rational rule in a non gold backed world, but I am out of my depth on Central banking.
Just seems phony to me with fancy words for stealing your wealth.
Capitalism is great …………. as long as one has a good supply of capital.
Which has been greatly achieved by some, in our current system.
I suggest we try free markets.
It is not the right time for it. 6 months ago i would say you are a fool but go for it. In a year i will say the same but now you will only harvest misery.
The reason the Fed is in this predicament is they didn’t notice until now that low interest rates slow the economy (some evidence) Building a system designed off backdata is inviting disaster.
“And we’ve said that we intend to continue relying on those tools which are tried, and they are now a part of our toolkit”, Powell says as he points to the Fed’s overflowing box of hammers and a single sheet of paper on which is boldly written, “In the event the tools don’t work, launch taxpayer backstopped debt at everything that moves.”
All tool kits come with a warning now to wear goggles in case of flying debrit (creating collateral damage). Might have to start adding face masks to that. And a cushion for the seat of your pants when our bottoms hit the floor!
The rise too of Canadian Housing was based on pure speculation and not at all to do with costs to build with a small profit margin, this then generated so many different scams with contracts and ownership.
How are the big Canadian banks faring compared to comparable in U.S. ?
The Bank of Canada has them covered too should they start to fail and impose the theft of your savings to $100,000.
Credit Unions in Canada up to 250K, but in actual fact your losses will be covered no matter how much you have invested in their saving vehicles. I looked into it pretty closely during the GFC, and while we don’t make any money on accounts, we still have it. :-)
@Paulo – better recheck your bail-in risk. Past 10 years have seen large policy changes, generally not advertised much.
There’s a healthy chance that the current crisis goes bad-to-worse and makes the GFC look tiny in comparison.
More info for Paulo – google CDIC D-SIB bail-in
“CDIC has the power to undertake a bail-in conversion by converting specified debt of a failing D-SIB into common shares to recapitalize the D-SIB and allow it to remain open and operating.2 The CDIC Act provides CDIC with the flexibility to determine the amount of bail-in debt to be converted into common shares, as well as the timing of conversion, including whether the conversion will take place over a period of time, and in one or more steps.”
Canadian law was revised 2016-2018 timeframe.
CDIC is Canadian Deposit Insurance Corp, equivalent to FDIC in USA. (FDIC has made similar changes but let’s not shock the poor sub-Canada Americans just yet.)
Here’s a link (if Wolf allows) to the horse’s mouth on this issue:
PLEASE don’t say this fear-mongering ignorant BS on my site. Next time, READ the article before you link it. Look at the section titled, “What is excluded?” And you will find:
“The following are not eligible for a bail-in conversion:
“Deposits (including chequing accounts, savings accounts and term deposits such as GICs);…”
This ignorant fear-mongering about deposits has no place here.
Thanks Wolf, I agree I should have read the full article.
I still think Paulo should know that the law was recently changed – and could be again. Anyone with more money in a bank above the formal deposit insurance limits needs to know what the current rules are that protect those funds, if it isn’t the formal deposit insurance guarantee.
What’s silly is that Canada took what ought to be standard bankruptcy practice and gave it a new name! Bank bondholders would expect to get bailed in anyway.
Investors in bank bonds (including most bond mutual funds) should be very concerned.
I also wonder – what if the regulators sit idle too long (or get overwhelmed again, like in 2009) and the bank ends up with a much larger solvency problem – are there enough bondholders to cover all potential bail-in scenarios?
So now I don’t understand why there’s a formal deposit insurance limit – something has to be at risk above that limit – if it’s not bail-in risk, what is it? Hmm…
Always something to learn!
Negative rates or not, the best thing ever American can do right now is learn to live way below their means. Else you will be a permanant wage slave, and treated like a soldier who is sent into harms way whenever “The Economy” is greater than “Living”. Imagine being 65 years old, and being told by Tesla to either come back to work or lose your unemployment benefits. There is not grey area for government help, no matter if you are 18 years old or 95 years old, you must COMPLY or go bankrupt and/or lose your health insurance, and then go bankrupt again.
Tesla HR boss Valerie Workman told the company’s California employees that if they are called back to work but opt to stay home due to Covid-19 concerns, they stand to lose their unemployment benefits.
Imagine being 65 and having to work at Tesla
And catching the virus there.
I doubt the company would put you on sick leave.
Some buyer would probably find your carcass in the trunk of a Model 3. LOL!
At 65 I am only going to be doing work I want to do and then it is not called work. Your gotta plan ahead though. I see too many people living like they are going to die tomorrow. Spend it all today. At 65 it’s all going to be about me. You will have to pry that margarita from my cold dead hands.
Awesome, sip up and flick all. I’ll do the same if I make it to 65.
“I see too many people living like they are going to die tomorrow.”
Since you’re 65, you might have missed that but the you-only-live-once indoctrination has been going on for a generation now. All those marketing campaigns by energy drink makers, extreme sports event organizers and sports apparel/equipment companies sculpted this mindset you described.
Easier to imagine being 77yrs old and being told you can not open
your business by ” essential ” govt. officials.
While they club you, they go begging to the feds for a bailout.
Not a d*mn penny. Make the Xi wannabes stand in front of their serfs
and determine if they are…. “essential “.
Agreed, not good, but if somehow I found myself there for a few months I might write a book like Nickeled and Dimed about the experience.
Unemployment is for people who cannot find a job. Tesla employees have a job. If they choose not to show up, that is called quitting. And you don’t get UE benefits when you quit. Pretty basic stuff.
unsafe working conditions resulting in sickness and death might help in California:
Constructive discharge. If the employee’s working conditions are so unsatisfactory that they would be intolerable to a reasonable person who genuinely desired to keep working, the employee may have good cause to quit. In this situation, the law treats the employee’s departure as a discharge (because the employer created the conditions that led to the end of the employment relationship) rather than a quit.
Nice company. (Sarcasm here). Like I always tell people who hate unions, “You think you have a 40 hour week and bennies because they like you? You’d be working for $2.00 per hour if ________ could get away with it.” Hey, we survived Weyerhauser until they were run off the Island.
Very very sad example, is old Tesla. Plus, the poor buggers lose their medical coverage if they don’t go to work. Terrible.
My mom used to say this to explain Russia, “You have to always remember 100 years ago the serfs were bought and sold with the land. That might answer a few questions”. What will be remembered about Covid and _____________ ?
I like your Mom. My Mom, when as a child I peppered her with angsty questions about boys I knew, and “the world”, would say:
“He’s a MAN.” and, “It’s the WORLD.”
She clearly did not want to get involved.
And I had to laugh at this new one, “announcement effect”
I had a financial advisor acquaintance that would start at the dinner table complaining about this trend or that, and I would say, “Start a rumor!” He really could not stand me.
Thank FDR for tying employment to medical insurance. During WW2, with wage and price controls in place, companies trying to attract talented workers could not offer more money, so they started offering free insurance coverage. Unintended consequences of government “solutions” result in more problems requiring more government “solutions”. Welcome to the “long run”.
“Negative rates or not, the best thing ever American can do right now is learn to live way below their means. ”
How do you live on negative means?
Yeah, I know triple bear ETFs are not the greatest deal in the world. But after yesterday and today, I am one happy boy.
Nothing in the world is the greatest deal at some point. If you win you win. Grats on the win!
They always work GREAT within 12-24 hr frame for ‘trading’ and then decay unlike 1×1 inverse ETFs. I used them during GFC, when mkt functioned under TRUE free mkt capitalism. once Fed entered, mkts became casinos, with fundamentals thrown out the window. Corona came and the Fed is upset!?
The markets have been manipulated for decades.
What do you mean by “then decay unlike 1×1 inverse ETFs”?
If you mean their 3x (or whatever ratio) is not maintained from a multi-day commulative price change point-of-view, then that’s expected and simple math.
It means when QQQ breaks even, the triple-short SQQQ loses a third, or some such.
Leveraged (1x,2x and 3x) inverse ETF acts like a derivative with daily decay or de-compounding, resets at the end of each day
The compounding problem is exacerbated by funds that borrow heavily to leverage the ETF into a 2x or 3x inverse ETF. In fact, according to CNBC the tracking errors on inverse ETFs can range from 20% to 42% on a yearly basis, with the higher range for 3x leveraged ETFs.
It’s for this reason that inverse ETFs should only be held in the short term – a major con for long-term investors.
I try compensate this ‘decay and reset’with leveraged ETF with long position. Not perfect but does cut the loss.
Definitely NOT for the novice. Read online re pro and cons
What was most surprising to me today was not the fed saying they will not do negative rates because that would suck for banks, it was David Tepper stating that he is only 10-15% long right now in this market. David Tepper is one step higher than God when it comes to Wall Street. Even the President had to tweet his negative opinion of David Tepper today moving the markets down, yet hard to “fire” someone worth $12 billion, or jail them, as just ask Elon who dares the government to jail him over the plant re-opening. It must be amazing being a billionaire and fearing absolutely nothing as money solves “everything”…
What crime has Tepper committed by saying this market is overpriced?
The only thing he might be ‘guilty’ of is understatement.
It’s PE ratio is the highest since 1999. That’s without taking the virus crash into account. A lot of people think this market is grossly overpriced. How about Wolf Richter announcing he was short a few months ago? ( I think it was Tesla hitting 900 that drove him off his ‘never short’ perch.)
Some bears are billionaires, some aren’t but that is no reason to ‘jail them’
As for ‘even the President had to tweet his negative opinion of Tepper’….
That reflects the state of the Presidency. I might be wrong but I think this is the first time in history a President has named a private citizen for a stock market opinion. Centuries ago, or is it just three years, this would have been beneath the Office.
being a billionaire is like immortality–it makes you absolutely unbearable.
All kinds of the usual propaganda in the “financial” press – Investor uncertainty about ______(fill in the blank) caused the Dow to go down 500+ points today.
No reporting of the likely real reason: “And it may mean that we actually aren’t needed.” – Powell.
The gamblers in the Fed’s casino are actually scared the fed may limit the house money they have been playing with
Good stuff Wolf. This site was one of the very few that actually pointed out, repeatedly, that the fed wasn’t doing most of what it had promised in the way of asset purchases. The “announcement effect” alone carried the markets post-crash and fueled the insane 30%+ in most indices. Now that Powell’s batted NIRP down, the debt-addicted markets are wallowing in a sea of red again.
Even if we don’t see a repeat of the off-the-cliff plunge we saw in late Feb/early March, if most weeks from now till year-end end up being negative, there’s your 50-70% crash in slow-motion. The market took 13 months to bottom out in the GFC, we’re just getting started with this one. All this talk of vaccine this and vaccine that is just a distraction IMO. When the economy is battered this hard and the resulting economic data is so bleak, it was inevitable that equities would fall in line.
“Don’t fight the fed”, my a**.
Market might just be smart and spoiled enough to figure out instead of slowly bleeding down till the end of the year, go sharply down again and stay there to force FED cater mode and make sure it isn’t a jawbone this time around. Like a rotten 3 yr old, eventually they learn same trick wont work twice but trigger point is almost always the same
That could happen because there’s no “good” news anymore:
– Vaccine: WHO says there may “never” be one
– Earnings: the tiny bit of good news with some companies, over for now
– NIRP: not happening (for now)
– Lockdowns: LA county extended till end of July, new lockdowns in China, elsewhere in Asia
The only thing left for the admin now is to blame China and the Democrats, cancel the Phase 1 deal and add more tarrifs. That might rally his base but it ain’t gonna help the economy or the markets.
On your ‘only thing left’ list you forgot war. With someone. Anyone.
Big distraction will be needed.
Paulo–it’s not like they aren’t trying real hard. What is in sharp relief for me right now is the difference in actual governance between men and women (I don’t mean the women who are trying to be “Cool Girls” (Madame House Speaker, I am looking at you)). I mean the heads of countries. When the U.S. sheds its burden of rich male domination, we may see some change.
‘The market took 13 months to bottom out in the GFC’
The Bear lasted 18 months (Oct ’07 to March ’09) untill Fed came for the rescue, otherwise it would have gone further. The can got kicked and NOW, it is back on the road, aiming for ‘reversion to the mean’.
I wonder, without corona how long and how large this 3rd largest ‘everything’ bubble would have been? The recession that got by passed will proceed ‘ to clean out’ the zombies.
My bad. 18-19 months, yes. The difference this time is that the fed brought out the big guns ASAP and if that ammunition has been spent right out the gate and things go in free fall despite it, that doesn’t portend well.
I second your praise of Wolf. Where is Fed worshiping WSJ on this stuff? Nowhere!
Let’s say the Eurozone breaks apart tomorrow, and US Treasury bonds get bid at negative rates, would the Fed raise rates then?
Given the importance of Treasury bonds in the Repo market, I wonder what the consequences are if they were to trade in negative rates territory.
All Fed has to do is buy less treasuries for the rates to go up. CB are the market for government bonds , there is no price discovery out there.
No private investor in their right mind would buy a negative yielding bond.
“All Fed has to do is buy less treasuries for the rates to go up.”
No way this is true in a real panic. I listed the scenario above i.e. Eurozone breaking apart. In that case, every fund manager in Europe will probably be bidding for US Treasuries, not to mention the money fleeing the stock market and the corporate bond market.
Every Treasury bond will get snapped up for sure.
One problem I see with with negative UST yields in the money market is that spreaders (who help make a market) will be less active because they will not want a negative carry, and the market becomes illiquid (see the non market eurobonds have been for the past decade) and europeans will take on liquidity risk and fx risk on the trade. This will carry over into IG bonds (which are also used in otc repo markets, which have way more credit risk, and we already see stuff like this now where alot of IG bonds are bid way over par with effecttive YTM that are neg).
Unless you are one of few who is willing to lock in a loss by hedging via futs/forwards/swaps/etc rather than pretending that bidding UST way over par will maintain its value day 2 day without the above risks…
IF what you say is true, why is the Fed buying Treasuries at all if the demand is what you suggest?
We are talking TRILLIONS in new debt, and without the Fed, interest rates would soar….
historicus, I laid out ONE specific scenario. You should contemplate that. I didn’t say that negative rates will happen naturally, but if everyone were to rush to Treasuries at the same time due to a big external shock, it’s hard to see how rates can remain positive.
Think about German bunds. Money fled the bonds of peripheral countries and flowed to the German bunds market, and for awhile there those bonds were trading with negative yields.
I liked the part where Powell said, the “Fed doesn’t spend money, it lends it” right before he talked about asset purchases as a policy tool that works.
Sure, they do it through middleman SPVs that they control but they are still outside of their mandate. However, they are also above the law.
Reminds me how the US Govt. is not supposed to be spying on people so it does it through FAAMG.
There’s a saying in Computer Science: every problem in Computer Science can be solved through a level of indirection.
So Wolf are you and Warren Buffett buying equities yet ?? Can you tell us when you do ??
My short-finger is itching mightily.
Mine too, got back in spy and qqq puts on Friday but bailed out today at 20% return. Before I sold I had been wondering if overwhelmingly bad news might temporarily bring a return of markets being driven by fundamentals. Then I said, naaaa and clicked sell.
Would you mind explaining that? I’m not clear how puts placed on Friday on SPY and QQQ could yield 20% by Wednesday? Thank you.
@ Joe in LA. Research price ranges on May 29 spy 166 and 169 puts, June 10 spy 260 puts, and qqq June 30 and July17 QQQ 200 puts between Friday and 9:30 am today. You’ll see how it’s possible. I had an equal amount of each and actually did better than 20%.
I’m not trying to brag. I’m a terrible trader usually, mostly because I have a hard time ignoring fundamentals which is why I usually trade on the short side. Has been humbling over the last year until recently.
I meant to say 266 and 269 SPY puts, not 166 and 169. My bad.
I’m assuming you weren’t trolling me and were sincerely curious as a novice. Don’t want to encourage you to trade options. You could lose bigly. As they say, leverage works both ways and it, combined with time decay, will eat your money faster than you can change your mind about a trade.
Don’t mess around with options unless you have done your research and understand the greeks. Best to keep those trades short term unless you are pretty sure of yourself and willing to lose 100% of your bet ( and bet less than you can afford to lose). There are useful and complicated strategies with fanciful names you can use to limit risk with options but they also limit profits.
Also, check out the book I recommended in this thread, Reminiscences of a Stock Operator. Your biggest enemy as a trader is your own bias and fear. That book addresses those subjects in a timeless manner. Hope this helps.
Joe: When volatility rises out of the money strikes rise in value faster. Both calls and puts become more expensive. Rising vol means the market is dropping, and puts are the choice. Out of the money strikes often have big spreads, and MMs are reluctant to offer them in size. These puts can double in value without ever getting near their strike price. Conversely when volatility is high your best trade is to sell the premium and wait on time decay.
read Characteristics and Risks of standardized options.
Not yet. Another round of stimulus checks and another round of helicopter money drives it back up. Then short it. Wish to GOD I had followed my gut instinct back in February. I was this close to being all treasury bonds. Yeah greed got me.
Do it… just do it…
You know you want to. :P
At times I wish you’d allow a youtube video, then I’d get that video of Ben Stiller in Starsky and Hutch saying; “Do it, yeah, just do it.” on the response. But then I realize it would be took tacky.
Calling a top to this market is pretty tough, the main problem is that there are going to be winners and losers here. Amazon and Microsoft are two winners I can think of. But they behave like they’ve hit a wall, and may be they have.
On the other hand, the obvious loser (TSLA) is just a nightmare to short. Trading that stock, you are literally putting you money at the whim of a very erratic genius. (Yeah, I think he is a genius to pull off what he has so far, but he is darn inconsistent)
Musk is protected by the swamp, Tesla will not be allowed to fail. Tesla is not about making a profitable car, it is about making an automated trackable car/people network.
No offensive intended but: It’s about skynet, stupid.
UK banks/finance, non-GSIFI
Random thoughts that came to me, not sure why.
Yup – see I agree with one of the comments, I think we get a bit more stimulus and a bit more gas then another major shorting opportunity.
Can you let us know when you pull the trigger? If so i will buy like 10 of your beer mugs (unless your wrong, in which case, I’ll return them !)
Was going to ask as the SP got within 10% of where you had shorted it at the end of December when there were 40M more jobs etc.
Btw. where is the Fed Hawk-o-Meter these days? Would love to see an updated plot!
The Fed killed the Hawk-o-Meter. Stabbed it in the back. The Hawk-o-Meter counted how often the word “strong,” “strongly” and “stronger” appeared in the text of the minutes with regards to the economy. So I count those words and remove the false positives, such as “strong deterioration.” And that worked great. There were usually 1-3 false positives. And then one day, suddenly, there were dozens of false positives, as the Fed was throwing in “strong” in large numbers about everything. I really think they hated the Hawk-o-Meter and wanted to shut it down. And they did ?
Fed minutes Oct 29/30 mentions the word Tool, 22 times, including the use of the word toolkit.
The tool, the tool, the tool, my friends.
“On 31 December 2019, the WHO China Country Office was informed of cases of pneumonia of unknown etiology (unknown cause) detected in Wuhan City, Hubei Province of China. As of 3 January 2020, a total of 44 patients with pneumonia of unknown etiology have been reported to WHO by the national authorities in China. Of the 44 cases reported, 11 are severely ill, while the remaining 33 patients are in stable condition. According to media reports, the concerned market in Wuhan was closed on 1 January 2020 for environmental sanitation and disinfection”
“Pneumonia of unknown cause – China”
WHO web page.
I thought a tool was something you screwed with? Oh yeah…righiiiiit.
Forbearance is a tool. Everyone with a chronically refinanced mortgage lifestyle has this tool. Very popular in Canada now, especially the Island. Wave to the Tourists! …. Ummm, yeah riiiight.
This is what the Canadian Government is doing right now with borrowing from the Bank of Canada in huge amounts and still giving it away nilly, Willy to any organization that requests it while making sure that Canadians must borrow as they too are well overextended.
Central banks and the new world order.
The global elites are conspiring to create a new world order or is it just that no one really knows what the hell they are doing?
In my view Economics is a flawed, incomplete science.
Smith, Keynes, Marx, Friedman, Greenspan, Bernanke, Dent etc, all have something to offer but who cares…
Current economic policy is based on one data set the Great Depression.
What kind of science is based on one data set?
Japan, Europe, Asia, the USA etc are preparing/fighting the last war, the Great Depression.
nothing new – read – once in golconda by john brooks – written about the 29 depression but 100 % applicable today – just change stutz bearcat to tesla –
Most of economic theory is dogma used to control behavior and justify a predatory economic structure that guarantees inequality. This has always been the case. Adam Smith’s Wealth of Nations was a blueprint for control.
The Fed has usurped all markets at this point, even making microeconomics and fundamental investing strategies invalid.
Remember Peter Lynch’s One Up on Wall Street? Used to be the bible of investing and required reading. Anyone who followed that book’s advice on following fundamentals over the last ten years would have been at a big disadvantage.
Reminiscences of a Stock Operator by Edwin Lefevre turned out to be the only book needed to succeed. It’s basically simple chart following, and rudimentary technical investing. Pretty good read too.
+1 The book that tells you everything you need to know about how market speculation really works. Have read it at least a half dozen times.
AKA Jessie Livermore the boy plunger.
“In my view Economics is a flawed, incomplete science.”
Arguably not even a science.
The “Nobel Prize of Economics” (official full name is “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”) is not a true Nobel Prize. It was something the Central Bank rulers “donated” to the Nobel Foundation almost 100 years after Alfred Nobel established the original Nobel Prizes, to “commemorate the bank’s 300th anniversary” (source: Wikipedia). It is part of a bigger scheme to make believe this field as a science and legitimize its theories (mostly ideologies/dogmas).
It is almost as if there was a cocktail party in Davos…
and they got together and said., “Why should any government have to pay to borrow.”
And they went out into the night, and drove interest rates to nil….
to the delight of the governments that empower them to do such things…
The Fed says they disagree with negative rates in principle, but that is another lie. They just don’t think the time is right…… yet.
There is no need for negative rates right now because Congress is passing stimulus packages like crazy. At a time when interest rates have been ultra-low for a decade, fiscal stimulus is 10x more effective. If structured properly, it puts money into the hands of people who will spend it.
As I write, Nancy Pelosi is trying to tee up a $3T spending package.
This is why you need some gold and stocks in your portfolio, and not just fixed income. Inflation and monetary debasement is a concern. Deflation is also a concern. When you are on a tightrope over the Grand Canyon, it’s hard to say which way you will fall. All you know is that you will fall.
There is NEVER a “need” for negative interest rates.
Why should irresponsible spending and borrowing be rewarded?
This is only possible because of the digitation of money….
Just 50 years ago, people would indeed pull their money out…..and sleep on it……
Cant now….and who could sleep?
You can still take your money out now. It just takes more effort.
It’s blazingly wondrous to me that while finance deals primarily with data and numbers, it certainly comes up with glorious imagery at times.
I relush the “toolkit.” Like a mechanic or plumber. Right out of blue collar world. It takes me back to previous talk of minting a trillion dollar piece.
“Oh look. I found a coin at the bottom of my toolkit. Maybe we can rig the machine with this instead of the screws.”
And the “announcement effect.” Like a weather phenomena or physics law. Beautiful.
As far as its worth, I’ll just plagiarize. It works until it doesn’t.
Funny enough every ad I see here is for loans. Either mortgages or car loans. I love the irony.
It (including the swimsuits-for-busty-women-ads that I see a lot) makes doubt on a daily basis if AI will ever be able to predict anything reliably.
At least those noxious Israeli Bond ads stopped when the judge finally ruled them to start paying their taxes.
Don’t worry Wolf. AI is far better than it might appear on the surface. The algorithm doesn’t have to be perfect, it’s a numbers game. And the numbers get better for them by the second. Googles almost complete gate keeping of information illustrates that.
The data points used to profile “people” are very, very deep. Trust me, they know you better than you can imagine. Worst of all, they are shaping you to be even MORE YOU into the future.
No tinfoil needed here.
Again I say all I get are the Spicy Lingerie ads. I guess I am living right. Don’t need a car loan or new mortgage.
Reality has this bad habit of sticking around even when you stop believing in it.
Jawboning bluff shall be called. And Powell will go all in.
Wolf wants to desperately believe that Fed will do the right thing and has this bias when he writes about it. It wont.
Once you start stretching your mandate by semantics and legal treachery the rubicon has been crossed, the Fed is acting illegally not only by going into junk bonds but also by buying so much government debt. Maybe not by the letter of the law but clearly by its spirit.
Once the laws start to be ignored, it is only a matter of time before they are broken and/or repelled. Institutions are as good as people leading them, Powell is spineless and will do whats convenient rather that whats right. Volker used to lament in his last days the lack of good public servants, he knew something was not right.
“Wolf wants to desperately believe that Fed will do the right thing and has this bias when he writes about it.”
You’re not reading my Fed articles, it seems. I’ve been calling it “Helicopter Money for Wall Street” since it started in March. So have a look: https://wolfstreet.com/category/all/federal-reserve/
There has been a huge amount of hype about these asset purchases, particularly the idea that the Fed is buying stocks and bonds, as a result of this jawboning, and I’m poking some holes into this hype.
I’ve also been reporting on how this QE binge has been shriveling in recent weeks. This is important because this market cannot stand on its own. And without a lot of QE, it will go down. We’re starting to see some of it. So DO read my articles about the Fed.
No criticism meant, I appreciate your work Wolf, you were the first to point out that the Fed had not bought junk yet here before other big names (Gundlach, etc ) caught on.
Albeit it turned out that the infrastructure with Blackrock was not ready yet and now we have to wait and see how deep the Fed goes. All people who work for their money are uneasy those days when they here how trillions are thrown about and we all want honest money to stay around but wishful thinking does not make so. Once a respected institution like the Fed starts braking the spirit of the law with no one protesting, how long before the president declares himself emperor for life to save us from the virus?
A “respected institution like the Fed” ?
Mr. Richter, don’t forget that Mr. Powell mentioned Fiscal Policy several times today i.e. MP3.
Here’s some numbers for the Federal Reserve just in case they’re reading your post today.
Well done, Wolf
A lot of you people forget that the rise of non bank and subprime commercial lending was eating into the primary dealers profits. A sorta gotcha moment for this forum and it’s posters in general. They gonna die
Once again, great coverage
Jeronamo said this Jeronamo said that…FOR WHAT IT IS WORTH. Jerome also said this: “This time, high inflation was not a problem. There was no economy-threatening bubble to pop and no unsustainable boom to bust. The virus is the cause, not the usual suspects—something worth keeping in mind as we respond.”
Robin the poor to give to the rich!
The plot never changes.
Your analysis accurately reflects the Feds latest communication to the public.That said , how dense would would one be to not understand the fed has done or in the process of doing everything it said it would not . The first lie some one tells you should be the last time you listen to what comes out of the mouth of the liar. Ipso Facto- the WORLD was told nearly a decade ago that the QE would be tapered and rates normalized. Lie+Lie. At the first hint of a bond stress they will buy an unlimited amount because the Fed has said their printing press is infinite, “what ever it takes”. Their words. The Fed will throw the banks under the bus with negative interest rates to preserve the wealth of the Oligarch Ruling class which are their Masters.If the Fed gave a rats ass about the banks the rates would not be where they are at now. We cannot escape our fiat fate and the Fed can not say that.
To be fair, Bernanke basically said the Treasury would probably never retire its debt to the Treasury. He said it at Jackson Hole in 2016, already second-guessing his successor, who since fell into line.
Powell basically repeated Bernanke’s expression of comfort with methods that have been tried (and “succeeded” at least in their view). Time will reveal how wrong they were, but they aren’t able to see it now.
The US is no longer a free market. It started to decay approximately 60 years ago and now has entered the abyss. Once you accept the first statement you accept that nearly all government and fed actions are designed to keep the current people in charge……no matter how dumb they might be and no matter what the cost to everyone else. The genius of our founders is gone……those that are successful lead……..today……those that were born into the lucky sperm club lead.
Until the emperor has no clothes…..which IMO calculated with a dull pencil should be about 50 to 60 trillion of government debt in current dollars. Seemed like we were OK for another 40 years or more just a short period ago……..however…….there is no limit to corruption once everyone loses faith and just wants a cut ……so it accelerates and the timeline begins to tighten.
Negative interest rates are not going to happen. They will not happen because it is not in the best interests of the banks. The Federal Reserve has no mandate to act in the best interests of the United States economy, it instead has a mandate to serve its member banks.
The Federal Reserve system is simply a cartel of banks. It is unregulated, and does not answer to the Federal Government in any way. It will do what it was created to do and serve the best interest of the banking system….
Now when someone can explain how the banks can make money paying interest to borrowers, instead of charging them interest, then and only then can negative interest rates even begin to become a possibility…
I will ponder your query, and present a Time Compression tool, not unlike the Western Canadian Crude episode, of a few weeks ago.
Jdog : The singular purpose of negative rates is to prevent a deflationary spiral downward. Deflation is Kryptonite for a
CB’s fiat money (debt). Their very existence would be threatend by deflation. The banks would still exist for basic currency functions, and if necessary, the Fed would pass off the banks cost of operation to the taxpayer. The deposits would circulate in the fed system as in the present. It would be like an airport. The taxpayer and the customer pays for everything and the airline companies use the system for profit. The citizen does not feel that their work product is worthy of time value and in fact have been already trained to pay in order to access their money. The sheep will bleat and line up behind the Fed.
They make money with transaction fees. forcing you to pay a cut of all your transactions.
At near zero interest paid into your checking, savings, and CDs it doesn’t take many fees to nirp you in real terms. That’s not even considering ongoing inflation in your necessities.
So, nirp, in terms of real inflation, already exists. We have had negative REAL interest rates for a while.
I applaud Jerome for now for not being so completely delusional to think that proscribed negative rates would work.
Nirp as a policy is impossible. Nirp as real interest rates considering inflation is the reality.
We’ve been at nirp for a while in inflation adjusted terms. Hopefully they never admit it and make a policy out of it.
12 years of “emergency rates” …in good times and bad…
QE with a 29K Dow…..and rates under inflation…
Hurt the holders of dollars….reward the borrowers….
and now they float the idea of NIRP……
where borrowing is a MONEY MAKING activity….
World upside down…..and not a word.
I discovered your website through my perusal of google news and I must say, I’m quite impressed with how you break down the complexities of the financial markets without the usual self important puffery of the typical financial press. You lay down the facts and analysis in a clear and concise manner all the while enlightening your readership in the process. People may disagree with your conclusions but nobody can accuse of you of making them dumber than when they started reading your article. Keep up the good work
I agree with you 100%. It was less than 18 months ago when some folks thought Powell was the second coming of Volcker.
They were salivating over the 25bp increases. They were using their magnifying glasses to track the $10b monthly B.S. roll offs.
Btw, Jeffrey Snider was the first guy i came across quite a while ago that pointed out that the jawboning Fed had nothing in their toolkit. The guy hammered on this point relentlessly and wrote countless articles outlining his reasoning.
I’m baffled how zero interest rates could possibly do anything good.
The Fed lowers interest rates to encourage borrowing–which is supposed to boost the economy. If interest rates are zero, that sure should encourage borrowing– but with zero interest who wants to lend? If you lower the cost on ice cream to zero, would that increase ice cream sales? The buyers would love it, but all the sellers of ice cream will disappear.
In 2008 the Fed reduced interest to zero. Then suddenly cash started being held as cash, rather than being invested or spent. The evidence is here. Note what happened to M1 velocity starting in 2008.
People wondered why inflation didn’t happen with QE. It’s because lots of cash dished out by the Fed was held as savings, not spent. When interest rates go to zero why would anyone invest or lend? No wonder NIRP didn’t work.
Correct and agree.
It is time to ask.. “are low rates the solution or are they the problem?”
I’m trying to comprehend how NIRP should necessarily be bad for banks. If they are able to make the same spread as before, what does it matter if it in a ZIRP, NIRP or iIRP (imaginary) environment?
I understand that negative short rates may squeeze the IR-curve but not sure if that’s a fatality.
So what if Credit Card rates are +9.99% if deposits cost -2%… oh never mind, this ain’t gonna work :)
That interests me too.
That should be something like “excessive liquidity creates so much credit offer (competition), that the credit spread is diminished to nothing leaving banks without their main profit line.”
In other words it is not so much the zirp/nirp as the excess of credit offer from organizations that dont have the high fixed costs of traditional retail banking.
Why can’t we all just bank at the Fed?
How is it that some can borrow at .25 rate at the discount window, without penalty…
and credit cards are 17%?
Credit rating, maybe?
??? how many times can you have to be bailed out and still have a good credit rating?
Answer: Banks ain’t got no stinking credit rating to worry about. They are the ones who get PAID to borrow.
What I have found absolutely amazing is that those who have really good credit and have maintained that rating for say, 40 years are still charged the same amount of interest as those who are at credit risk (within some few percentage points).
I remember well in “my day” if you had really good credit history your interest rate would be lower than the average.
I know that there are credit lines (cards) that “reward” with give-backs and such but that’s not the point.
The financial system has bamboozled most Americans.
We have to pay the Piper sometime.
Re: “Toolkit”…….a much worn out phrase that should be plowed under.
If this Corona Virus mess continues for any medium term, or re-occurrence this coming winter that “toolkit” will be useless…..like being in a sail-boat in mid hurricane and not having a “perfect size cork” to plug the leaks.
FWIW it might not be the stock market or even the bond market that forces the Fed’s hand, it could well be the foreign exchanges. If the Fed really does resist NIRP for any length of time while other global central banks go down the rabbit hole won’t this create huge dollar demand from carry-traders or other arbitrageurs? Among other effects, a high dollar will cause fresh difficulties for those non-US entities (especially in Emerging Markets) who have loans denominated in dollars, as well as those countries who run any kind of dollar-pegged currency.
That reminds me of Alice in Wonderland, and the mushroom where she has to keep taking bites from each side to get herself back to “normal”, and the two “Drink Me” potion bottles, where one sip could make you shrink to nothingness, and the other to giraffe proportions, Getting those magical bites and sips just right to adjust to magical kingdoms. How the eff did we get here, and let me out.
Jay Powell…your comments please..
The Governor of Colorado asked for ONE TRILLION in aid…..
and his point was that because interest rates are zero….why cant he get that money if it costs nothing to borrow it?
Mr. Powell, your response please.
Colorado is full of two bit Hicksters. The Govenor needs to understand his state couldn’t pay back $1 dollar, never mind a $Trillion.
The governor of Colorado should cut nonessential services, then he should increase the tax rate on those who have benefited immensely from the bubble, like wealthy stockholders, RE owners, and many large corporations.
Ask first what you can do on your own.
The Fed might not buy a lot of junk bonds. The Fed should not buy any. In what way are the banks in general at risk if the Fed does not buy them.
Annoyingly The Fed likes to talk about “markets not working properly,” whatever that means. On the other hand we know it will always intervene to protect the banks. The problem seems to be one of The Fed not knowing where the line is between protecting banks and steering clear of corporate failure (bankruptcy,) which may well mean loan defaults, resulting in Bad Debt provisions. But this is arguably more about incompetent lending. And therefore moral hazard. This therefore goes WAY beyond what taxpayers should be made to take responsibility for.
This isn’t really about the banking system, which doesn’t lend anymore. It’s about the corporate bond market and the institutional investors who bought all that crap. That means pension funds, insurance companies, and 401k plans that added these mutual funds to their lineup–a retinue of “price insensitive” buyers (let’s not call them investors!) who don’t actually think about the returns they’re *not* delivering to clients.
Really fine read on the Fed, except for how things work when the government mandated organization regulating private banks, comes into conflict with those entities. Powell uses the term “committee”. His “dire” warnings were something of a “snit”, done in deference to the consequences, saying, “please don’t tweet me, tweet them..” He also pulled REPO back to “ONE” B, giving them his two cents. (Back to 9B today). This is probably not a “sea change” in the market, just a dustup. To remind everyone, “We are not all in this together..”
Does anyone believe Powell anymore?
He has consistently pivoted and met the administration and market demands since he started lowering rates in 2019. The market and hedge funds have been front running the Fed since.
We effectively already have negative interest rates. This economy is not going to bounce back in 3-6 months. I have very little doubt we will see negative rates. The market and commander and chief will get their wish.