Odd Man Out at the Fed: Kaplan Talks Tapering, Inflation, Risk Management, Excesses in Financial & Housing Markets, Supply-Demand Imbalances

“While you don’t want to be too preemptive” in tapering, “you don’t want to be so reactive as to being late.”

By Wolf Richter for WOLF STREET.

After an onslaught of Fed governors assured us over the past few days that monetary policy is “in a good place,” and that it’s “not time to talk tapering,” and that inflation is nothing to worry about, despite the “raging mania” in the markets, as Druckenmiller called it, and despite inflation that has come unhinged for the first time in decades, here comes odd-man-out Dallas Fed President Robert Kaplan, speaking at a Q&A event at the University of Texas at Austin’s McCombs School of Business. And it was fascinating.

It was about inflation, supply-and-demand imbalances, tapering, risk and risk management with regards to inflation and the excesses in the markets, including the housing market, and even on how much influence he has on the FOMC where he is now the odd man out. And so here are some tidbits (I grouped together his responses by topic; transcription of the video is my own; apologies if I mangled his words).

Right off the bat, and throughout, one of the big issues were the imbalances and shortages in various goods and in the labor market, and the impact they have on inflation.

In terms of the semiconductor shortage, he said, “people in that industry were telling me first [the issues would be resolved] within 12 months. Now it’s lengthening. Now they think it’s closer to 12 to 24 months. More uncertainty.”

What they’re struggling with is that demand is not fixed. “If demand is fixed, and if there are no intervening events, it is much easier for people to say, ‘OK, within the next 12 months.’”

“What is happening is demand is shifting. There’s more fiscal policy coming, and demand could be strengthened for some of these products, and that’s actually creating some of the uncertainty. Demand is not static; it’s increasing and there are intervening events. And that’s why there is so much uncertainty as to how long this is going to take.”

What he worries about is, “depending on how long it takes to resolve these supply and demand imbalances, do they start to feed into inflation expectations?”

“While I’m willing to let inflation run moderately above 2% for some time,” he said, “I’m also committed to anchoring inflation and inflation expectations at 2%.”

As the economy is “making progress to achieving full employment and price stability, it would be healthy to begin the process in the not too distant future, sooner rather than later, to at least discuss weaning off these extraordinary measures” – these extraordinary  measures being the purchases of Treasury securities and mortgage-backed securities.

“I worry about excess risk taking in the financial markets, very tight credit spreads. I worry in particular about leverage and excess risk-taking building up in the nonbank financial market. I worry about some of the excesses and imbalances in the economy,” he said.

“And in addition, I focus on the housing market, and I use that as an example. We buy $40 billion of mortgage-backed securities every month, and that has helped during the pandemic to bolster the housing market. However, at this stage home prices are at historically elevated levels,” he said.

“And in addition, increasingly over the last 6-8 weeks, I’m hearing more and more widespread reports of private investors entering the single-family housing market, competing with families, often making bids above the asking price and requesting that the house remain furnished.”

“So, we’re in a position where families are being crowded out, or squeezed out, of being able to buy the first home,” he said.

“This is an example of an excess, maybe an unintended consequence, a side effect of these extraordinary actions. In a crisis, the benefits of these extraordinary actions outweigh the side effects. As we emerge from this pandemic, that balancing calculation starts to change.”

“I would prefer to be talking, for example, about the mortgage purchases sooner rather than later. I think it would be healthy, as we emerge from this pandemic, to have those kinds of discussions and to begin the process of weaning off some of these extraordinary actions, particularly some of these purchases.”

If you have these excesses and supply-and-demand issues, “what you don’t know is, depending on how long that goes on, whether it starts to get embedded in inflation expectations. And you worry that inflation expectations start to get to be more elevated, and then you are getting them elevated to a level that is not consistent with anchoring them at 2%. That’s the part I’m concerned about. This is a risk for me.”

“I’m not a Ph.D. economist. I’m coming from a risk management background. I’m accustomed to looking at a range of outcomes and acknowledging that there is always a range of outcomes,” he said. “And you want to apply some of this risk management to realize that there may be outcomes that may not be exactly what you expect.”

In terms of tapering, “ideally you want to do things gradually and communicate them in advance. While you don’t want to be too preemptive in taking action, you don’t want to be so reactive as being late. And I think that balance is critical.”

Asked about his influence at the FOMC, where he is a non-voting member this year, he said, “If I have something to say, I speak up, even if it’s a different view than everyone else.” Alas, “things don’t always go the way I want them to,” he said. “But I always have my say, and I always have the ability to try to influence the decision. Sometimes I succeed, and sometimes I fail.”

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  208 comments for “Odd Man Out at the Fed: Kaplan Talks Tapering, Inflation, Risk Management, Excesses in Financial & Housing Markets, Supply-Demand Imbalances

  1. Trucker guy says:

    Nobody wants to be the party pooper and take away the combative drunks keys. Hopefully it is temporary but I’m scaling back, selling anything I own that I can do without here at what I call the peak and pocketing the money. No more quicky fast food stops or frivolous spending of any level. Cash is a bad thing to have with inflation but I think a world of hurt is coming. Perhaps the inflation will be temporary like they say because nobody will have money to burn in the coming year.

    I’m hoping I don’t lose out moving to mostly cash but if it comes tumbling down I’ll have a solid down payment to buy land and a cabin and 10-15 year mortgage and possibly low low rates. I’m just hoping the sharks speculating on real estate and trying to turn the usa into a permanent renter economy bite it the worst.

    • Oh yay says:

      I completely agree with that last statement. My wife and I have been arguing if we should try to buy our first house or not. We live in Phoenix metro area. I don’t think anyone can predict with a high degree of certainty what may happen and when. If it crashes soon great but if it’s not for a couple years till prices come down how much could we gain if we’re paying rent till then? What if mortgage forbearance is a new tool for every downturn? Lots of what ifs and every individuals situation is different. Crazy times indeed. Someday we’ll have to return to times when the govt wasn’t there to hold everyone’s hand thru the rough times.

      • Depth Charge says:

        Housing is not liquid. It takes years for prices to correct. We will not be seeing any deals for at least 5 years.

        • gametv says:

          Housing came down very fast in the 2008 period. We are at an inflection point. Mortgage rates will be rising rapidly for the first time in decades. Higher mortgage rates directly impacts loan qualification and prices that people can afford.

          Housing is all about supply and demand. Once we see higher mortgage rates (in the next 6 months I see a full percentage point increase) and foreclosures and forebearance are normalized, there will be a flood of houses on the market and few buyers at the current price points.

          The Fed and other central banks created a massive bubble and now it will unwind and crush everyone.

        • Anthony A. says:

          I bought my 2,000 SF brick house @$64/SF in 2010 as sales were at the bottom. I bid on several HUD foreclosures at that time and was outbid each time. The successful buyers were offering over list price. The rebound could be pretty fast once the bottom is in.

          I have a cash stash ready for this one when it crumbles.

        • RightNYer says:

          Nah, I think it’s more like 6-12 months. That’s how long it takes for sellers to realize that the prices they could have sold at in the past are not the current prices, and if they want to sell, they will have to reduce the prices.

          I’m not saying it’ll crash by 40-50%, but I think a 10-15% drop (which brings us back to 2019 prices) is likely.

        • Jon says:

          This time things would move fast because of easy availability of information and the rate at which the information flow.
          On top of this housing is all game of mindset and in this era of technology mindset can change on a dime

          Same thing for all other asset classes

        • Depth Charge says:

          Housing did not bottom until 2011/2012, and it started falling back in 2006. It’s not going to be “different this time.?

        • timbers says:

          Depth Charge, yes it might/could be different this time. Only because we have a different Fed that had learned to deploy it’s tools in it’s tool box much more quickly. Instantaneously if fact.

        • historicus says:

          OR immediately..
          Real Estate is the most illiquid of all markets…

          Turn on a dime….like an inflation dime that FORCES a reluctant Fed to raise rates….or people to take to the streets

        • Cheerful says:

          Don’t see any comments about the huge trade deficit and the fact that the foreign demand on US treasuries was 0 for more than a year, except Japan who had to consume excess of 200 billion. Also the trade war and de-globalization just began. I bet prices will continue to rise.

        • Turtle says:

          Prices have gone up 20% year over year in some places. This market is like a crack house really to explode. I don’t see why relatively fast downward movement can’t be possible. It’s not going to be different in outcome this time but the mechanics are. We’ll see. All I know is I don’t feel like a fool for holding enough cash to pick up one of the pieces for myself.

      • Dan says:

        People who don’t own a home but want to are in a very difficult spot. Prices could go up from here and/or interest rates which in effect increases monthly payments. Maintaining a home is very expensive, must more than people realize. People who are buying investment property will need much higher rents which they may not be able to obtain for lots of reasons. The probably with renting a house is that the landlord can want to sell at some point, and then you have to move which is not easy. However with bidding wars and people chasing the prices higher,…it is difficult.

        • Nathan Dumbrowski says:

          People do not realize the monthly/yearly bill for a house is much more than the mortgage. Insurance doesn’t cover every possible issue. New Roof, Air Conditioning, flooded floor damage due to a leaky water heater, etc. The cost of a home takes time and even if you plan to have a renter there to cover the costs they leave sometimes and you have to carpet, paint… and find a new renter. Over years have learned that rental properties can be a real PITA

        • historicus says:

          The FED has locked the real estate market up
          New supply should begin the balance….but contractors cant even bid not knowing the price of materials…..due to the inflation the Fed promoted…

          And people see the replacement price of their homes LEAP 35 % or more ….so they pull their house off the market and sit.

          A good market driven by FREE MARKET FORCES has good supply and demand . Not so in this fake environment created by the FED. Free markets work . This doesnt.

        • Nacho Libre says:

          “Free markets work . This doesnt.”

          Bingo historicus. Evidence is in the face. Yet we find truth deniers.

          Free market to determine mortgage rates.

          No GSE purchase of mortgages.

          No Fed purchase of MBS.

          No mortgage interest deduction.

          No depreciation write-offs.

          No eviction moratoriums.

          No rent controls.

      • makruger says:

        When I lived in the Phoenix metro in the late 90’s a starter home was selling for about $100K. By 2006 that same home increased in value to about $225K. By 2009 it was again selling for about $100K. Today that home is valued at $240K.

        If you buy now and the Phoenix metro housing market contracts to the same degree it did the last time, you’ll find yourself seriously underwater on your mortgage with a home worth less than half what you owe on the loan. So, if you can resist the fear of missing out, and just sit things out for another few years, you should be well rewarded for doing so. That’s my plan anyway.

        • VintageVNvet says:

          Good plan mak!
          Been there and done exactly that a couple of times over the last 5 or 6 decades, and now have no mortgage.
          Also might want to make sure there is some kind of constitutional limit on property tax increases where you buy,,, otherwise, as many comment on here, property taxes might end up being more than the original mortgage.
          FL also requires a new property appraisal every year, so taxes sometimes actually go down, as they should when — NOT if — RE market crashes once again.

        • Turtle says:

          Phoenix is up 21% in one year! Boise takes the cake, though. Up 33% in a single year according to Zillow. These are red flags, are they not? FOMO makes people take unbelievable risks.

    • Rosebud says:

      Scaling back? Interesting choice of words.

      Maybe in the future hearing the words: is it Function Gainable? takes over for: is it Scalable?


      My investment in Social media, forum x… It is Function Gainable! Lets go golfing with zoom office in the cart background, have a meeting, and tell you all about it!

    • Tom says:

      That’s a big bet. That means if you are right it’s a home run. If you are wrong or partially wrong could be painful. I think you are assuming a level playing field but with all the corruption and manipulation in financial markets, who knows? You are one brave dude.

      • Trucker guy says:

        Not much of a big bet though. A younger working class guy gets his meager savings wiped out by inflation is the risk and gets priced out of a market he was already priced out of to begin with.

        If the bet pulls through he can finally get out of the Russian roulette game of renting soaking up 60+ percent of his income.

        If the market stays where it is or only collapses slightly I’m still sidelined. If it goes bust, working class people with finance responsibility have a chance again.

        • historicus says:

          The FED is bound to FIGHT inflation…..yet openly promotes it…

          People will eventually take to the streets….like in Venezuela

        • Turtle says:

          I hope they decide to crash land this ship right here and right now before we get to Venezuela.

    • Boomer says:

      I’d rather have your CDL right now than a Phd in economics. My frugal friend in the transportation business made out very well measuring every purchase he made in terms of miles run instead of fiat currency earned. Need vs Want. I don’t feel like I’m missing out by skipping dinner at the high brow French dinner house.

      • Trucker guy says:

        Truckers are a notorious bunch for telling tall tales. Owner ops that are one man operations barely scrape by on 5% profit margins if they are lucky and not highly specialized. An owner op will barely cut his teeth on more than a measly 10k a year above a company driver with similar experience. Unless he is running multiple trucks and drivers he’s probably turning a nice gross profit but a pitiful net. Especially considering the hours truckers put in.

        When I was otr I worked 70-80 hours a week Sunday through Sunday for 3 months at a time with 3 days off every 3 months. I grossed about 50k a year in wages. I’m pulling a tanker in the northwest and Montana working 40-45 hours a week and including per diem I’m grossing almost 45k a year.

        I have a CDL in good standing and various trade skills so I’ll always be able to earn my keep but the fact of the matter is 45k a year doesn’t mean squat when renting might be nearing 2k a month alone if you can find it and houses are running half a mil for a starter home.

        Also, trucking always gets hit super hard when the economy shuts down. It comes back somewhat quicker than something like construction but rates tank, freight slows down, truckers sit around at truck stops and do what truckers do best, complain lol.

        • RightNYer says:

          Random semi-related question. How transferable are CDL skills? For example, you said you drive a tanker. Could you drive a city bus if you had to without a lot of training?

        • NoPrep says:

          You’re a Pure Denizen of the Citizens Band (Frank Black song). Truckers are a tribe and a thing. Life is tough. Truckers know this as well as anyone. Many are fans of Randy Bachman and BTO too, the Canadian legends. Not Fragile. Enjoyed the comment. Good luck.

        • Depth Charge says:

          Get out of that line of work and become a carpenter, a plumber or an electrician and make some real money. Killing yourself by sitting idle in a seat every day for $45k per year is sinful.

        • 91B20 1stCav (AUS) says:

          RightNY’er-Bus drivers need good people-handling/tolerating skills in addition to their operating ones, which are not easily taught or administered in any endeavor involving significant public interaction-this isn’t diminishing OTR skillsets at all, but only to say bus driving isn’t any more an easily transferrable skill/knowledge than saying a bus driver can easily acquire the skill/knowledge to safely haul 15k gallons of high-test. (I would agree, though, that gasoline and humans can be analogously volatile…).

          may we all find a better day.

        • LGC says:

          as a fellow trucker, i completely agree with what you said.

          also, if truckers don’t bitch, they die. :-)

          and L/O’s are the worst of the liars. Ohhhh look how much i grossed? uh huh, what did you net? wow, 30k? that’s awesome for 52 weeks at 70 hours a week plus all the risk. (/sarc)

        • Trucker guy says:

          Legally you can just get a passenger endorsement on your license and cart people around. But I don’t know how much exp you need but in general if you’ve been trucking for a couple years you can go anywhere and pull nearly anything provided you have the endorsements. Some stuff like heavy haul and hazmat requires you to work your way up. A reefer driver shouldn’t be pulling oversized and overweight 12 axle super loads obviously but they can work their way up pretty quickly if they have any sense at all. I’ve pulled a lot of trucks in not a huge amount of years of driving.

          I’ve done roll off, dump truck, belly dump, lowboy, step deck, flatbed, tanker, rgn, heavy equipment, reefer, dry van, and probably some others I’m forgetting and I’m not even over a million career miles. Not being an idiot or lazy is about all it takes to be a really good driver. Nobody wants to do the job for a lot of reasons so the riff raff that gets pulled in is usually just that. In addition to insurance requirements for new drivers, decent companies can’t hire decent people until they’ve put in 1-2 years with bottom feeders like jb hunt and swift who are meat grinders and create the driver shortage in majority because they self insure and can hire new drivers or “train” people to get a CDL.

          I went through the meat grinder years ago. Most of the people going in the revolving door at the starter companies are young lower class kids fresh off the grey hound with no options in life except prison or drugs. It’s commendable that they’re trying to get into the middle class and make a decent living instead of turning to crime or abject poverty but they get chewed up and spit out before ever seeing the decent jobs in trucking. It’s a lot like how I imagine the military is, but only worse with little benefits. Unfortunately you have people in my situation now who would have had a nice down payment, put up with years of complete BS and misery, be looking at finally having an easier go at life but getting slapped in the face by the fed reserve and an economy that ran away from them the second they got close. I wasted my most of my 20s living in a truck and I’m already feeling it and the unhealthy lifestyle.

          The point I’m making us go to college no matter what really. If you’re a kid nowadays and don’t have a college degree you’re worthless. I bought into the trades scam. I’ve made 16/hr welding. I’ve made 15/hr machining. I’ve made 12.50/hr running heavy equipment. The whole idea that trades pay amazingly is a lie or region specific. I’ve never made good money breaking a sweat and usually there is stiff competition for trade jobs. Blue collar life means being poor and scraping by. Go be a physicist or psychiatrist or something else. Working hard for table scraps sucks. Especially when the winds are a blowing in the direction of debt forgiveness for student loans. You run up 100k to be a lawyer, can pay it off in a decade or less or just make minimum payments forever and then suddenly have the .gov say it’s all good, tax payers will cover ya. No sense at all being a working stiff anymore.

        • VintageVNvet says:

          Obviously you have some brains and enough education to be able to write coherently, so I will just suggest you do some research to find out where welders are getting $$$$ per day.
          Friend did 7 0n 7 off in the gulf of Alaska and made $1000 per day,,, other friends have made consistently over $100K per year being carpenters, electricians, plumbers, tin bangers, etc…
          OF COURSE it is location specific,,, and although the most consistent money is in the Union situation in various places, I have a friend making $100 per hour non union right now,, and loving it… except when doing ”forensic” tree work,,, then, with one helper, it’s $250 and hour and he has all the work he wants each season — ( until he burns out.)

      • historicus says:

        I’d rather have a CCL than a Phd in economics.

        Economics? Heck, the Fed and the central bankers do whatever they want…and roll over all the theories of price discovery via supply and demand…..

        I’d rather know the inside on the Fed than have all the degrees in the world…and the is the problem. I’m not alone

  2. Phoenix_Ikki says:

    Guess who won’t be the next FED chairman? Sadly Weimer Powell has no such worry and instead dumping more fuel to the fire. Worry without action might as well be wishful thinking, too bad he is not a voting member of the FOMC but even if he is, I would assume his voting power will likely be a slim minority and won’t change anything.

    “I worry about excess risk taking in the financial markets, very tight credit spreads. I worry in particular about leverage and excess risk-taking building up in the nonbank financial market. I worry about some of the excesses and imbalances in the economy,” he said.

    “And in addition, I focus on the housing market, and I use that as an example. We buy $40 billion of mortgage-backed securities every month, and that has helped during the pandemic to bolster the housing market. However, at this stage home prices are at historically elevated levels,” he said.

    • historicus says:

      “We buy $40 billion of mortgage-backed securities every month, ..”

      To point out what the Fed has done to free market forces..
      in 1999 and 2006, with CPI running roughly at the rate it is now (actually lower then), 30yr mortgages were 6%!
      Now, 2.95%.
      Why would the Fed buy MBSs (lend) for a 30yr at rates UNDER the current inflation rate? It is completely out of whack with any free market rational conduct. It is purely manipulative.

      • tooshort says:

        History doesn’t always repeat itself but Historicus sure does.

        • Gomp says:

          Short people look further away than they really are.

        • Just Jon says:

          Historicus, I hope you keep saying it every day, 365 days per year, until enough people hear it and think about it.

          Ps. Thanks Wolf, great article as usual. Hope you can put together another meet-up one of these days.

      • Later this summer Treasury will reissue the 30yr TIP, and they pin the rate from the first auction, and that will no doubt be lower than the second issue. It should be pretty interesting, like why would anyone buy the 30yr below current rates, when the median rate as you say is closer to 6%. Inflation expectations could drop, if supply chain disruptions recede. The real question might be what is the future trajectory of the dollar, and that doesn’t bode well either.

    • historicus says:

      Next Fed chair….Kashkari….and that is Cash SCAREY

  3. pbfurn says:

    Much ado about nothing. These musings will get “walked back” by Monday, at latest.

    • rick m says:

      Entirely correct. The second violinist is out of tune, a sharp crack of the conductors baton is coming. The matinee performance will be pitch perfect (or else)

    • Turtle says:

      I wonder what they all really think.

  4. Rosebud says:

    The Fed looks at Vital statistics in its mechanisms. This forum doesn’t go there by writ.

    If someone comes up with a Vital Stat idea artwork that upsets the order of power, guys like Kaplan come of their foxholes praying, bouncing around, like punkers pogo dancing…

    And you get this speech.

    • historicus says:

      Please identify the “vital statistics” to which you refer?
      Is 4% inflation one of them?
      I suggest the Fed and anyone who is supposed to be watching the Fed…make certain that the Fed holds to their THREE mandates…
      They violate the second and third now for about 12 years.

    • Rosebud says:

      The Fed writing the Gettysburg address

      “Two score and zero years ago our mothers brought forth upon this country, a new low in post WW2 fertility, conceived in high interest, and dedicated to the proposition that all are functionally gainable.”

  5. historicus says:

    The Fed can’t get out, back off…
    Powell, to his credit, attempted normality in the latter half of 2018…
    Fed Funds and inflation circled into the same range…. about 2%
    The Dow lost 5,000 pts in about two weeks.

    So 2% Fed Fund Rate seems a disaster for the stock market.
    In 2007 when the market made its then all time high of 14K, Fed Funds were 4%. So markets could at one time handle 4%. Then 2% became a poison to the markets. What’s the interest rate now that would roll stocks over….1%?
    This to me points to
    *The Fragility of the markets
    *The “box” the Fed has put themselves in

    Inflation running close to 4%. Fed Funds essentially zero. That spread is a record, unless someone can correct me.

    The Fed’s predicament, if they even detect they are in a predicament, is that they have gotten more of what they wanted, inflation. Now what?
    Do they care? The theft from savers to leveragers, the arrangement where Lender is Slave to Borrower continues…..at the biggest rate ever.

    I still can not believe a Fed Chairman can get before a podium and say he is promoting inflation when the Federal Reserve is mandated/instructed to FIGHT INFLATION by keeping to “stable prices”.
    And thus begins the problem….a problem apparently that is “our problem” for those living in the economy and not the Fed’s problem.

    • gametv says:

      There must be a catastrophic market collapse to cleanse the system of all this built-up financial manipulation. In 2018, the Fed made a mistake. It should have allowed the markets to crash and bitten the bullet. That would have resulted in alot less damage. The amount of financial market excess now is so absurd that it will be much harder to kick the habit.

      But there really will be no choice at this point.

      • historicus says:

        Exactly…but the markets would not have “crashed”…they would have adjusted and become much more healthy.

        The Fed denies “corrections” …cylcles….but anyone who believes in the free market forces UNDERESTANDS that these are good events.
        Jim Grant said, “They call them market corrections for a reason. They correct”. The overleveraged and financially fragile are flushed, the strong survive. Markets adjust . Free markets are a wonderful mechanism in which low prices cure themselves with demand, and high prices are cured by and increase in supply. The market participants always KNOW more than a central planner …. central banker. When did central bankers become central planners…?
        digital minters? Inflation tax proponents?

      • Finster says:

        Much agreed. But even if the Fed felt compelled to back off its normalization program, it didn’t have to actually cut rates, and even if it cut once it didn’t have to keep cutting. And when repo market rates started going up, it didn’t have restart QE (or not QE).

        It’s the same problem over and again. Even if easing is the right response to some exigency, the ease just keeps going even after the exigency has passed. It’s like getting appendicitis and having an appendectomy every month for years afterwards.

  6. Nice to see Kaplan stating the obvious. You’d have to be an idiot and not see the distortions created by current policy, particularly in the Texas housing market. Austin and Dallas have become a comical mess.
    In the DFW area you have cash buyers bidding up properties 15-20 percent above list price, pushing the average percent of list to unprecedented levels.
    With all due respect to Kaplan, talk is cheap. The only thing that matters is what the Fed actually does to resolve the mess they created.

    • Old School says:

      Watched good interview with David Rosenberg. He is saying it’s going to be like 2008 most likely. Inflation was high just before the bust. He said assets to income is higher than 2000 or 2008 at 7.7 X income and it tends to revert to the mean. Don’t know if he is right, but if he is it’s absolutely wrong time to buy house or stocks.

    • polecat says:

      The LowlyMokestanis will continue to be shoved straight into the Chompers. Well, SCREW THAT!

      Whoever wrote this $cript needs to DIE!

  7. Joe K says:

    I believe this is ultimately how the “market” will “expect” negative rates, then 0.25-0.5 will be effectively the new market busting threshold, and the Fed has to go negative. At that point, it’s just a matter of time til we’re -0.85 and can never get back to 0.

    • Wolf Richter says:

      The Fed has lots of reasons not to go negative, and has said so. One of the big reasons is that it’s bad for the banks, and the 12 regional Federal Reserve Banks are owned by the financial institutions in their districts. That’s why the Fed isn’t going there.

      Neither the ECB nor the BOJ nor the SNB nor any of the other major central banks are owned by the banks.

      • Phoenix_Ikki says:

        I love when Wolf clears this up time and time again. This is one point that most MSM media or other Youtube financial channels completely ignore when they talk about the possibility of going negative

        • Jon says:

          The real rates are quite negative anyway …

        • Auldyin says:

          And US sets the tone for the World. What free investor would take negative anywhere else when he can get positive in US. Anybody taking nominal negative must be trapped.
          No comment here on real rates, that’s another game altogether.

      • The Fed buys Treasuries using an IOU, the charters have no liability. They can cancel that debt if they like and the money stays in the system. Segway from monetary to fiscal policy. Look at the monetary base, and the Feds balance sheet, same thing. Cancel the feds debt, hypermonetize the system from the ground up, and erase the wealth disparity gap. Interest rates? Will they raise them at the low end, or cap them using YCC at the long end? They are already buying 120B a month, just buy something different? Or let the market set long yields and track them with FFR? They are already considering erasing their debt (or drawing down their balance sheet). Last one out of Mariner Eccles turn out the lights.

        • Nacho Libre says:

          “and erase the wealth disparity gap.”

          Did you just handwave that in?

          Fed has caused such wealth disparity in last 2 decades it will take decades to reverse it even with the Fed blown up.

      • John says:

        Wolf so a bunds sell off in Germany just might sell American stocks, being they are not owned by banks. Like last weeks, never mind an inflation scare narrative.

    • historicus says:


      Strongly disagree. Negative rates will implode the United States.
      The rate direction is in the opposite direction.
      We have never (someone correct me) seen inflation 4% above Fed funds…

      • Jon says:

        You see inflation 4% above Fed Funds rate but Fed does not see it.
        It would matter if they see it realize it and act on it
        Till then its all talk

  8. John says:

    I always suspected private equity or peeps pooling money to buy these homes. Kaplan said it too. For me when rates were rising end of 2018, and house sellers dropped their prices seems to be the last window of opportunity for buyers as far as price. Re-financing came about too, later on. Mortgage backed securities!?, it just baffles me, the fed is still buying them. It seems the money printing is keeping all assets up with no losses, whether occupied or not with this pandemic.

    • timbers says:

      I agree with you. This is huge threat…the gobbling up of residential homes into the hands of US 0.001%, to further transform the US into a rentier society with extreme class divisions and move all wealth to the top.

      This is the next logical step to what Michael Hudson refers to as the “rentier society” in which the US no longer produces anything the world wants but instead makes it’s money on rent, patents, intellectual property, monopoly, privatized public monopoly utilities. His most interesting point is China is some ways what the US was 100 yrs ago – using ad-hoc non ideological polices like the US used to do, such as genuinely public utilities to drive down costs to it’s nation and citizens to focus on productive pursuits (vs the US and Europe which have privatized and monopolized formerly public services). China has made a deliberate decision NOT to financialize it’s economy the way the US has. Instead of power concentrated in Wall Street and the Banks and finance, in China it still resides in the Party and finance is cut out entirely or at least reduced. Will China remain immune to eventually being controlled by financial interests, as the US is now?

      As of now, this a big reason why many think China’s economic system is currently superior to the US and will surpass it.

      • historicus says:

        Two things
        Blackrock, which is partnered with the Fed (illegally) has huge bets in residential real estate from about 6 years ago.

        VRBO changed the game… People looking for any FAIR return on investment buy these homes in nice weather places and rent them…leveraged up to make some money. Why? Because the Fed took away fixed income as an investment.

        • historicus says:

          as an aside and prove the manipulation of this new FED GAME since 2009…

          In 1999 and 2006, we had similar inflation numbers…even less actually.
          30yr mortgages were 6%!!!
          now 2.95%.
          And everyone knows it…so the real estate market is locked up…
          buyers want….sellers know the rates are half what they should be and they throw out the crazy sell price.
          Replacement values have risen circa 35%…..due to material inflation promoted by the Federal Reserve.
          And contractors cant bid jobs or create supply due to the same issues.
          Federal Reserve serving whom?

  9. Rosebud says:

    The Feds Gettysburg address, contd

    “Now we are engaged in a great civil Gain of Function, testing whether that nation, or any nation so conceived and so dedicated, can long endure. We are met on a great battle-cloud of that war. We have come to dedicate a portion of that cloud, as a final resting place for those who here gave their liquidity that that nation might live. It is altogether fitting and proper that we should do this.

  10. timbers says:

    It’s really become striking. Given the amount of data now available on real estate and stock prices, the Fed’s hubris, head-in-ground, out of touch-ed-ness with the real world is breath taking.

    In high school and college, we were taught John Maynard Keyes said the government should counter balance what was happening in the private sector. This was widely accepted conventional wisdom. Sure folks argued the govt never seemed to get it right and couldn’t move quickly enough or whatever (as now) but the idea was mostly accepted. Economy roars, government takes away the punch bowl. Economy sputters, government steps in. Easy peasy.

    Who can argue with that?

    Today’s voting members of or very own Federal Reserve, that’s who! It’s as if mankind at the Fed as reverse-evolved about 100 years into the past.

    The sectors affected by Fed interventions are exploding to record shattering levels and all you hear from them is steady as she goes for years and years and years.

    How can they so not get it?

    • Rosebud says:

      Debt is a function of population growth. There’s no disagreement amongst ordained Economists on this matter. I forget who said it, but it was the 1930s, and Keynes had been around for awhile.

      This is why the student debt burden became gargantuan. It was reflecting the typical college kids’ sex appetite. Demographer bankers (oxymoron) hustled credit cards. These days they hustle immigration, because homey Inuit know what happens when yer an idiot with your balls… bankers don’t enter into the equation.

    • historicus says:

      They get it ….and the people they serve love it.
      Now its turn for the people who they are hurting to weigh in.
      But the free Fed money to the government allows the government to pass out money at little to no cost to quell the tide…appease the masses.
      Marx Engles

    • coalman says:

      Because they serve the wealthy, not the working wage stiff. We are the “grist for the mill”. The more things change, the more they stay the same. We are governed by psychopaths.

  11. Ron says:

    Biggest problem is faang and banks black rock run govt we need a flAt tax no w rite offs no special interests only way out of cesspoolofcoruption

  12. Mike R. says:

    I’ll say it again. The Fed wants inflation that sticks. The current high prices won’t/can’t stick unless wages comes up for the bottom 80%.
    The Fed knows this too.
    The plan has been to capitalize on the “end of COVID”, taking advantage of massive productioin shortages that were formed during the lockdown while throwing stimulus at the masses to encourage demand.

    Now….how to get wages up? Continue to provide higher unemployment and other free money to citizens so that the calculus for them returning to work is swayed to staying at home. This forces businesses to raise wages to get workers back.

    We’ll see if Federal unemployment supplement are re-upped in September; good chance that will be highly promoted.

    Please, please, stop railing at the Fed for not knowing about the rampant inflation in prices out there. These people aren’t stupid! They know it and want it.

    • timbers says:

      “Continue to provide higher unemployment and other free money to citizens so that the calculus for them returning to work is swayed to staying at home. This forces businesses to raise wages to get workers back.”

      I agree.

      But let’s call it what Bill Clinton signed into law to abolished:


      • endeavor says:

        And forcing businesses to pay higher and higher wages will crater small business. The corps that pick up the slack can afford the higher wages through monopoly pricing.

    • Joe K says:

      That would make sense. Taking the “stimulus” away will negate the “progress” on inflation, dry up consumer spending etc.

      But now you have vast swaths of the country already removing the “stimulus ” a mere month from now. What happens in those states come July and August, not to mention September and beyond?

    • Cashboy says:

      “taking advantage of massive production shortages”; most of the shortage is goods from China isn’t it? Inflation in those goods just makes more US dollars leave the USA.
      Isn’t the USA economy mainly service industry?
      Wages might go up in restaurants at first, while a lot of people have no incentive to go to work with the unemployment benefit and stimulus checks being more. However restaurants will have to charge more for meals to cover the extra wage costs.
      The way to have inflation in wages (net wages) would be to reduce the tax on the lower earners.

    • historicus says:

      As the free flow of cheap labor crosses over ..uncontested…
      and the government pays people to stay at home…
      can we see that government doesnt know what they are doing?

      And as the Fed, allegedly to promote maximum employment, provides free money to the federal government to then dole out to people to stay at home…. the idiocy continues. Their actions promote idleness….then they keep rates at zero to promote the opposite. NUTZ

  13. YuShan says:

    “what you don’t know is, depending on how long that goes on, whether it starts to get embedded in inflation expectations.”

    With everybody putting bids above ask in the FOMO real estate market, stuff is definitely embedded in inflation expectations already bigtime! Not to mention bonds, stocks, crypto,….

    Anyway, I have no confidence at all left in any central bank (if I ever had any) that the Titanic will avoid the iceberg.

    • Old school says:

      I think a reality is unskilled labor isn’t worth very much unless the economy is hot. If middle class is fully employed retail, bar and grills and hospitality will be booming. If not people can do without those things.

  14. Tom Stone says:

    At least he comprehends that their are significant risks, not always the case for those who are the smartest guys in the room.
    The illusion of control is seductive, all of us are subject to it to one degree or another.
    However, the idea that ANY human being can maintain the critical balance needed at this point is laughable.
    I’m beginning to see some softening in the RE Market here in Sonoma County, two local builders have had price reductions recently.
    And we know CMBS are in the midst of a slow detonation ( It’s speeding up).
    LOTS of fraud out there, we always see that when people chase yield and ignore risks.
    It’s going to be a wild summer.

    • SnotFroth says:

      It’s hard to believe commercial RE has held on as long as it has. There were places around here in Contra Costa that were vacant starting end of 2018. They’re still vacant, and now many others around them are too.

  15. Anthony says:

    Everything will be OK unless a war starts up in the middle-east…. Oops too late.

    Let’s hope it doesn’t spread or you will be seeing $25 a gallon gas prices by August.

    I don’t think it will but then who would have thought using $60,000 bitcoins, that crooks could blackmail the USA but they did….. Who knows, they may forbid bitcoin to be used in USA and world banking (once the banking crooks, that is, have taken their share out) Stranger things have happend… lol

    • David Hall says:

      The Hezbollah war against Israel in 2006 lasted a few weeks and did not affect gasoline prices. Hezbollah was backed by Iran as Hamas is backed by Iran. Previous Palestinian attacks resulted in the Israelis building a border wall and cutting off Gaza’s road access to the West Bank.

      • Auldyin says:

        When an Aramco refracting tower was taken out by a missile from an unknown distance it sent a message to the whole middle east. The most heavily and expensively defended installation in the region was penetrated by a weapon from the other side. I think everybody knows they didn’t just make one of these weapons.

  16. Crush the Peasants! says:

    The real question for most Mericans is this: Are you financially better off, or worse off, in the last five years? If the former, than thou dost protest too much, methinks.

    • Rosebud says:

      for your thots: a trillion x 5
      Especially created for the bottom up and middle out age. (Checks clock, must be 5 pm somewhere)

      But correct you are. Encouraging words to sensitive soul, a worthy squatter, there are a few+. He befriends a fallen bird looking for a pet, yet nature wants to take its own course.

    • Petunia says:

      I am better off than five years ago, better off than 10 years ago, but a lot worse off than 13 years ago.

      • Crush the Peasants! says:

        How much equity did you lose, as a percent of your total wealth at the time? I am guessing a chunk of wealth was in the house.

        • Petunia says:

          We lost everything, over $300K in equity and savings. Eventually, we even had to sell our wedding rings.

        • Crush the Peasants! says:

          This scenario? Unaware of the underlying fraud that is pumping up housing prices, i.e., the MBS’s filled with NINJA mortgages rated as secure as UST’s but with higher yield (GOLD!), Mister and Misses Citizen (MAMC) jump in, and buy a home, using their hard earned money as the required down payment. It’s the American dream, and MAMC are cheered to see the price of their home rise…until it doesn’t, and in fact, sharply reverses as the fraud unravels. Their down payment is gone, and worse, they have negative equity. Their dream home is worth less than they paid for it. Catastrophe, the imploding RE bubble triggers a financial depression, and MAMC lose their jobs in the economic meltdown. Now they cannot pay the mortgage, and lose their home. To the rescue, one of the major architects of the fraud, Hank Paulson (Al Capone) becomes the head of the Treasury (Justice) department. A black guy becomes president (surely he will help) and bails out the banks, but not the under water homeowner victims who get the smash show Dancing With The Stars to soothe their misery.

    • Old School says:

      That’s a hard question. All my personal asset gains are backed by my future debt obligations of the US government. Mainly both numbers got bigger. 1 – 1 = 0.

  17. fred flintstone says:

    Taper……LOL……the fed knows they are not going to taper…….every so often parade one of these tools out to the public just enough to give pause to the unknowing.
    How do you taper when you are running a 6 trillion deficit. As soon as the fiscal stimulus lets go collapse will be evident. 6 Trillion is just about a third of our entire GDP…..and almost half the non government part.
    Some folks have finally gotten what they always wanted……an economy which is composed of a bit of this and that and a whole bunch of government. Permanent government. 5 year plans are on the horizon…..hopefully after I’am dead.
    Whats wrong with a government run economy……politics determines who benefits……and in most cases it won’t be you.

    • Wolf Richter says:

      fred flintstone,

      Not only did they taper last time, they actually reduced their balance sheet until markets started to crash. People were saying the same thing back then that you just now said.

      • Depth Charge says:

        Wolf. C’mon. Does it really matter when they abruptly arrested their taper and started QE infinity again? Fred Flintstone is right.

        • Reshudicata says:

          Flinstone is 100% correct. They let this robot say this to slow walk some (think of it like negative forward guidance). There’s only one way forward without a crackup, and that’s to grow the debt and monetize it faster and faster in perpetuity. Bet on it.

      • andy says:

        Wolf, after the next taper the balance sheet will be $15 Trillion.

      • polecat says:

        That slowwwww moving Fed Tap!r…. hanging down, but always on the upside .. just sucking up that balance, to be spewed – just like digital ants – ALLLL over the likes of Muskmelon, Bazooka Jeff, and all the other high-flatulent talkin E-Lord conjurers ..via finbots and dodgy coin holders!

      • Nathan Dumbrowski says:

        They tried they really really tried to taper. But I believe the words used were taper tantrum in the markets. So based on the charts and the numbers showing an increase it does not seem like the taper is going to be a reduction of the total debt load. But more like we will stop eating sooooo much cake. Maybe just three slices a meal.

    • Old school says:

      If system hangs together I think in five years Fed funds rate is still zero, government debt is 48 T and Feds balance sheet $28 Trillion.

  18. Petunia says:

    No market is more scrutinized than the mortgage market in America. Kaplan knows who owns every single house in the entire country, whether there’s a mortgage on it or not, and how much the last buyer paid.

    There is no reason for the fed to allow investors to own multiple homes on borrowed govt money. When they buy these loans they are feeding the frenzy and they know it. They buy this MBS crap because the real market makers for it won’t touch it at the current interest rates. It is priced incorrectly.

    If the MBS is priced incorrectly, then the underlying asset is also priced incorrectly. All the players in MBS know all of this. The public not so much. If they try to unwind these positions they will have to lower prices and the truth will be revealed.

    • Depth Charge says:

      Housing is shelter, but it has been turned into a speculative investment. That’s morally wrong. Not only does the FED need to get out of the MBS market, the government needs to heavily tax people who own more than one house, and AirBnb, VRBO and all other short term rental companies need to cease to exist. Again, people NEED shelter. Turning that into a speculative orgy is morally wrong.

      • Phoenix_Ikki says:

        Absolutely agree with you that it’s morally wrong to speculate on housing but yet it’s so widely accepted especially in Asian countries. I personally despite the fact that something that’s a necessity to all, a component to an string fabric of society has turned into just another gambling device. Wait until the almighty market figure out how to commoditize oxygen we breath and speculate on it.

        • 91B20 1stCav (AUS) says:

          Phoenix-‘…privatize all profit, socialize all risk…’ (the core driver of the lotteries).

          may we all find a better day.

        • O2 Speculation says:

          Commoditization of O2 is happening in India right now because of inept handling of Covid-19 crisis by the government and corrupt hospital bureaucracy. Hospitals don’t have their own oxygen plants, but rely on the inefficient delivery of Q2 tanks. Thousands are dying daily gasping for the next breath. Nobody knows the real numbers due to deliberate under count of deaths.

          Here in US, people are unaware of the invisible dangers of particulate pollution, especially PM2.5, which can travel deep into blood tissues. Prices of RE with quick access to highways fetch a premium, not knowing that If you are residing less than 1500m from an highway, your life span is gradually being being cut short. If you’re already suffering from an underlying condition, particulate pollution is like pouring gasoline on fire!

      • Gomp says:

        If the Fed wants to help the RE Market, how about a moratorium on Capital Gains upon sale of investment properties. Flood the market with all these properties. As it is now, small time investors get hit with 20% (going higher) of their gain going to government. In my case, cost prohibitive. And I’m old and retired.

        • Petunia says:

          The investor class already has enough tax dodges.

        • Lisa_Hooker says:

          Petunia – Too broad a statement. The 0.1% has excellent tax dodges. The retiree trying to make it on Social Security and typical “safe” investment/savings has access to few if any. Fed policy on interest rates is literally killing them slowly.

      • JackPru says:

        Property rights are a large part of what this country was founded upon, and though not all can be equal in that regard I don’t see the reasoning behind disallowing others to pursue that to their ability.

        I own more than one home because I worked hard and bought when the market dropped, just like many here are hoping to do. But because you have not yet done so you bash those that have.

        There is not moral crime in capitalism.

      • Lisa_Hooker says:

        @DC – Food is kind of necessary. Turning wheat, rice, corn, &c into a speculative orgy is morally wrong too is it not? How about speculation on the price of fuels to heat those houses?

        • Swamp Creature says:

          Why don;t we have speculators buy up all the water rights in the country. Then sell clean water back to the public at inflated prices. That’s Capitalism right!!?

          I think people are doing this already in Arizona and California.

      • Swamp Creature says:

        Here in the Swamp there are a lot of turn of the century homes that have fallen into disrepair. Investors buy them up, fix them up and sell them and this adds to the housing stock available and helps the overall community. So there needs to be some way to encourage this kind of activity while at the same time discouraging rampant RE speculation.

      • Cas127 says:


        I agree that the speculative component of housing has increased significantly…but the problem would be a lot more self correcting if more new housing got built (you can’t corner a mkt continually adding new supply).

        So, I think the real bottom line problem is why is housing being added so slowly…especially in the most inflationary metros?

        Builders will build to meet demand, be it occupancy or financial speculation…but something is getting in the way…and has been for a long long time.

    • andy says:

      Pretty sure we will be saved from the truth.

    • Nathan Dumbrowski says:

      Me thinks the government is the only one BIG enough to absorb the losses. So the MBS purchases are calculated to be the HOUSE who can handle and write down those losses unlike the banks that tried and failed 15 years ago

    • Lisa_Hooker says:

      Ladies and Gentlemen. I thank you all for this economic insight that has been long in coming. Investment is when you make money with your money. Speculation is when I make money with my money. Beautifully simple.

  19. Paulo says:

    I like someone who has a background in “Risk Management”. :-) Why? Because my entire life has been predicated on such a concept, particularly 20 years of bush flying. I’m with Trucker, have not one dime in the ‘Market’ and formally retired in my 50s so the concept works. Live below your means to get a stake, then build on it while enjoying the days. In my world, working guys (like myself) are not entitled to all inclusive tropical vacations or yearly Disney trips for the kids. We didn’t eat supper out unless it was a special occasion. No 70K trucks or Beemers. Needs and wants……. needs and wants. Then, get on with getting ahead.

    If you cannot afford to lose your investment money? Then don’t invest and don’t gamble. Inflation? Cut back, and when everyone does so we will have deflation and many silly businesses will fail. Does society really need nail salons and tattoo parlours? Do people need $5000 mountain bikes, $40k motorcycles, motorhomes the size of Greyhound bus? Nope.

    What do people need? Affordable housing. Three hots and a cot. People who can build and fix, medical coverage, transportation, schooling for their kids. Decent entertainment. Music. Art. Green space. The rest is fluff and should not be on top of the economic pyramid, or within the concerns of Govt. It is unsustainable.

    The best things in life are free. And it is important never to lose sight of that. So look around you. Wherever you see friendship, loyalty, laughter, and love…there is your treasure. – Neale Donald Walsch

    • Petunia says:

      Yes, people need nail salons and rhinestone encrusted flip flops too. Salmon dinners, pickup trucks, work boots, not so much. Freedom to choose is the best thing in life.

      • polecat says:

        Me .. I’ll choose the baby’s arm, holding an apple. I won’t be out too much.

    • Phoenix_Ikki says:

      Rather have someone with risk management background than a lawyer and former investment banker in charge now.

    • Old school says:

      I tell my female friend that a woman’s body is a business opportunity from the hair on her head to the small toenail on her foot. Not one square inch will not be a source of income. It’s called the beauty business.

      For guys it’s usually boy toys.

    • 91B20 1stCav (AUS) says:

      Paulo-i’m with you, but it appears to me that this point of view sails against a very strong (for at least four generations, now) and effective wind of mass-communication advertising…(…thank gawd for the original ‘Mad’ magazine and its ‘gang of idiots’ in my younger days…).

      may we all find a better day.

    • Lisa_Hooker says:

      Then again it is the JOB of custom bike builders, motorhome workers, tattoo “artists” and fingernail tweakers, even yacht builders to relieve the rich of their largess. I prefer them over excessive government takings. Who should be assigned to decide which jobs are unnecessary?

  20. Island Teal says:

    Someone needs to send Fed Kaplan a DVD copy of “The Big Short”. ???

  21. Micheal Engel says:

    1) Goldman’s Kaplan is coming from risk mgt. He is accustomed to looking at a range of options.
    2) Ford : thousands of pickup trucks overflow safe parking lots, due to chip shortages.
    3) Long lines clog gas stations from FL to DC .
    4) Rising gas prices will paint (electronically) Ford pickup trucks. Sales of new and used cars will suffer from a shortages of customer. Mar 2020/ Apr 2021 extreme instability will cont.
    5) Chip shortages, the Colonial cyber attack and lack of quality US engineers, will force US industries to simplify, to adjust. Complex systems tend to collapse.
    6) US high tech is under attack in Israel. Without the FANG leadership the stock market bubble might plunge.
    7) The Suez canal, the Colonial pipeline shortages, chip shortages, housing shortages and tp shortages… led an old liberal prof to predict 20% inflation Y/Y ==> thereafter M/M.
    8) Amazon $17 induce inflation. Higher wages will hit the surviving small business. Frog cooking.
    9) The Fed asset have reached $8T. In the next recession the VALUE of those assets will rise. Tapering will keep it constant, or reduce it.
    10) Will JP cave in under DC pressure.

    • andy says:

      Well, without a chip you will be driving a Ford truck without the Bluetooth connection. Like some kind of loser.

      • Lisa says:


      • Anthony A. says:

        You mean I will actually have to use my cell phone without the connection to the truck audio and screen? Man, that’s so low class.

        How will I stream my music?

        • polecat says:

          You call that stuff Music ???


        • Anthony A. says:

          I stream 80’s stuff and older. Still pretty good.

        • Boomer says:

          Maybe you can find an old 8 Track. We had analog AM radio in the good old days. Better that way, no distractions. No AC either. Tour Books and maps from the auto club.

    • Crazy Chester says:

      “Frog Cooking”!

      It’s everything you need to know in this discussion. You’re either looking for some side fixin’s or starting to sweat.

  22. marc says:

    There’s no taper coming. Just words to the effect.
    A bankrupt country run by inept people will print, print, print.
    It will make interest rates negative (at least real rates).
    And will tax to oblivion.
    It’s always the same recipe .
    And last time around, in the 70’s, with an economy in shamble, real estate was going up and up and up, without any connection to the underlying economy.
    Inflation is truly a game against the people, for the benefit of the rich.

  23. otishertz says:

    “While you don’t want to be too preemptive” in tapering, “you don’t want to be so reactive as to being late.”

    These jackasses think they own everyone.

  24. Heinz says:

    “I’m not a Ph.D. economist …”

    Good for you Mr. Kaplan, that is a point in your favor.

    “However, at this stage home prices are at historically elevated levels,” he said.

    Housing bubble is a ‘Voldemort’ in Fedspeak:

    ‘that which cannot be named’.

    At least he had the gumption to call a spade a spade, even if couched in mincing terms.

  25. Chris Herbert says:

    Private debt peonage created by the rentier economy requires broad debt forgiveness. Don’t bail out the rentiers/speculators. If the Feds are going to continue buying mortgages as part of this relief, pay the ‘real’ value, not the last, inflated price. Meanwhile gradually raise the interest rates. The stock market needs at minimum a 10% correction. Make it rain.

  26. Petunia says:

    As I am sure every reader of WS is aware, the latest innovation against fakes in the luxury goods market is to embed a chip in each handbag. This latest innovation replaces the old imprinted serial number or date code previously used. No shortage of chips in this markets.

    • Depth Charge says:

      And it also listens to the new “owner” and reports everything to the CCP and NSA.

      • Petunia says:

        The ability to hack and abuse the chip will no doubt emerge soon enough. That the manufacturers think this won’t happen is amazing to me. Most of the good fakes come from Russian and Israeli firms, so there’s a better than good chance the chips will be cloned and worse.

        • 91B20 1stCav (AUS) says:

          Petunia-re: ‘good fakes’. Have any reached the point of the old saw about a professor of Classics who spent his career proving that the ‘Odyssey’ wasn’t penned by Homer, but by another Greek of the same name?

          may we all find a better day.

        • Petunia says:


          The good fakes aren’t really fakes. They are extra runs of the original product lines and/or rejects with small imperfections. These luxury goods are manufactured in the millions and generally not worth more than the price of the good fakes.

        • 728huey says:

          The good fakes are being sold for the true value of the product, which like someone else indicated earlier are factory extras with slight imperfections but don’t have the official tag of the designer name attached. I.e., the fake Gucci or Louis Vuitton handbag that cost $50 to make and is being sold for $80 is the same “authentic” handbag being sold for $500.

        • LVBuyer says:


          Please tell us where we can can buy a new, real, authentic LV handbag for $500.

          The wife wants to know……………..

          last one cost $1500……….

    • gorbachev says:

      They will hack that too.

  27. Depth Charge says:

    ““So, we’re in a position where families are being crowded out, or squeezed out, of being able to buy the first home,” he said.”

    This guy is so freakin’ late to the party that the host doesn’t even live there anymore.

  28. Depth Charge says:

    “We buy $40 billion of mortgage-backed securities every month, and that has helped during the pandemic to bolster the housing market.”

    He readily admits what Weimar Boy Powell couldn’t bring himself to say, stammering and stumbling as he dissembled when asked the question.

    • MonkeyBusiness says:

      He’s either covering Powell’s ass or angling for Powell’s position. When “austerity” later returns to the nation’s economic agenda, Kaplan will be the man to execute it.

    • historicus says:

      Just a coincidence..
      The Fed partnered up with Blackrock
      Blackrock put a big play on in residential real estate about 6 years ago..so they have a very vested interest in residential real estate.
      The Fed is still buying mortgage backed securities….under the current inflation rate…ever happen before?
      Last time we had inflation CPI at these levels….1999 and 2006, 30yr mortgages were 6%. Now 2.95%.
      Is the Fed holding the 30 yr beach beach ball under water….? And why would they?
      Contractors cant bid jobs because of building material shortages and inflation.
      House owners pull their homes from selling because the replacement value of their homes just increased about 35%.
      Buyers know this 30yr rate is out of historical whack and want to buy.
      Result…..Housing market locked up. Nice job Jerome.
      Kinda like the free money provided to the govt to keep workers at home…as you allegedly are supposed to promote max employment,.
      Two strikes Jay.

  29. Depth Charge says:

    Regarding inflation, I’m watching automobiles and RVs, specifically inventories of a select few dealers (around half a dozen in different states). When I start to see inventory builds and slower sales, I think it will indicate the stimulus effects are wearing off. We’re not there yet.

    Everywhere I look, people are driving brand new cars and trucks. At a certain point, everybody’s got one. I think demand has been pulled forward dramatically. Those sorts of purchases are not an annual thing.

    • Petunia says:

      I don’t know how true this is, but I heard those that don’t want to put money into RE are buying cars, new and used, and storing them as a hedge against inflation. I heard this a couple of weeks ago, when they first started talking about large numbers of trucks being warehoused because of chip shortages.

    • endeavor says:

      You may be right. Was down in the big city this week and in my daughters new sub I was quite a few house with TWO 4×4 PU’s parked in the driveway. RV’s dealer I passed seem to have more inventory.

  30. MCH says:

    You know what Kaplan’s comments sounds like?

    The start of the destruction of the J team, and in the end it’ll come down to a simple message: “it’s Trump’s fault.”

    Cause let’s face it, this is the opening salvo against JP, basically saying you dummy, you did the wrong things and spurred on inflation with low interest rate. This will deflect attention from the other members of the J team who equally had a hand in this problem on the fiscal side. Then it comes back to JP was a Trump appointee, he is Trump’s responsibility. Ergo, this crazy devastation of the economy is all Trump’s fault. First the botched handling of c19, the crazy tax cuts for the rich, and leaving his stooge in charge of the Fed.

  31. We already have hyperinflation. Stocks! RE! GOLD! What happens after that? In the first instance money was a commodity, you took your seashells to the store and bought groceries. Now with computers you never receive your pay, and the store no longer takes seashells. Otherwise everything works the same.

    • Jdog says:

      We do not have hyperinflation. Apparently, you do not understand the meaning of the word. Hyperinflation is inflation at the rate of 50% or more per month.

  32. Micheal Engel says:

    1) US10 Y reached a lower high on Mar 30 @1.776.
    2) Since then, US 10Y is trending down. The 10Y entered the cloud, hit
    the bottom of the cloud, bounced backup above, but since Thur and Fri it’s back inside.
    3) Rising interest rates means falling assets prices. Yet, the Fed assets have reached $8T. The Fed is building ammunition.
    4) When US 10Y will plunge, the value of the Fed existing inventory will be rising.
    5) In order to prevent 3Y NR, due to speculators panic seeking shelter in UST, the Fed will have to sell assets, to go against the trend, to use it’s ammunition, in order to survive.

    • Beardawg says:


      RE #5, so your prediction is the Fed will “taper” (taper = sell) UST at higher prices than what they purchased them for because yield drops ?

      • historicus says:

        The Fed can taper just by buying less and allowing maturities to not be reinvested.
        Jokingly……Bernanke laid all the mechanisms for tapering the TEMPORARY Quantitative Easing in a WSJ article ………in July of 2009!!!!
        ha ha ha Ben.
        Temporary….until things got back to normal. Dow then was circa 10K…unemployment over 6%. Unemployment went to 3.5% and Dow to well over 30K…..and no tapering….
        ha ha ha Ben…you win. Those who believed you lost.

      • There is no collateral behind the Fed balance sheet. Cancel the old debt and replace it with new debt, rewrite the terms of the bonds you hold and replace them with whatever you want, it’s a gentleman’s agreement. The only thing that is real is the money government spent after those bonds were monetized. The casandra like warnings about higher interest rates bankrupting the Fed (balance sheet) have never come to pass and need never happen. (Jim Grant) However pulling the face off their potemkin charade will cause some real damage to the dollar, which is happening anyway, because people are not stupid.

        • Wolf Richter says:

          Renegotiating a bond is considered a DEFAULT. No different than Argentina and Greece renegotiating their bonds. Those were defaults too. But financially, those countries don’t matter that much. A default by the US Treasury would unleash all kinds of global heck.

          A bond is a bond. That’s why it’s called a “bond.” If you try to change the terms, you’re in default.

  33. Micheal Engel says:

    6) Tapering, selling, taking profit, buy low/ sell high. At higher Bonds prices and higher TY.
    7) An anti gravity vector to Europe NR, against the panic trend, if the Fed dare to prevent NR, causing pain…

  34. Hyperinflation as an Artform says:

    Change my Mind:

    Due to soaring inflation the Fed will be forced into raising rates but to prevent a collapse they will end up printing hundreds of $ Trillions to buy stock indexes, corporate bonds, pensions, etc and parking all of that massive inflation onto their balance sheet. Wall St will be no more concerned about about this than they are about soaring trade and government deficits. Not only will markets and the MSM not care, they will applaud the Fed for saving the US Dollar against collapse thru raising rates while monetizing away systemic risks.

    I’m sorry to be the bearer of bad news but the Fed is far from trapped.

    • historicus says:

      The Fed is trapped……unless they become something other than the Federal Reserve as layed out in the Federal Reserve Act.

      You suggest actions that are way beyond the agreed upon scope of the Fed…thus they must become a newly defined entity….one of their own design.
      The Fed has morphed with every “emergency”. They have accrued new powers by their own initiative. They have become central planners, digital minters, and a taxing body (inflation).
      The unelected committee ….who controls the citizenry to such high degree….yet the citizens have no say, no representation.
      Quite an arrangement.
      “, they will applaud the Fed for saving the US Dollar against collapse ”
      new trade resolving mechanisms will collapse the dollar, and bring more inflation (disguised as “shortages”)

  35. Inno says:

    OK, admission here….I’m an idiot. I didn’t partake much in this runup since 2017. I started getting nervous back then, and went to 30% equity, 70% Treasurys. Rode the yields from 2% down to 0%, now sitting there, as I’m unwilling to take duration risk on Ts.

    This despite all the educational background in Keynesianism curves, monetarism, etc. I figured at some point the real side of the equation had to matter…still waiting.

    I remember back in 2000 listening to an old man talk about not believing in the runups in the 1980s, and he sat on the sidelines for 20 years…at the time I said, “I’d never be him”…how wrong I was.

    So, who’s stupider than I? House paid off (but paying more in CA property taxes than many mortgages), sitting on cash earning 0%? Go ahead, throw stones…I deserve it, and I’d accept it from this forum.

    • Xavier Caveat says:

      Earning the tiniest sliver of interest you can double your savings in less than a millennium, so you have that going for you, which is nice.

    • Anthony A. says:

      Inno, lots of us older folks (and some younger) have paid for houses and are sitting on more cash than equities. It’s not the worst situation, and I know the “smart” people will say we were nuts not to gamble with stocks instead of staying with a lot of cash like they did. So what, as long as you can live a decent life with what you have and not go begging for food, you did great.

      Not everyone comes out a multi-millionaire. Heck, I know very successful people that never have bought stocks.

    • Old school says:

      By all measures we are in the biggest asset bubble of all times. It most likely will collapse as that is what history tells us will happen. Being out of stock market four years too early is better than being four weeks too late. Remember Galileo that got sucked into stock bubble got out and then got back in at top in time to lose all his wealth.

      Really central bankers aren’t that smart. It’s really a deception game against the common man. John Law backed French currency with Mississippi swamp land stock. Fed has fiat backed by NASDAQ stocks. Let NASDAQ crash and financial system falls apart. If future income can’t support the asset price it is a bubble.

      France couldn’t afford 5% interest rate, just like US can’t afford 5%. That means you have to play games with money as long as you can. You are better off if you admitted you were broke before you started printing.

      • Jon says:

        But I don’t see FED letting the asset bubble burst

        It can go on for long time
        From here say it increases 50 percent more and then bursts 30 percent for example… people would still come head.

        • RightNYer says:

          I don’t think the Fed has as much control over it as people think they do.

          When this house of cards finally collapses, it won’t just be 30%, believe me.

        • MonkeyBusiness says:

          When the stock market crashes 30%, they will call for a market holiday. The market will be closed until morale improves ;)

          So easy.

        • Jdog says:

          If you think the Fed is all powerful, then you do not know enough about the subject. The Fed has never been able to prevent a collapse in it’s entire existence. It could not do it in 1929, 1933, 1974, 1980, 1990, 2001, or 2008. The one that is coming will be larger than all of those, and possibly combined, and it will be something that we may never recover from in our lifetimes…

        • Swamp Creature says:

          I can see them limiting cash withdrawals from ATM machines to $300/week if there is any hint of a bank run.

      • Volvo P-1800 says:

        That was Newton, not Galileo.

      • historicus says:

        The Dow made an all time high in 2007 at 14K. Fed Funds were circa 4%.
        In 2018, Powell, to his credit, attempted normal rates..ie Fed Funds equal to or in excess of inflation (the norm pre 2009). In December of 2018, with 2% Fed Funds, the market shed 5K Dow points in three weeks.
        The thresholds of what the market can “take” is lower and lower.
        Now we have inflation at 4% and still Fed Funds at zero. Ever happen before?
        The threshold of what the market could bear Fed Funds rate wise is probably 1% or less…
        The theft from the holders of nationally backed currencies is enormous and dastardly.
        Central Bankers (the Fed) write their own rules, and abandon the instructions, agreements, and mandates under which they are allowed to operate. Congress, sadly, enjoys the free money.

    • Swamp Creature says:

      Don’t feel so bad. I’m in the same boat. I earned .57 last month on my BYN Mellon Treasury bond fund, with over 57K invested. Losing purchasing power to boot. What am I suppose to do? jump in the long term Treasury Bonds and lose 30% when interest rates spike upward? Hell no. And the stock market. Price earning multiples are out of sight.

  36. BigAl says:

    I think this time it *really is different*…though not in a good way.

    When the pandemic first hit – there were dire predictions about cities and towns becoming insolvent quickly because of the destruction of their commercial tax bases.

    That didn’t happen, it turned out, *not only* because of fed->state->cities/town aid – but *also* because of the prodigious increase in assessed property values – which enabled residential tax revenue to largely offset losses elsewhere.

    Doubtless the fed recognizes that – and this introduces yet more resistance to enabling a housing price correction.

    One of the (many) downsides is that this *does* eventually cause problems for the property owner in the form of rising tax obligations. The property may appreciate in value – but it costs more to “service the asset”, if you will.

    It won’t be all that long before “homeowners take out HELOCs to pay their property taxes” becomes front-page news.

  37. Heinz says:

    “It won’t be all that long before “homeowners take out HELOCs to pay their property taxes” becomes front-page news.”

    For retired homeowners I thought reverse mortgages were also being used for that purpose.

    Reverse mortgages represent another banker scam.

    • historicus says:

      Tom Selleck says no. (ha)

    • Turtle says:

      In Texas and a few other states, seniors (and in some cases, the disabled) can opt out of property tax until they’re dead. Their estate will pay it with penalties. I know a couple who owned their home free and clear but could no longer pay the property tax. This was a huge relief for them.

  38. 91B20 1stCav (AUS) says:

    Petunia-Shazam! And thank you!

    may we all find a better day.

  39. Breamrod says:

    his opinion don’t mean shit. He’s not a voting member. Yellon and Powell will destroy the dollar. Housing continues up with all risk assets

  40. Auldyin says:

    Wolf, another stonking article.
    First a plug for me. What’s different from,”happy as Larry sailing along at 3%”(mine, previous) and “willing to run moderately above 2% for some time” (his) ???
    As I read, I thought, how the Hell did this guy get past the PR department? He was saying all the stuff the Wonks argue about behind closed doors before the PR people come in and ‘polish’ the message on narrative for their pals on the media. Last para gives it away, he doesn’t vote, so he doesn’t count as far as PR is concerned. At least we know what they are arguing about. Priceless.

  41. MonkeyBusiness says:

    Given that states will be reopening soon, I wonder what’s going to happen with rent/mortgage forbearance. Will a lot of people be owing back rent/mortgage payment?

  42. Bobber says:

    So where are the legislative bills to curtail the powers of the Fed? It’s 12 years past the Great Recession and the Fed is still repressing interest rates and printing money as though we are in a perpetual emergency situation. At this point, they are just hand-picking winners and losers in arbitrary or unfair fashion.

    Also, who gave the Fed the power to experiment with modern monetary theory? Who gave them the power to establish a 2% inflation target? Who allows them to base 25% of the CPI on a guess (for homeowner’s cost), as opposed to actual market prices?

    Legislators are sleeping on the job. The leaders on both sides all say nothing about the biggest issues in our economy. They’ll argue endlessly about who gets a temporary tax cut, or a VISA, but they don’t care if the USD lose 5-10% purchasing power each year, or deficits are 10% of GDP or more. WTF!!

    • historicus says:

      Agree whole heartedly.
      First to provide temporary liquidity, now digitally minting (27% M2 gain) in a year, all by an unelected committee and likely one person. The power to mint is a Congressional Power, and at least they must answer to voters every two years.
      Instructed to FIGHT INFLATION with a stable prices mandate/instruction, they openly promote JUST THE OPPOSITE…..INFLATION. Remarkable that this unelected body, and likely one person, can impose an inflation TAX on the citizenry. This also is a power reserved to Congress.
      Fed Funds 4% below inflation….ever happen before?
      For the entire 20th Century and until 2009, Fed Funds equaled or exceeded inflation. Since 2009, pegged artificially below.
      The Lender is Slave to the Borrower.
      Who is the greatest borrower in the world?
      Who empowers the Fed?
      Same answer….and that is the problem

    • Heinz says:

      Fed is now a rogue central bank ignoring its mandate on currency stability and doing central planning functions that would have made old Soviets jealous.

      As if its economic activism were not enough, Fed has just made climate change and race part of its purview.

  43. historicus says:

    The mandates of the Fed are BOTH the INSTRUCTIONS and the AGREEMENTS under which they are allowed to operate.
    The Fed is in constant violation of the second and third mandate (don’t play the dual mandate game)
    Second…..Stable prices. Stable means ‘fixed’.
    Third….Moderate Long Term Interest Rates….maybe the most important mandate, and the one purposely omitted with the “dual mandate” game.
    Moderate means “not extreme” and that door swings both ways..
    Too high is punishing, too low is also punishing and opens the door for irresponsible debt creation that can empty out future generations by essentially pulling that wealth forward to “fluff” the present. That is where we are.
    Record low long rates for nearly 12 years has allowed just that. And now the MMT excuse, by design.
    How else to justify $21 Trillion in new national debt in just 12 years.
    $9 Trillion for the first 215 years…..then an additional $21 Trillion in 12 years.

  44. Lisa_Hooker says:

    Wolf, another one. Not nit picking, just an update for the archives ;-)

    “… [the issues would be resolved] withing 12 month.” Should be within instead of withing.

    • Wolf Richter says:

      Now you sent me to the dictionary :-]

      Withing: “a willow twig or osier. any tough, flexible twig or stem suitable for binding things together”

      That’s why the friggin spellchecker fell asleep.

  45. Winston says:

    Gosh, central planning always works so well, doesn’t it, especially when it involves controlling the world via the price of money calculated using garbage computer models based upon simplistic garbage economic theory fed with inadequate data points and with the data that is fed into the models (ex., CPI) having been manipulated for political reasons.

    Proven to be so wrong so many times, but not changed because those in a position to change it, pols and the “elites,” benefit greatly from it.

    • drifterprof says:

      It’s not really “central planning” in the sense of the planning being a function of a central federal governmental bureaucracy.

      It’s more a peripheral, large private financial oligarchy implementing this “planning” — functions that they are not legislated to perform, but have usurped the power.

      • Winston says:

        I’m completely aware of that and how does that differ from what I said?

        The politicians benefit by forever being able to promise much more than they can fund via tax receipts because “deficits don’t matter” and the “elites” benefit in a two steps forward (bubble), one step back (bust) process when REAL assets are available at fire sale prices to those with large cash reserves.

  46. MonkeyBusiness says:

    I expect the housing market in California this year to be HOT. With worse than expected drought, the stage is now set for extreme fire season. More houses burning means that demand for existing homes will skyrocket.

    It’s a good thing I listened to SocalJim!!!!

  47. Winston says:

    The interest on the national debt in 2020 was $523 BILLION dollars. Why can’t I find an analysis of what will happen, even approximately, to that amount if The Fed morons raise the prime rate to fight inflation, assuming we aren’t at the start of stagflation.

    I’m trying to figure that out on my own.

    CBO’s research found that over the long-term, an increase in the debt-to-GDP ratio of 1 percentage point is associated with an increase in inflation-adjusted 10-year interest rates of .02 to .03 percentage points.

    So, WHY does this data so conveniently end on 1 Jan 2019?

    Gross Federal Debt as Percent of Gross Domestic Product


    • Wolf Richter says:


      To figure it yourself: US gross national debt ($28.2 trillion) divided by GDP in current dollars in Q1 annualized ($22.0 trillion) = 128% of GDP.

      • Winston says:

        So, why can’t THEY graph that? Looks too bad? 128% now – 105.77% on 1 Jan 2020 = 23.23% increase in 17 months!

        • Winston says:

          And, even worse, there’s the issue of the GDP itself being inflated because its calculation includes debt-based government spending, thereby creating the illusion of productive growth:

  48. Jdog says:

    The real question is, how long will the average American believe the lies they are being told?
    Everything you are being told by government, and main stream media is a lie. Idiotic economic policy is driving inflation, and shortages, not to mention government deficits that are absolutely staggering and are going to require massive tax increases to service.
    Our State just got a shock, when several of the County Assessors announced that the average property tax assessment in the State is being increased in the neighborhood of 28%. They are trying to say that will not translate into much higher taxes, but anyone who believes that is a complete imbecile. Our country is being ruled by criminals and incompetents, and it will translate into lower living standards for the people. I guarantee it.

    • Swamp Creature says:

      “and it will translate into lower living standards for the people”

      I think this has already happened. And you are only seeing the beginning. It will get much, much worse

      • jon says:

        As I mentioned in my previous comments, at least in Southern California, I ma seeing the standard of lving going down over time.. high cost of housing and too many people a making life tough for everyone.
        One of my friend lives in a very expensive neighborhood. His next door home was sold for 2.5 million USD last month and 3 families moved in , in that home. This is the story of many so called good neighborhood in San Diego. Streets are all taken up by cars parked..

  49. yxd0018 says:

    Is it consensus now that corp invest big into equity and RE just to ride up the inflation? If so, any retraction to the mean is really hard in the short term as they have nearly unlimited backing by the FED.

  50. cb says:

    He is a typical FEDster. A self important BS artist who makes a living by enriching the wall street/ banker/ speculative class at the expense of the unconnected class.

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