When Fed Doves Get Hawkish… Balance Sheet Runoff Should Start at End of Taper, First Half 2022: Bullard

“Inflation could be a lot more persistent than we had hoped.”

By Wolf Richter for WOLF STREET.

Right after the Fed ends its asset purchases in the first half next year, the Fed should start reducing the assets on its balance sheet by letting maturing bonds roll off without replacement, said St. Louis Fed president James Bullard, a monetary-policy dove who will rotate into a voting slot next year, in an interview with Reuters.

“Everything can occur much faster than it could have in the previous recovery,” he said, pointing at economic output that already exceeds pre-pandemic levels.

“We should start to allow runoff of the balance sheet,” he said. “We could get going on that process at the end of the taper” next year. “That would be a natural time to do it.”

This is the first time in this cycle that a Fed official put a time stamp on when the asset reduction – the QE unwind – should start. Fed Chair Jerome Powell had previously said that the Fed would eventually do this, and everyone brushed him off, but now Bullard wants to see this happen starting about mid-2022 before the Fed even begins to raise short-term rates.

During the last QE-unwind, the Fed – after it had started raising short-term rates – reduced its assets by 15%, from $4.45 trillion in November 2017 to $3.76 trillion in September 2019. Mortgage rates hit 5% in November 2018, stocks fell, and in September 2019, the repo market started blowing out.

This time around, the Fed would be better prepared to deal with markets going haywire because in July it implemented the Standing Repo Facilities for repos and reverse repos, which it had before the Financial Crisis but replaced with QE. This time around, with the SRF in place, the Fed wouldn’t need to come up with ad-hoc solutions.

Bullard didn’t specifically say this, but a reduction in assets on the balance sheet would allow long-term yields and mortgage rates to rise. With the short-term rates still initially locked into place by the Fed, the yield curve would steepen, which would be a good thing, and would allow the Fed to then raise short-term policy rates without flattening the yield curve.

Bullard has for months been fretting about the “threatening housing bubble” the Fed is fueling with its massive purchases of mortgage-backed securities.

He said he expects inflation, as measured by the lowest lowball inflation measure, core PCE, to still be at 2.8% by the end of 2022, well above the Fed’s target of 2.0%. Core PCE most recently hit 3.6%, the highest since 1991.

While inflation may ease somewhat, it will take more effort by the Fed to ensure that happens smoothly over time, and never requires the sort of restrictive policies that could imperil the current expansion, he told Reuters.

Inflation, he said, “is going to stay above target over the forecast horizon. That is a good thing. We are delivering on our…framework.” This new framework calls for inflation to run above 2% for a while to make up for the years it ran below 2%, as measured by the lowest lowball inflation measure, core PCE.

“There is now a risk we are going to overachieve and be too high for too long,” he said. “How much of that do we want? That is the key question for the Committee over the next year.”

The exact start date and pace of tapering of the asset purchases hasn’t been announced in the FOMC statement yet, but will likely happen at the next meeting on November 3. Fed governors have come out and supported a start of tapering in November and be done with it in the first half – at which point, no new bonds would be added and only maturing bonds would be replaced, which would keep the Fed’s assets flat. That would be the completion of tapering.

It would likely take a “very large shock” to throw the process of tapering off course, Bullard told Reuters.

Bullard proposed today to start the next step – the actual reduction of assets on the balance sheet – right then and there.

The assets on the Fed’s balance sheet would be around $8.5 trillion by the time the Fed stops adding to them, and Bullard told Reuters that there was no reason to hold on to them.

The FOMC has not yet begun those discussions, he told Reuters, but “I don’t think it is too early” given the surprising speed of the recovery and the concern about inflation.

Even if long-term Treasury yields rise steeply next year, they will likely remain below the rate of CPI inflation, and therefore “real” Treasury yields would remain negative, which would still provide a highly stimulative fuel in the most grotesquely overstimulated economy ever.

In terms of short-term interest rates, Bullard said he sees two rate hikes in 2022, on concerns over the global supply shock and above-target inflation becoming anchored. Over time, he sees short-term rates slightly above 2%, with inflation back to about 2%, which he estimates would be about neutral (neither stimulative nor restrictive).

But with the assets on the Fed’s balance sheet being reduced, long-term rates would theoretically meander higher, removing stimulus off where it really matters – long-term borrowing costs.

It may all work out “and we will converge into bliss at the steady state where inflation is at 2% and we never change the funds rate again,” he told Reuters. “That is the current scenario,” he said. But “we all know reality will probably be something messier,” he said. And “inflation could also be a lot more persistent than we had hoped, and in that case, we will have to recalibrate how we are going to keep inflation under control.”

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  114 comments for “When Fed Doves Get Hawkish… Balance Sheet Runoff Should Start at End of Taper, First Half 2022: Bullard

  1. Minutes says:

    These central banks are learning that they can’t print energy. By pushing so much money into economies everywhere we have massive instability now…Wherever you feel we will be on the “Green” future, we aren’t there yet. By curtailing investment and squeezing ability to produce energy the world over, we are starting at an ugly picture. When some in Europe can’t heat their house this winter, I doubt they will be concerned with CO2 emissions.

    • Old School says:

      They will probably kill us with unintended consequences of green energy like they most likely did with unintended consequences of gain of function research.

    • Cem says:

      Kind of a strange way to bring up how you don’t agree with clean energy alternatives.. still can’t decipher what the connection is according to you.

      Ironically though if we were where we needed to be with all of that tech it would mean fuel shortages wouldn’t even be a concern right now or really ever.

      • Minutes says:

        Its not about agreeing with anything regarding clean tech. Reread the post. Survival comes first. You know, heat and food. I wonder how the economy will do with 20 dollar equivalent Nat Gas and 8 dollar gasoline? Poorly I would guess. Perhaps a bridge to the future. This is more like a trap door.

        • Seneca's cliff says:

          The solution is clearly wood stoves burning federal reserve notes because that is clearly the only fuel source that is infinite.

        • Wisdom Seeker says:

          If inflation rages long enough, there will come a point where a $1 bill is worth less than its energy-equivalent in wood or paper…

          The penny and nickel are now worth more in melt-value than monetary value… sooner or later paper money will have more in burn-value.

        • Citizen says:

          We would be doing just fine with a modern infrastructure based on solar, wind and thermal with advanced battery tech and some nuclear and cleaner nat gas as backups ….. if we had gotten going 10-20 years ago and the argument will be even more so 10 years from now with just much costlier and disruptive events due to climate change and pollution.

          That’s to say nothing of all the jobs, bankrupting our enemies and all the benefits of a new modern infrastructure. Man, it’s frustrating having to explain this still to the Fox propaganda lovers. There isn’t one single aspect that wouldn’t be far better with a move to clean, modern infrastructure…only that some things would change a little…ooooo scary!?!?!?!?

        • Harrold says:

          Heck, if only we spent a little bit of money of the Iraq invastion money on insulating houses…

        • Sams says:

          Those gas and petrol prices may arrive soner rather than later anyway. As the market work, if not manipulated, it is the price of the most costly produced barrel of oil that set the price.

          With the easy extracted oil used a larger part must come from the sources expensive to develop. The price then rise, “Green”, politics or not.

        • Les says:

          Green Energy was always really about the inevitable peak in oil and gas production 50-60 years down the road and the need to make infrastructure changes that take almost as long to avoid the price shock. What we see now is crude oil and natural gas are reverting to the price levels where drilling current reserves is economical. When QE ends, we may see another drop in energy as in 2014.

          Realistically, $85 crude oil is need for shale and $ 115 for deepwater drilling.

      • Old School says:

        I am OK with progress on cleaner energy, but call me sceptical about the political process.

        If government was concerned about clean energy why did we allow China into WTI and then offshore manufacturing to the most environmentally dirty place 20 years ago and brag we reduced emissions?

        Why did we outsource manufacturing so that Amazon delivers a 1 lb. package of trinkets from 10,000 miles away?

        Why do rich people who believe in global warming have 7 homes and fly on private jets. Every lb. of material in a home contributes to global warming so if you have 7 mansions you full of you know what if you claim you care about green house gases.

        How is Musk up in the top 5 in riches and his company has burned through billions of dollars yet to achieve a net positive return?

        For the most part if you are living on a lower income you are probably 10,000 times greener than the green billionaires lobbying Congress.

        I realize it is the rich that get the laws written, but don’t screw up consumer energy market like Germany did.

        • Felix_47 says:

          Infrastructure…..20,000 dollars to take care of a child so the mother can earn 12 bucks an hour at McDonalds? WTF. and one third of all working age males are not working, not looking for a job and not on unemployment. I wonder if they are paying child support. Problem is our graft laden politicians cannot do infrastructure. They can only do what they and their families are paid to do. That is why the majority of US companies are headquartered in Delaware…..the economic wisdom of the senior senator…..he said it.

    • Don says:

      Minutes,

      “When some in Europe can’t heat their house this winter, I doubt they will be concerned with CO2 emissions.”

      The obvious solution here is to pump lots of CO2 into the atmosphere so that so that they won’t have to worry about cold winters.

    • Djreef says:

      The Europeans can’t heat their houses because they’re gas slaves to Putin. This is what happens when you put all of your eggs in one basket and ask Grogu to carry it.

    • Maximus Minimus says:

      These clowns are responsible for a lot of greenhouse emissions by giving rise to bitcoin mining. Raise rates, kill bitcoin, green the planet.

      • Thomas Wolfe says:

        Bitcoin: Proof of work
        US Dollar: Proof of war

        Money always has a price tag attached.

      • Michael Gorback says:

        When crypto moves to proof of stake the massive energy consumption of proof of work will evaporate. You can run proof of stake on your laptop.

    • RH says:

      The supply chain bottlenecks exist, which are cutting into gas and other energy production, but they are not related to any “Green” future plans. For example, reportedly, in Europe the wind has temporarily declined significantly, so their wind farms are generating less. I predict that we will see more freakish events like that in the future.

      I love those who are talking about China fighting to reduce its carbon emissions by regulating its power generation to cause many, major blackouts. LOL. That is not what they are doing at all!

      See the article “Coal prices are skyrocketing as an energy crisis in China rages” in business insider as to the shortages. Closing down every area that has outbreaks every time is not working out well for their productivity. As to those who think that the CCP or other world leaders plan everything very carefully, read about Roman Emperors, like Nero or Caligula. Sometimes seemingly “normal,” mass murderers do crazier stuff.

      Trying to normalize irrational behavior is itself crazy. If Caligula were around now and governing China, commentators would be congratulating him on his incisive social commentary and innovative political strategy of making his horse, Incitatus, a Roman Senator!

    • Roger Pedactor says:

      The Fed isn’t pushing greenness until Brainard is in as Chairwoman.

      The lack of appetite to invest into more fossil fuel reserves is strictly due to the Green Mafia as Europeans refer to them that I know.

      My buddy in the shale fracking fields is busy as hell but they can’t expand more to sites. The shareholders won’t let them and the government won’t give them a straight answer.

      They are exporting more than the U.S. is buying comparatively.

      So I ask the question:
      When you can’t afford electricity, heat, or gas and manufacturing is shutting down already and we are lowering emissions at the cost of things we take for granted what is the “Green Mafia’s” response? Because in my eyes that’s antihuman. Is it ok because man is a blight on Earth and should die or at least struggle severely? Because Brainard is going to get in there is no doubt in my mind and no matter how much money you throw at everything but fossil you aren’t covering the gap that exists to maintain the quality of life that already exists.

      • Felix_47 says:

        Fossil fuel is energy dense and portable. Nothing is even close. And the planet would have no major problem with fossil fuel if we had the population we had in 1970 and it was stable. Problem is that populations are exploding worldwide especially in the Middle East and Africa and Central America and most of Asia. High population with fossil fuel is not going to work. So either the Afghans and Africans and Haitians continue to have four and five children per woman and export their surplus population or they control their growth and we stabilize world population. That seems more sensible than trying to convert to wind and batteries and solar without anything else. The rest of the animals in the world might be thankful as well.

  2. Yancey Ward says:

    I am still waiting for the 10Y and 30Y to breach the March 21 levels. For me, long rates will have to pierce through that 35 year down trend line for me to change my prediction for sub-zero 10Y and sub 1% 30 Y. That still hasn’t happened despite 10 years worth claims that interest rates are heading higher.

    • Minutes says:

      Low rates are making things worse, not better. A negative 10 year won’t be helpful…and no, it wouldn’t shock me but remember they will fight it and try not to invert at zero bound. The whole thing is ugly.

    • Wisdom Seeker says:

      Between yesterday’s move and today’s, the 10 year is on track to breach the March 2021 high of 1.74% next week.

      Even if it moves at the slightly slower pace of early 2021, it’ll get there by the end of October.

      Unless, of course, we’re all being gaslit into inflation-panic in order to move the markets around and allow a whale to get a better entry point on a big trade…

      • Djreef says:

        Does it feel like we’re being gaslit? Do you not do your own shopping?

      • Jay says:

        As you pointed, the FED is printing so much money that they can’t let interest rates rise very fast or too far. If these infrastructure bills are passed, we’re looking at minimum $1.5T annual deficits over the next 10 years. If the FED lets rates rise very much, the interest on the debt will balloon from ~$525B to $1T which would be very, very bad.

  3. Jay says:

    It took the FED about three years to start unwinding its balance sheet the last time, so let’s not hold our breath thinking Bullard is going to get his way. Once its all said and done, the FED’s balance sheet will be close to $10T. There’s no way the FED manages that process effectively without spooking financial markets. The same thing can be said about their ability to taper $120B monthly in QE and to raise interest rates in a timely & prudent manner.

    • Wisdom Seeker says:

      As of last week, the Fed had printed $4,331,187,000,000 in the 2020-2021 crisis, more than doubling it’s pre-COVID balance sheet.

      “They printed up $4,331,187,000,000 and all I got was this lousy Inflation” – 2022 T-Shirts everywhere ($50 each!)

  4. Old School says:

    I think they have a plan whether it will work is another question. They have allowed fiscal policy to carry the ball now that they have real rates negative. They are hoping they can reload monetary policy while government borrows for less than nothing.

  5. COWG says:

    “Inflation, he said, “is going to stay above target over the forecast horizon. That is a good thing. We are delivering on our…framework.” This new framework calls for inflation to run above 2% for a while to make up for the years it ran below 2%, as measured by the lowest lowball inflation measure, core PCE.”

    Is my math off?

    How can you run inflation higher in the future to make up for less in the past ? I don’t see how that is possible when you are starting from a point today that already has the previous inflation added to it… wouldn’t you have to actually deflate to correct an inflation marker from 5 years ago to bring that figure up to 2 percent based on the amount of money these fools have printed?

    Can one of you really smart guys or girls help me out here?

    • Bruski says:

      Moving target.

      When you can’t hit it, move it!

      Semper Fi.

      b

    • Roger Pedactor says:

      This is an unanswerable question. Just like the question I posited regarding green everything but no regard for current standard of living.

      They are basically hypothetical.

  6. Rory says:

    Wolf, love your stuff but huge missed opportunity not titling this article: “When (Fed) Doves Cry.”

  7. Bruski says:

    The Fed is totally out of control.

    There is no way that they can “face the music”.

    My guess is that at some point (who the hell knows when) the dollar will collapse into a worthless currency.

    Then comes the “reset”.

    Meanwhile; fasten your seatbelts.

    B

  8. Yields on the rise, and a whole lotta cash just got pulled out of stocks. I thought this was what they would have preferred all along, to force reallocation and thereby fund government spending (without destroying the equity market). Now its pretty hard to see stocks, labor tight, earnings compressed, go ahead, keep your tax cuts, you are going to need it. Market investors got a whiff of it today, they are expendable.

  9. davie says:

    Or put alternatively, following a botched vaccine drive, increased political tensions around international markets, and a huge backlog of supply chains and in trade routes:

    “The Price Gouging could be more persistent than we had hoped.”

    But that would put the onus on the people actually making the call to increase their prices.

  10. otishertz says:

    Gee, I wonder what would happen if the Fed stopped buying MBS?

  11. YuShan says:

    Nobody believes the Fed anymore. We need to see a decent bear market in stocks without the Fed blinking before people will believe that they will really fight inflation.

    • YuShan says:

      Having said that, now that Fed staff have cashed in their own stocks at the top of the market, they may have become somewhat more credible in that respect.

      It is sad how we have to take into account the lack of ethics in our morally bankrupt institutions.

    • Old School says:

      I read some of Bullard’s comments and I think they are going to try to convince us of something the know is not going to happen.

      Sounds like Bullard was saying they are going to taper and then let balance sheet run off back to a normal level and they are going to raise interest rates after taper is done. They will be wrong again, we just don’t know how.

  12. Ralph Hiesey says:

    Color me pessimist about this whole taper thing.

    Seems to me the Fed has been reliably acting like the FDIC for the bond market.

    Wonder what would happen if the FDIC said–“we’re going to start tapering down our coverage of your bank deposits in a couple of months Not to worry, we have tremendous confidence in how great our banks are”

    And now a Fed guy who thinks not only that, there will be lots who will eagerly buy our stuff when we start to sell our balance down.

    Wouldn’t say that’s going to be good for Democrats in 2022.

    • Wisdom Seeker says:

      Ralph, great comment – just want to add that inflation is already tapering FDIC coverage exactly as you say. At least in terms of what the insured $250,000 will actually buy.

  13. Poor like you says:

    Reminds me very much of 2008, insofar as the markets and Fed officials keep saying, “There’s nothing to worry about, everything is going according to plan.”

    Meanwhile, they keep the economy’s engines red hot even as it approaches max-q condition. If policymakers want to avoid a catastrophic economic explosion, they must throttle DOWN.

    The economy will survive only as long as the system can support the pressures exerted on it. Those pressures are only increasing and multiplying over time.

    • polecat says:

      Yes. ” There’s nothing to worry about, everything is going according to plan” Fed speak for : ‘Inflation for thee, you dirty little peons ..

      .. As for MY highbrow insider-trading – what inflation?? – I don’t see no inflation ….. for moi ..’

      And so, should one or more be caught doing what would otherwise put a plebe in PMITA Prizon, they’ll scream ‘I didn’t know!!’ HONEST!.. as they jump, pulling the golden ring-cord on their precious Eccles parachute!

      I so hate these fedhead hypocrites.

  14. David W Young says:

    Kind of like what the characters in a Charlie Brown comic strip heard when an adult spoke: “Wa Wa Wa Wa Wa”. Only a carnival barker could say one thing one minute and spin around the next minute and say something 180 degrees the opposite. Like the shell game concession, now you see it, now you don’t. The steepening of the yield curve is already happening, Sir Bullard, not to be impertinent. Mr. Market has a way of forcing bureaucratic minions’ hands when valuation inputs like roaring inflation are screaming for recognition.

    Interesting that he would single out the housing market as the one bubble to worry about with money printing to the Moon, but how about the cash market, the bond market, and the stock market. They are not also in nosebleed territories???

    Today’s stock market action, timberrrrrr seems to come to mind, is a case in point. Somehow, someway, stock investors are finally waking up to the fact that the much bigger Bond Market is throwing a hissy fit and has been for some time since August of 2020, with a temporary recovery now in the rearview mirror in 2021. Could true price discovery be coming back to U.S. financial markets, based on economic fundamentals and historic metrics of value? What will we do with the Fed if normal market function takes over?? You needn’t ask!!

    Not only have I sent a year’s supply of Pampers to the Fed, but I am delivering at least a dozen dispensing machines of same to the trading floors of the NYSE. There is a supply issue here because it appears the Chinese are actually hoarding these vending machines, but we are assured that sufficient supply will be shipped before November 3rd.

    These guys had better have their annual physicals ASAP, because very trying times for stock traders have just entered the room. Remember to put both arms into the air above your heads, boys and girls, as the equity rollercoaster takes the Plunge of the Deadly Air Pocket. There will also be an air pocket in corporate earnings coming up, but that ride is sit sitting in the launching pad. What goes up on hot air, must come down in a hail of dust.

  15. YuShan says:

    The way these guys work remains weird. Now they are finally admitting that things are running much hotter than they had anticipated, but they are still throwing gasoline on the fire! And they will keep doing that far into 2022.

    Tapering is not tightening. Only once they let assets roll off when they mature are they somewhat tightening. And still not really, because the excess reserves are massive (as you can see from the reverse repo). The only real tightening is when they start raising rates. And that will be in baby steps that hardly matter until they get to a couple percent.

    Of course, when markets start freaking out over it that can cause the most effective tightening. But once you get a panic, it will be very difficult to control.

    That is why you should never allow bubbles to form. History has shown that time and again. Unfortunately, intentionally blowing bubbles has been the official policy for 20 years now.

    • Minutes says:

      Yes and as Wolf has stated before the inflation thats happened in the last 18 months is permanent. It isn’t transitory.

      • Poor like you says:

        Because the very last thing that the entrenched financial elites want is massive deflation.

      • KGC says:

        The inflation of the 70-80’s lasted 13 years. That’s a temporary period of time to use as the benchmark for the FED.

    • historicus says:

      “The way these guys work remains weird”

      Not when you assume they lie to you…then it all lines up

    • Old School says:

      If you listened to J Powell and J Yellen they were kind of hinting that bond funds and some hedge funds are going to blow up when there is an interest rate hiccup.

  16. Dudu says:

    “Inflation could be a lot more persistent than we had hoped.”
    Hahahaha what a bunch of 🤡 clowns…. taking us as fools… but what we’re going to do ???

  17. KGC says:

    “…reality will probably be something messier.”

    Yes. Yes, it will.

  18. Dudu says:

    *I forgot to add:

    The more and more I think the strategy is to make the people poorer… like poor to just afford food.

    Poor people don’t pollute as much.

    The establishment want the goods only for themselves.

    • qt says:

      You will own nothing and be happy!

      – New World Order

      The rich will own everything and be happier!

      – FED and Central Banks

    • Ron says:

      Government will simply nationalize our 401 and pension money everything fixed as we beg on streets elites will run to there safe hideouts

      • TheRealMRDyno says:

        If social security is the third rail of American politics, touching private retirement accounts would be a salted nuclear device.

  19. RightNYer says:

    Looks like the BTFDers are out in droves.

    • Wolf Richter says:

      Looks like their mom called at around 3:10 pm and they went home.

      • RightNYer says:

        Yikes. This market is simply not investible.

        • Old School says:

          Our local electric utility stock is off about 12% as interest rates have went up lately. Gold and miners down too. If you listened to Harry Dent you have been getting clobbered on his 30 year Treasury call. Maybe he will end up right, but I knew it was too risky for me

  20. HotTub says:

    “Inflation could be a lot more persistent than we had hoped.”

    Duh.

  21. You already know what’s going to happen the same thing that happened in 2019, they’ll start tapering and then the markets will cry and they’ll come running back in with the money printer and start flooding the markets again and blowing these bubbles up even higher the Federal reserve is a joke.

    You know who put Kyle in the office, it was Wall Street all the cronies up there got together and told Trump to put pal in the office their buddy and then he got in the office and turned on those printing presses and is enriching the top 10% and where is all that money coming from that’s enriching them, it’s coming from the poor and middle class it’s called a wealth transfer it’s sickening and it’s sad and our founding forefathers warned us about this, Thomas Jefferson once said first by inflation and then by deflation if the banks are ever given the authority to issue currency, the corporations that will grow up around them will take over all the money until your children wake up homeless which they are for some people a lot of people can’t even afford to buy houses now they’re so expensive and rents are going up through the roof I don’t know what people are going to do and now the feds have their fake tapering talk. And even when Powell was given to speech about tapering he looked all sad and upset that they’re going to have to stop printing it’s unbelievable what’s happening. Eventually all this is going to implode and it’s going to be worse than 1929.

  22. Mark says:

    I guess we’ve all forgotten what a fed hawk sounds like. They say raise rates now. They don’t say maybe slow down asset purchases, which is really just slightly less dovish. They don’t have hawks any more. They just have less aggressive doves.

    We live in a centrally planned economy. And like all times in history, this ends badly. Capitalism is essentially crowd sourcing. It allocates resources effectively, but monkeys in gov’t have to leave it alone.

    We now have massive shortages and price spikes. That is what has always happened to planned economies in the past. Call it socialism, communism or any other “ism” that you like. It’s just another type of planned economy where some gov’t idiots think they know best. And never do.

  23. Brendan says:

    Kaplan and Rosengren knew when to get out. There has never been a bigger tell. In the history of tells.

  24. David Hall says:

    They might raise rates later. For now I worry about the chip crisis.

  25. Depth Charge says:

    These guys are fraudsters spewing lies. Nothing they say is the truth. They’re ripping off the American people – impoverishing them – to amass enormous personal wealth.

  26. Ron says:

    Government will simply nationalize our 401 and pension money everything fixed as we beg on streets elites will run to there safe hideouts buy a farm become self sufficient

  27. Auldyin says:

    “Bullard proposed today to start the next step – the actual reduction of assets on the balance sheet – right then and there.”
    God, these guys are a scream when they don’t actually have a vote.
    I’ll settle for a permanent end to QE
    If we get that out of all this, that’s a huge win for us ordinary folks.
    To actually reduce the balance sheet in the present circumstances has got to be a joke, because the Fed would be in direct competition for sales of bonds with the Treasury and you know what happens when there is competition for sales. The price goes down which means the rate goes up, even higher and faster than it will with the Treasury selling alone.
    At least the Treasury will put the money back in via deficit spending but, if the Fed reduces it’s balance sheet, the money is gone forever and the recession could be massive if all the goods and services become available again.
    He’s just selling his book and priming MSM for a much lesser move. IMO

    • RightNYer says:

      The money SHOULD be gone forever. Money added to the economy through QE was always supposed to be temporary. It was never intended to be permanent, which essentially means it’s just stolen from existing holders of dollars, rather than “borrowed.”

      • historicus says:

        Right you are…
        Bernanke, WSJ July 2009…… laid out how the QE would roll off, securities mature and not be reinvested, all would be fine. It was really a soothing, this is just a temporary measure assurance. AND IT SHOULD HAVE BEEN. But then …..

        This is when the backbone of a Volcker would have been needed. Markets back to the old highs (then 14K in the Dow) and unemployment at reasonable levels…..do what needs to be done. But we had the lower lip quivering Bernanke, then the robot Yellen.

      • Auldyin says:

        @RNY
        You are right in principle, of course, but in practical terms, it could send rates so high that the house of cards would come crashing down. That’s why I think a permanent end to QE is the best we can realistically hope for and even that isn’t certain by any means.

  28. coboarts says:

    “Inflation could be a lot more persistent than we had hoped.” It’s too bad these guys don’t understand their industry and how the economy works. They could at least read Wolfstreet. Or, “I’m sorry it took us so long to figure out, but we’re ready now for your requests for $15/hr” – or maybe not yet – how much inflation would equal $7.25/hr. Wolf, they might need some help with the math here…

  29. Rcohn says:

    I ask this question again
    Who would buy 10 year paper when the real rates are strongly negative?

    • NJB says:

      It only makes sense if you consider there is no good alternative. Asset price bubbles exist everywhere.

    • Auldyin says:

      @Rc
      In a desperate World a US treasury is probably the safest thing many people could ever hope to have. A 3% loss is nothing alongside a possible 50% loss.
      If that ceases to be true the USA is done.

      • historicus says:

        Exactly

        The Fed has set up a dystopia…

        Own fixed rate … lose to inflation

        Own equities….lose due to the rate hikes to fight inflation.

        So why did they promote inflation?

        • polecat says:

          Cuz they have ravenous jawbones .. like the sharks they are!

          How else can they gobble up all that chum.

          Somewhere in me mind, I hear Jeffrey muttering ‘We’re gonna need a bigger ‘float’..

      • Nick Kelly says:

        German bund still negative, so someone thinks it’s very safe.
        BTW: If the euro was to contract to the Frugal Five, while dumping Italy. Spain, Portugal and Greece, it becomes strongest currency.

        • Auldyin says:

          @NK
          Is there a hint of wanting to break up the EU in there?
          I’m told EU pensions are mandated to be invested in EU state bonds. If you’ve got to do it, you’ve got to take the loss. I wish my pension was in negative German bonds.

    • historicus says:

      Who would lend (buy MBSs) 3% below the inflation rate?
      Answer: The Fed.

  30. grant says:

    This post has me thinking about TIPS. Is there any risk to principal for short-term (1-5yr) TIPS in a deflationary environment? Thinking about if the Fed overreacts to unexpected inflation….thanks

  31. Marco says:

    If you believe that then you also believe in fairies, leprechauns and goblins

  32. gametv says:

    I saw that crazy lady Warren is calling Powell dangerous today. I think that he is not radical enough for her. She wants lael brainard as the Fed chair. My guess is that Lael is going to keep pumping the money longer.

    The Democrat control of the mass media (mostly) is the only thing that keeps the public from fully revolting against their incompetence. But independents are running away from the democrats currently. Afghanistan, immigration, COVID, financial deficits. First the Republicans elected Trump and tried to wreck their party, now the dems are doing it by following their progressive wing in full on socialism/reverse racism.

  33. Depth Charge says:

    “Inflation could be a lot more persistent than we had hoped.”

    As they buy $40 billion more in MBS. These deranged lunatics need to be stopped at any and all costs.

    • Depth Charge says:

      By the way, since when is “hope” a strategy? These guys should be arrested for fraud and dereliction of duty.

  34. historicus says:

    “It’s not transitory as we thought”

    Really? How come everyone saw it…but you guys didnt?

    The fact is you cant keep the false narrative up

    • Depth Charge says:

      They saw it, but they LIE. LIARS – CROOKED LIARS. That’s all they are.

  35. Rowen says:

    No relief from inflation in the auto sector. Hurricane Ida just created 200K cars of demand, where there is no supply… White House finally convened the automakers and semiconductor companies to a summit to work out the supply chain issues.

    • Old School says:

      Most of what politicians are doing is cover to look like they care about inflation when they are the problem. Best solution to most shortages is price mechanism. A politician has the wrong incentives to fix economic problems from inside the beltway. Too many unintended consequences.

  36. Nick Kelly says:

    Related to today’s topic, but more about WS 2 days ago re: China

    A nugget in ZH gravel

    “The Endgame Of Communist Rule Has Begun”: Evergrande’s Fall Shows How Xi Has Created A China Crisis

    BY TYLER DURDEN
    MONDAY, SEP 27, 2021 – 05:40 PM
    Authored by Niall Ferguson, op-ed via Bloomberg.com,

    The name of the author stands out. (NOT Burden)

    The relation to today’s topic is that China’s huge contribution to world GDP may be evaporating. Maybe this will lower inflation.

    I don’t how Oz can avoid a severe recession absent iron ore to China, because on top of that lost money, then its RE bubble bursts. (37% of all Oz exports go to China, with iron ore over 80% of that.)

    • Old School says:

      China had a good thing going, but they got greedy and stole too much technology. I think Uncle Sam had to kill off China taking over the high tech sector before it was too late. US got tuff.

      Maybe it’s not too late to get some rules of the road, but seems like China and US are both struggling with all the imbalances between the countries.

      • Red says:

        I remember when China would buy the old huge $5,000 kinkos machines that were scrap at auction. Shipped them in container ships to China in the hopes that the hard drives inside of them were not properly wiped of all the copies that were made.

  37. historicus says:

    Question the premise…

    “2% inflation target”

    That’s 22% off the dollar in ten years…..and that is supposed to be “stable prices”?

    No. The Fed doesnt get to lay taxes on the American People. A 2% tax on the holders of dollars would not pass a vote by congressmen who must answer to voters. So why is it an unelected body can ignore its mandates and pass an inflation tax upon us?

    • Dan Romig says:

      It takes 34 years and 240 days at an erosion rate of 2%, continuously compounded, to turn a one dollar bill into fifty cents.

      That, my friends, is the official policy and mandate of the Federal Reserve System of the USA.

      • Auldyin says:

        @DR
        I’ve got a cure for that.
        All they need to do is put one of these little electronic counter displays on each note and have it count down day by day. So 100c on Friday would show 95c say on Monday. That would get them rushing out to spend pronto.
        Don’t give the Fed that idea, by the way, they might be crazy enough to try it.
        Just sayin’

  38. dd says:

    Why should anyone believe anything coming out of the Fed? How can we trust the information when we know they trade on it? The Fed is compromised at this point and allowing miscreants to retire without an open and thorough investigation by the SEC and the Justice Department is just more evidence of a total lack of integrity throughout the financial system. Think of all those freeriding off the Fed trading and the multimillions being skimmed from everyday investors and us saps stuck in 401ks. Sure it’s just an “ethics” violation! (Hint: another lie in a long list of lies including inflation.

  39. Yort says:

    J-Pow might want to start listening to those (wiser) who see structural inflation as anything but transitory…

    Bloomberg, WSJ, and FT article titles released just today:

    Bloomberg:

    “Fed’s Infighting Shows It Lacks Answers About Inflation”

    Bloomberg:

    “Everything Is Getting Costlier”

    WSJ:

    “What if Inflation Is Here to Stay?”

    FT:

    “Bond sell-off is a warning to the Fed”

    • Yort says:

      And a fun article from Bloomberg yesterday giving the truthful state of American Stonk Market Casino, in which the Feds themselves actually admit to insider trading (and the get to cash out and keep the profits):

      ‘Most Americans Today Believe the Stock Market Is Rigged, and They’re Right’

      New research shows insider trading is everywhere. So far, no one seems to care.

      • polecat says:

        I think that for many, it’s NOT about caring little of what they see – they most certainly do.. but about holding tight, whilst the many 20%ers; the PMCs, the wokerati, the control freak pols -both the D$ and the R$, the various Wall$teet Tubeworms .. All working on behalf of some, or several, oligarchii .. as they whistle past the Compliant Mokestani Graveyard ….. not grokking that eventually, all the angry spirits of the spat upon, just might in the end, prevail.

  40. SpencerG says:

    I burst out laughing at one sentence about inflation from him… ““There is now a risk we are going to overachieve and be too high for too long,”

    Only a Fed Governor could think that inflation running hotter and longer than INTENDED could prove the Fed to be a bunch of “overachievers.”

    • Wolf Richter says:

      Glad someone caught the humor! I cracked up when I read that. These people can be funny when they aren’t trying to be.

      • SpencerG says:

        Two hours later and I am STILL laughing!

        • David H says:

          This sh*t ain’t funny to me. I didn’t get a raise/COLA at all for a couple years.

          What planet do these people live on where inflation is a good thing and overshooting a 2% arbitrary, garbage inflation metric is a good thing?

          This has real impacts to real people. The next person that laughs at this gets the taste slapped outta their momma’s mouth.

          Millennial here, now out of the closet :)

      • Frengineer says:

        They’re overachievers at betraying their mandates (:

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