Enough of this “Bond-Markets-Don’t-Buy-Hawkish-Fed’s-View” Nonsense: It’s the Fed’s Reckless Interest-Rate Repression

Bond Markets will buy Hawkish Fed’s views just fine if the Fed stops buying bonds, period, and sells outright its TIPS, MBS, and long-dated Treasuries.

By Wolf Richter for WOLF STREET.

The articles are everywhere, including today: “Bond Markets don’t buy hawkish Fed’s view on high U.S. rates can go.” They’re looking at the Treasury yields, particularly the 10-year yield which currently is at 1.4%, which is just a little higher than where short-term rates might be, according to the latest dot plot from the Fed by the end of 2022 and below where short-term rates might be in 2023. The theory is that bond markets are smart somehow and figure that the Fed won’t raise rates, or might cut rates into the negative or some such thing.

The reality is that the Fed already holds $5.64 trillion in Treasury securities, after its reckless bout of QE that started in March 2020. These holdings represent 25% of all marketable Treasury securities.

But this includes only $326 billion in short-term Treasury bills. The remaining $5.31 trillion are coupon-bearing Treasury notes and bonds. Of them, $1.02 trillion mature in 5-10 years, and $1.34 trillion mature in over 10 years.

With these enormous purchases and still growing holdings, the Fed has massively repressed long-term Treasury yields, which was the primary purpose of these purchases – to reduce borrowing costs across the board, from mortgages to junk bonds.

The interest rate repression scheme is even bigger: MBS.

The Fed also holds $2.63 trillion in government-guaranteed Mortgage-Backed Securities, which, due to their government guarantees, trade with yields just a little higher than Treasury securities. And 97% of those MBS that the Fed holds mature in over 10 years.

MBS are different from regular bonds in that they pass the flow of principal payments through to their holders. These principal payments occur when a mortgage is paid off when the home is sold, and they occur when a home is refinanced and the existing mortgage is paid off, and they occur as monthly mortgage payments are made.

During the full-blast QE, which is now being tapered out of existence, the Fed purchased roughly $110 billion a month in MBS: $40 billion a month to add to the overall pile of MBS; and $70 billion to replace the pass-through principal payments.

By buying $110 billion a month in MBS, the Fed was the hugest gigantic-est and most relentless ravenous buyer ever in the MBS market. Nothing came even close. The Fed doesn’t trade; it only buys – unlike many other market participants that trade in and out of their positions.

By buying $110 billion in MBS a month, and by increasing its holdings by $40 billion a month, the Fed massively repressed not only the interest rates on mortgages, but also yields in the broader bond market. And that was the stated purpose of those MBS purchases.

The Fed purposefully falsifies the bond markets inflation signals.

Part of the Fed’s Treasury security holdings are Treasury Inflation Protected Securities. The Fed holds TIPS with a face value of $381 billion and accumulated inflation compensation of $70 billion, for a combined $451 billion. Its holdings at face value represent about 20% of total TIPS outstanding.

With these TIPS purchases and holdings, the Fed has not only repressed the TIPS yield, but also has ingeniously manipulated the bond market’s “inflation expectations” data, that are based on the difference in yields from Treasury notes and TIPS with similar maturity dates.

So the often cited inflation expectation data coming out of the bond market, such as the “10-Year Breakeven Inflation Rate” (now at 2.38%), is not an indication of actual inflation expectations by the bond market, but what the Fed wants it to be.

Despite the Fed’s year-long and now abruptly abandoned efforts to brush off the worst inflation in 40 years, it must have expected back in 2020 and 2021 that there would be a lot of inflation as a result of its reckless money-printing.

And to be able to brush off this coming inflation for as long as possible without looking too ridiculous – an effort that failed as the Fed ended up looking totally ridiculous by summer – it preemptively manipulated the inflation signals coming out of the bond market with its proportionately large purchases of TIPS. It thereby purposefully falsified the very inflation signals that the Fed cited endlessly in its efforts to brush off the surging inflation.

The bond market will buy the Fed’s hawkishness just fine if the Fed allows it to.

So we’re confronted with headlines like this: “Bond Markets don’t buy hawkish Fed’s view on high U.S. rates can go,” and similar.

But what bond yields reflect is what the Fed allows them to reflect. So in order to free the bond market from under the yoke of the Fed, and in order to allow it to signal what it really thinks, and to allow the bond market to buy the hawkish Fed’s views on how high rates can go, the Fed should:

  1. End QE cold turkey now, rather than in March.
  2. Allow all maturing Treasury securities to roll off the balance sheet without replacement, starting now.
  3. Sell outright, starting in January, those Treasury securities with a maturity of five years or more, starting with the longest-dated maturities, in large and unspecified amounts that are sufficient to allow the 10-year yield to rise well above the rate of inflation.
  4. Reduce MBS holdings by not replacing pass-through principal payments, and by selling MBS outright to where the combined reductions amount to about $120 billion a month. This will allow the Fed to wash its hands off these MBS in less than two years.
  5. Announce a policy shift, where QE is removed from the Fed’s toolbox forever.

If there is too much demand for yields to rise beyond a certain point, particularly demand from foreign buyers whose own sovereign bonds might still yield near 0%, the Fed should increase amounts of outright sales until the 10-year yield rises well above the rate of inflation. Blistering foreign demand would provide a perfect opportunity to unload the balance sheet for a perfectly timed exit.

And after the Fed starts actually shedding two or three trillions of its holdings in this manner, the bond market will start joyfully buying the Fed’s hawkishness, and yields will jump to where they belong with CPI inflation at 6.8%.

And as long-term yields shoot higher, the yield curve steepens, and the Fed can then raise its short-term rates rapidly to keep spreads at a reasonable level, while keeping the yield curve steep enough. And it will then gradually begin to accomplish the other task at hand: tamping down on this runaway inflation.

That’s what it would take to free the bond market to signal a reality outside the reckless interest-rate repression scheme designed and created of the Fed.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  240 comments for “Enough of this “Bond-Markets-Don’t-Buy-Hawkish-Fed’s-View” Nonsense: It’s the Fed’s Reckless Interest-Rate Repression

  1. Depth Charge says:

    “And to be able to brush off this coming inflation for as long as possible, without looking ridiculous – and effort that totally failed – it preemptively manipulated the inflation signals coming out of the bond market with its proportionately large purchases of TIPS. It thereby purposefully falsified the very inflation signals that the Fed cited endlessly in its efforts to brush off the surging inflation.”

    This is called FRAUD, Wolf. That’s why I maintain these people are evil, dangerous, lying narcissists. Who else would be comfortable propagating and promulgating such lies?

    • MiTurn says:

      DC, I concur with you that it is fraud. As Wolf wrote, “The Fed purposefully falsifies the bond markets inflation signals.”

      This sort of falsification of data is systemic throughout the government. Bald-face lying. It’s all becoming so Orwellian.

      • Tom S. says:

        Fed buying the long bonds and MBS is probably the worst thing they do. It’s stealing from our future. It is manipulation and oppression. Nothing more depressing than looking at the amount of long bonds on the balance sheet. It’s completely non-productive and should be made illegal.

        • Failure to pass BBB bill means two percent just got shaved off of GDP for each of the next five years.

          FED may feel less pressure to tighten up now on its brilliant methods that saved the economy when it was cratering.

        • Wolf Richter says:

          If “2% sawed off” is correct, it would be sawed off the 5% growth in 2021 = 3%, which would still be the highest growth rate since 2005, except for 2021.

        • historicus says:

          Tom S

          The Federal Reserve Act makes it clear that the Fed should PROMOTE MODERATE LONG TERM INTEREST RATES.

          Moderate = not extreme, up OR down.
          The Fed since 2009 had purposely depressed long term interest rates to record lows…..ie, EXTREME and not moderate.

          Any blowback from those who are supposed to keep the Fed between the rails? No.
          That mandate to promote MODERATE long term interest rates serves many purposes…
          *IT keeps a balance between lender and borrower
          *IT maintains a positive yield curve
          *most importantly, it PREVENTS the pulling forward of future wealth to fluff the present by allowing immoderate cheap rates to subsidize long term debt, crippling future generations.

          Since 2009 and the temporary QE, we have added $20 Trillion to the national debt. For the previous 215 years, the national debt to that point was $9 Trillion….last 12 years it has increased nearly double that amount. Fake long rates, depressed on purpose, as admitted by former Fed Gov Fisher, to FORCE investors to take more risk. Curious that the Fed feels its their duty to FORCE the people to do injudicious investing.

          You won’t find any reference to this third mandate, the promoting of moderate long rates, on the Fed web site or in their publications. You will only get the “dual mandate” game which carves out the “moderate long rates” mandate which can be seen in the Federal Reserve Act. This mandate was what should have stopped the antics of the past 12 years….

      • Catxman says:

        Fraud is a little extreme a label.

        They are, after all, not doing this for personal financial gain. You can handwave it aside by noting that it’s primarily for the public good. If the Reserve isn’t for the public, then I don’t know what is.

        It may be a little self-deception, come to think of it. When you attain that level of power, a lot of your minions are yes-men who are nodding their heads every time you come up with a new idea. There is a danger in ensconcing oneself in an echo chamber.

        • Anthony A. says:

          I don’t really think the FED top brass are doing what they do “for the public good”. I’m pretty sure their decisions have to do with keeping the U.S. central banking system from blowing up.

          Then it’s up to the banks to lend money to the public and businesses for capital uses.

        • Jacob Hunt says:

          Yeah, I kind of agree with what your saying, but as Anthony points out.. It’s not for the greater good. It’s totally about (attempting) stopping the collapse of the reserve currency.
          They know trickle up works, yet went with trickle down for 10 years… with terrible results the whole time.

          Wolf, it love to know what you think the market reaction would be to your 5 recommendations being implemented immediately?

        • Wolf Richter says:

          “…what you think the market reaction would be to your 5 recommendations being implemented immediately?”

          The market would ignore it for as long as possible, maybe even hit a new high. And then it would eventually sink in.

        • James Charles says:

          “ . . . the true purpose of government assistance to the banking system: to prevent the savings of depositors – especially wholesale depositors such as corporations, foundations, savings institutions, and local governments. These depositors would have seen trillions of dollars in payrolls, pensions, and working capital evaporate if the banks were allowed to fail. Guarantees would have underlined the fact that the main beneficiaries of all bank rescues were not greedy bankers or shareholders but wholesale depositors whose money is not covered by retail guarantees.”
          A. Kaletsky: Capitalism 4.0. P150.

        • Its Institutional Corruption, and the benefit to the officially sanctioned form, allows them to push the limits of the law, which in financial matters is ‘advisory,’ and income tax, by some legal measures isn’t compulsory. The institution regulates corruption by degree through review, according to its effectiveness, and can expand or rescind that policy, without crossing the criminal threshold. Policy is in full view and the public remains incredulous. When like in 2008 the policy is called into question, some tweaking is done around the edges and the system is not impaired in any way. Regulatory adjustments are more threat to the markets than any actual Fed policy.Can you buy a bond on margin and how much can you rehypothecate to buy stocks? Those are the real issues.

        • georgist says:

          Wolf – the market would tank as they also think America cannot exist as a real endeavor.

        • cb says:

          Catxman said: “Fraud is a little extreme a label”

          Not extreme enough. They are larcenous, scumbag fraudsters.

        • Swamp Creature says:

          Anthony A.

          Bernanke said as much in 2009 when he bailed out the financial institutions using taxpayers money. He said he did it to keep the entire financial system from blowing up. When Leahman Brother’s collapsed he said there would be a chain reaction financial meltdown if he didn’t take action. But no one was held accountable. We’re going to see a repeat of this when the everything bubble blows up.

    • MyLadyHumps says:

      Those assigned to be the losers in the Fed’s scheme may call it fraud.

      But those assigned the winning bets would claim it is fair because they correctly predicted Fed policy.

      The speculators naturally believe rational investors deserved to lose for not knowing how to read the Fed tea leaves.

      Meritocracy and hard work have no place in the Fed’s modern game of finance. We aren’t doing that anymore, speculating in bitcoin is what should be admired and emulated. What could go wrong.

      Unfortunately the Fed will never follow Mr Wolf’s to do list for restoring bond market signaling, that’s not how command and control economies work.

      • Depth Charge says:

        Fraud is fraud.

        • drifterprof says:

          I just looked up the definition of fraud, and agree that it is definitely fraud in a conceptual sense. But in a legal context, criminal fraud has to be proven in court, or defined by new legislative laws.

          Have read some critical histories of the Fed, IMO they have systematically committed fraud since it was created (in 1913, on a last day before Christmas holiday, when there were a minimum of representatives in Congress to vote). In general, powerful people don’t get punished for fraud, murder, etc.

          Nowadays, fraud trots out in plain sight for all to see:

          “House Speaker Nancy Pelosi on Wednesday said lawmakers should not be barred from trading stock … ‘We are a free market economy. They should be able to participate in that…”

          I thought that maybe she was joking, a jab at people who claim the U.S. has a free market economy. But no, it’s just another huge WTF?

    • Catxman says:

      Fraud is a little extreme a label.

      They are, after all, not doing this for personal financial gain. You can handwave it aside by noting that it’s primarily for the public good. If the Reserve isn’t for the public, then I don’t know what is.

      It may be a little self-deception, come to think of it. When you attain that level of power, a lot of your minions are yes-men who are nodding their heads every time you come up with a new idea. There is a danger in ensconcing oneself in an echo chamber.

      • Nick Kelly says:

        I saw you had this as a duplicate comment, now just one. I was going to say it needed to be said twice. The only thing missing from the rants about the Fed is that they are lizard people who drink infants’ blood.

        As for the ‘Fed is run by England…’

        Yes the Fed has bowed to political pressure and far from taking away the punch bowl, spiked it. I’m the author of that metaphor btw.

        So it has foolishly got itself into a position where a return to sobriety means a recession, which may be as extreme as the boom. The stock market especially the NASDAQ may lose 50% or more. We lived through that in 2000, the sky didn’t fall.
        A housing crash would be tougher. That’s what led to the GFC and why the Fed can’t rule out QE forever.

        But making mistakes by trying to be popular is nothing new. And up until 3 years ago the only leader in the developed world castigating his central bank was Erdogan.

        • Pea Sea says:

          The sky might fall off there isn’t a housing crash. Working people are getting awfully tired of having to put half their income into rent, with buying out of reach, and the fact that this bubble is great for the people who already own property probably doesn’t impress them very much.

        • Pea Sea says:

          *if there isn’t

        • cb says:

          @ Nick Kelly –

          a housing crash would be better. Inexpensive housing is good.

        • cb says:

          Nick Kelley said: “I was going to say it needed to be said twice.”

          It needs to be said zero. Never cover for thieves.

      • ChrisR says:

        “Not doing this for personal financial gain”

        It’s just a coincidence to you that 90% of the gains go to the 10% or so that own the assets, stocks, bonds etc? Come off it.

        There’s deception going on all right. The bankers, governement and MSM all colluding to insist this is not going on for their personal financial gain.

    • RH says:

      Amen. However, if the banksters’s “Federal” Reserve should sell all the treasuries, etc., that they hold, that would be a disaster: “$5.64 trillion in Treasury securities.” Who would buy them and at what interest rates? The US government would have to cancel the US armed forces, because it would not be able to roll over outstanding treasuries at a reasonable interest rate.

      • RH says:

        Of course, if interest rates on rolled over treasuries rose to 13% a year or more, the US government could then theoretically force rich people to pay taxes to increase its revenues. A windfall profits tax would seem appropriate given the decades of tax avoidance/evasion by them.

        However, apparently, both parties regard forcing their wealthy masters to pay taxes with knee-knocking terror, mindless fear, and trembling. That appears to be the case worldwide: see “Britain’s Second Empire: The Spider’s Web.”

      • Wolf Richter says:

        There will be a huge amount of demand for 10-year Treasuries at 6% or 7% and then at 8%, etc. Yield fixes demand problems in a New York minute. Once you get the Fed out of the market, investors will decide at what yield they would like to hold nearly risk-free securities in an environment of 6% or 7% inflation.

        • Dolors says:

          There is a liquidity crisis building up right now in the eurodollar similar to late 2019. The FRB is clueless and blind. Look out for more printing to stabilize foreign markets.

        • COWG says:

          10Y to 6% would wipe out todays 10Y holders, right? Either sell for pennies on the dollar or be prepared to hold to maturity…

          Couple that with a 40% haircut of your other assets makes everybody mad at the Fed…

          With all the losses, will there be anybody left to pay taxes?

        • gametv says:

          agreed, but if you are going to let yields rise on Treasuries, then the borrowing costs of the government would explode higher. we really need to tame the federal deficit first. we actually need to run a slight surplus, so we can offset the higher interest rates with a shrinking debt and a higher GDP, although keeping the GDP up in that scenario is a tall task.

          we really need to have the government lay down some basic principles and then follow those principles, no matter what the impact. so remove government support from the housing market by exiting the mortgage business. raise taxes, particularly taxing the wealthy on unrealized gains – when warren buffett buys coke 50 years ago and never sells and never pays taxes, that is the key source of economic inequality. bring jobs back to America with a new corporate tax policy that heavily favors domestic production.

        • Nick Kelly says:

          If the highest rated debt is paying 7 % there will be limitless demand for it and zero demand for anyone else’s at less than double digits. As for the 50% of US corporate bonds rated a notch or 2 above junk…
          Good riddance? Maybe but they must employ lots of people. The possible survivors among the zombies need time to adapt.

          In this environment inflation won’t be 7 %. It may get to negative in 3 months. The balloon explodes faster than it inflates.

        • Nick Kelly says:

          PS: clarification. I’m all for WRs program, and I think JP should have announced the first .25 bump for Jan 1 for starters. I just think too fast a raise in rates could not leave enough time to adapt.

        • cb says:

          @ Dolors –

          Do not high yields, defaults, bankruptcy and reorganizations solve a liquidity crisis?

        • cb says:

          @ COWG – a risk taken is having to hold to maturity. Isn’t that as it should be?

    • Bruce says:

      And know one goes to jail

  2. Peanut Gallery says:

    I’m sure a fair amount of foreign demand for UST will come from Turkey and the other weaker economies in the EU…

    The craziest thing is even though the US inflation situation is a total farce, there are other countries out there who are faring far worse and will gobble up UST if it is sold. The demand for dollars is still out there. So then does that mean that demand will continue to repress yield?

    I wonder if the Fed is arranging for higher powers to bring buyers to the trough?

    • Wisdom Seeker says:

      Demand for short-term T-Bills as collateral is absolutely huge right now.

      The Fed has $1,600,000,000,000 (1.6 trillion) in overnight repo Treasury loans.

      Some of this will unwind as the Treasury begins issuing more bills to fund the ongoing deficit (now that the debt ceiling has been raised), but there’s a lot of demand for collateral for whatever shadow banking shenanigans have been going on outside the spotlight.

      The LIBOR spread to treasuries has also been inching up slowly. Too soon to say but this suggests incipient stress in the overseas (aka “Eurodollar”) dollar banking markets.

      • Peanut Gallery says:

        So funny to think that there is STILL voracious appetite for our country’s… debt. At 100%+ debt to GDP, people still gobble it up!

        • Old school says:

          The government has the biggest guns and can create money with the touch of a button. That’s a special power that bond holders like when the economy gets wobbly.

      • Djreef says:

        $1.758 trillion as of today, and rising.

        • Wolf Richter says:

          It’ll spike at the end of December, maybe to somewhere near $2 trillion as banks engage in quarterly balance sheet window dressing. I’ll post a nice WTF chart in a few days when we’re there.

      • cb says:

        This sounds like Jeff Snider speaking. I never understand it. Dollars are as good or better collateral than Treasuries.

        • will says:

          But not dollars that are “Gated”/frozen in a MM or Bank account, is the problem.

    • Xavier Caveat says:

      Ever look at the countries that ‘buy’ our UST’s?

      It’s complete BS, an agreed upon fantasy.

  3. Depth Charge says:

    I won’t quote your piece on “what the FED should do,” because it is too long, but in response to that I say – over their dead bodies will they EVER do it. These fraudsters are running a scam. They talk out of both sides of their mouth. They are pretending to be concerned about inflation in public, while stoking it as much as possible in private. There is ZERO justification for the next 3 months of QE forthcoming. And then, supposedly, 3 chintzy rate hikes? Laughable. I imagine these guys on stage in a Mark Twain novel, getting pelted with rotten tomatoes. They’re full of you know what.

    • ivanislav says:

      I like to imagine that you are Wolf’s alter ego and he posts on the forum as Depth Charge so that he can be more abrasive.

      • LK says:

        It’s funny how you never see Wolf and Depth Charge in the same room.

        • Wolf Richter says:

          Depth Charge has gotten pissed off at me a few times because I deleted his comments that were over some invisible line. You must have missed those fireworks.

        • LK says:

          Excellent job throwing people off the scent with that manufactured drama, you rascal!

          Yeah I saw, just playing along.

        • Depth Charge says:

          I’ve never been “pissed” at you Wolf. Disappointed over some of my posts being deleted? Sure. Others were deleted for good reason – my counterattacks on those trolls who like to come at me. You know, the ones who are stuck in their partisan stupors. Hehe.

          I’ve never been one to back down, and sometimes it leads to interesting experiences. When I was a kid, I’d take on the schoolyard bully even if it was apparent he could wipe the floor with me. You do what’s right in life then deal with the consequences. Sometimes you find those bullies weren’t so tough after all. :)

          Love the site, still learning the boundaries – or pushing them. I was never one to travel the middle of the road. The ditch was always a lot more exciting. (Neil Young said something to that effect, though I’m sure I butchered it). Cheers.

        • Peanut Gallery says:

          Wolf, I think I actually have figured out where your “invisible line” is and when/where you delete comments.

          Basically, the comments section of your blog serve as your own personal kind of… forum or “trading floor” where you can hear water cooler talk from all ends of the spectrum.

          Basically any comment that doesn’t contribute to your corpus of knowledge or help you gain perspective gets tossed out.


        • Wolf Richter says:


          Nope. Way too smart and complicated for me.

          But you’re right in that the comments do contribute to the “corpus of knowledge” and they do help me “gain perspective,” but I hope that is broadly the case for lots of readers because the comment section isn’t for me but for the many thousands of people who read the comments every day, many of whom skip over my articles and head straight for the comments. My job is to build the readership for the comments, so that more and more people read the comments, and there are some things I need to do to make that happen.

          If you use an ad blocker, you might not see it, but I monetize the comments with ads, just like everything else here. And I’m perfectly fine with readers who come just for the comments, and skip my stuff. The comments are an attraction of their own.

    • Swamp Creature says:


      Yep, they talk out of two sides of their mouths and lie out of both sides at the same time.

  4. NR says:

    Will the Fed be allowed to maintain a negative real interest rate? Their dot plot might indicate a target rate, but the real rate is still negative. How will they resolve that? They cannot change the inflation rate

  5. Concerned guy says:

    There is only one player (fed) which is so big that has taken over the market, all other participants are meaningless and looking at last ~12 years of history, it does not inspire too much confidence (in fact very depressing). Interest rates will rise little bit but it will all be too little too late.

    WR – Do you know if fed have announced when they planning to roll of all this from their balance sheet?

    • Old school says:

      Fed talks big, but carries a not so big stick. If market really panics, there is not much they can do.

      Executive branch might can do something with treasury department as they have a lot of power. Will have to be the crooks in Congress that gets some emergency power through legislative power to steal more of your future and save the system.

      • cb says:

        Have you been sleeping the last few years of large QE, even with MBS (criminal) and interest rate suppression?

  6. MaxProtein says:

    Under your prescriptions, how quickly will the s&p drop 75%? I think instantly. A slow death of 1000 cuts is perceptually easier to manage then a sudden suicide.

    • MaxProtein says:

      Ok I feel better now.

    • Wolf Richter says:


      It won’t be “instantly” because this market continues to refuse to believe anything the Fed says and does. So it will spread out over time as reckoning sets in step by reluctant step.

      • To be fair the market was really lowballing inflation expectations for a long time, and we know the reason. The market doesn’t believe the Fed will stay out of the bond market, they think they will drop the taper and the dotplot at the first sign of economic weakness. The notion that growth is more transitory (fragile) than inflation is sinking in. They might need to stay the course (tightening) even if GDP dips. They’re going to end up tapping the breaks just as the economy loses speed. Now that BBB has been scuttled, they projected that 1/2 of spending was only going to bump inflation a tiny bit over ten years. No frontloaded initial surge in growth, and the markets reacted today, bringing longer term yields down. You’re right we won’t know what the bond market should price this paper, and if they dump it all on the market we won’t know either.

      • Chipster says:

        Perhaps market effects will not be “instantly” but you are not the only one who sees what the Fed does compared to what it says. If it starts doing what you prescribe the bear market effect in bonds and equities will be sooner rather than later as the market participants will be able to see very quickly what the Fed is actually doing. So Max Protein is correct on the direction if not the “instantly” effect. So best to act more quickly but not the apparent shock treatment you prescribe.

    • Old school says:

      To get to last time inflation had to be broken by Volker would be down 87% from here. Great depression was down 89%. Don’t say it can’t happen.

      • Pea Sea says:

        It won’t happen. How’s that?

        • Old school says:

          I am not predicting it, but we are set up for the possibility.

          Anybody that thinks it’s impossible for the biggest financial bubble in history not to end in the biggest bust in history might be surprised. You can blow up the world financial markets really fast with high speed computers unlike when things moved a millions of times slower.

        • Wisdom Seeker says:

          I could see market down 89% after inflation within 15 years.

          With inflation, it would be a roller-coaster without any safety harnesses. Corpses all over the ground and the rest holding on for dear life.

          Don’t believe me – look at 1968-1982. That’s pretty much what happened. The 1970s were rough.

          P.S. Stocks, bonds, and cash may all do equally poorly.

  7. Auldyin says:

    “Announce a policy shift, where QE is removed from the Fed’s toolbox forever.”
    That is prime, without that people will never, ever, believe that honest finance is the only option and they will continue to dare the ‘Put’
    Your Quote”particularly demand from foreign buyers whose own sovereign bonds might still yield near 0%, the Fed should increase amounts of outright sales until the 10-year yield rises well above the rate of inflation. Blistering foreign demand would provide a perfect opportunity to unload the balance sheet for a perfectly timed exit”.
    That’s OK for the USA but all the other countries have to defend their currency so they will also have to raise rates aggressively (eg Russia) which would blow the dodgy debt bubble all round the World.
    That takes it all into geo-politics and USA needs it’s Lap Dogs to stick together more than ever as it faces Russia and China’s attempts to cast off dollar hegemony. USA cannot afford to blow up Canada. UK. EU, Aus. NZ. Japan. They have to stick together which means an interest differential to draw money to US can’t happen. The World is dividing into two distinct camps and money is at the core of it which means interest is at the core of it.
    Great article, way above MSM BS.

    • phleep says:

      The Fed has been de facto central banker to the world (rather, the USA world order) since at least 2008. Before that, really (Mexico 1994, East Asia 1997-8).

  8. Anthony A. says:

    “During the full-blast QE, which is now being tapered out of existence, the Fed purchased roughly $110 million a month in MBS:”

    Wolf, shouldn’t that “million” be “billion”?

  9. ivanislav says:

    typo: million ==> billion

    “During the full-blast QE, which is now being tapered out of existence, the Fed purchased roughly $110 million a month”

    • charlie says:

      A billion here, a billion there, pretty soon we’ll be talking about real money

      • Wisdom Seeker says:

        $120 billion per month is 4000 millionaires per day. Over a million millionaires per year.

        If you aren’t getting any of that money, you probably aren’t one of the new millionaires.

  10. JFExum says:

    Is it even possible that the bond market could/would normalize in spite of the FED?

  11. WES says:

    The Fed is very pleased by the current rate of inflation.
    They will talk tough and do nothing to stop inflation.

    • Depth Charge says:

      Right. If they were serious, they would do everything possible to snuff it out immediately. Instead, they are intentionally stoking it and staying way behind the curve. All of the measures they announced will not stop it. They should be hiking rates massively RIGHT NOW. But they have no interest in that, because they have no interest in actually stopping inflation. They are “letting it run hot for a while.”

      • Confused says:

        Never discount the possibility that the Fed doesn’t know what it’s doing. Put differently, the Fed doesn’t know as much about the world economy as it thinks it knows and doesn’t know what it doesn’t know.

        • WES says:

          Actually the Fed does know what it doesn’t know, but as central bankers they have to pretend to not know what they know!

        • Depth Charge says:

          BS. That’s equivalent to the old “nobody could have seen it coming” excuse they tried to use last time when the housing bubble blew up. Too bad that many saw it coming and were talking about it for years.

          People are seeing through all the FED’s lies in real time, and they know it. They are even getting excoriated by the billionaire set now – you know, the ones who are trying to portray themselves as (tax-dodging) philanthropists after they already stole everything from everybody.

        • Confused says:

          In the spirit of Christmas, I was trying to give Chair Powell and his sidekicks at the Fed the benefit of the doubt. My actual opinion flip flops between: (1) they are criminals; and (2) they are trying desperately to prevent the house of cards that they and Congress created from collapsing.

        • Old school says:

          How can Fed know when I am an emotional human and don’t know what I might do? Maybe I will get afraid and pull all my money out of system.

          Maybe I will get afraid and save more.

          Maybe I will meet a young blonde and spend it on trying to feel young. Now multiply that by a few hundred million people and Fed’s ability to know what future holds is nil.

        • Matt says:

          A philosophy book I have from 40 years ago argues effectively that the Fed *can’t* know what it’s doing. It’s said that the “bureaucratic manager” is the “central character of the modern age”, and I would call the Fed chairman the chief bureaucratic manager today. The author’s conclusion after 40 pages of analysis is that – following Weber – the bureaucratic expert’s claim to authority, status and reward derives entirely from his claim to effectiveness, but:

          “The expert’s claim to status and reward is fatally undermined when we recognize that he possesses no sound stock of law-like generalizations and when we realize how weak the predictive power available to him is. The concept of managerial effectiveness is after all one more contemporary moral fiction and perhaps the most important of them all. The dominance of the manipulative mode in our culture is not and cannot be accompanied by very much actual success in manipulation. I do not of course mean that the activities of purported experts do not have effects and that we do not suffer from those effects and suffer gravely. But the notion of social control embodied in the notion of expertise is indeed a masquerade. Our social order is in a very literal sense out of our, and indeed anyone’s, control. No one is or could be in charge….The effects of eighteenth-century prophecy have been to produce *not* scientifically managed social control, but a skillful dramatic imitation of such control. It is histrionic success which gives power and authority in our culture. The most effective bureaucrat is the best actor.”
          -After Virtue, 1981

        • Depth Charge says:

          “Maybe I will meet a young blonde and spend it on trying to feel young.”

          I don’t know why, but that just sent a chill up my spine. I realize I am getting older now, and don’t want to become vulnerable to such a beauty.

      • Jay says:

        It seems reasonable that the FED actually wants an economic downturn over the next 12 months, giving them the justification not to raise rates and to restart QE.

        • Flea says:

          Easy peasy no more free stimulus checks or child tax credits everyone is broke

        • Lone Coyote says:

          I would not be surprised, hell, I expect, that as soon as the stock market loses a decent percentage they’ll be back on easy policy.

          Or, I could be really cynical, and say that the federal government wants justification to do another stimulus to buy some votes. It worked pretty well last time, but with inflation they might have to offer $3000 instead of $2000.

  12. fred flintstone says:

    Unfortunately….it is my belief the fed has finally arrived at the doomsday moment…..which is what stocks are saying.
    Omicron slows the economy but also causes more inflationary delays in goods production. Fiscal stimulus caused by the infrastructure bill already passed and anything else they do contributes more inflation.
    So…..at a core inflation rate exceeding 5%, which is ongoing, the fed has no choice but to reduce demand by raising rates…..or risk a hyper inflationary event.
    The economy drops into a recession which drops the stock market down so low that all margin is driven out……which is a big drop.
    Lots of books written by FOMC members claiming how their insight saved the republic.

  13. DawnsEarlyLight says:

    As long as the US keeps deficit spending, the Fed will still be able to keep gaming the system. The US is a nation built on debt, to infinity and beyond!

  14. David W Young says:

    Remember the Government ad for Anti-Drinking where the face of the Enabler was distorted by a fisheye lense as this Pinocchio-like character handed the already drunk party guest another ill-advised alcoholic beverage.

    Powell and all Fed Heads prior to him starting in 2008 could have played that role without even breaking a sweat, but instead of cocktails, they were offering Free Money to the party guests already drowning in Excess Liquidity.

    Now we come full circle, to the waning nanoseconds of 2021, and the Spirited Enabler is now becoming the Grinch That Stole Christmas!! This host of the ZIRP Party is now not only locking up all the booze in the joint, but shipping it out of the jurisdiction beyond the Publics’ grasp.

    No matter how much they accelerate their Cessation of QE, VI, I have lost count, or expedite the appearance of even 1% 30-day Treasury Bill rates, THEY WILL NOT BE FAST ENOUGH TO SUBDUE THE HOUSE FIRE THEY HAVE SET IN THE FINANCIAL MARKETS. The Inflation Genie is not only out of the shapely bottle, but has opened up a sushi bar in New York City and advertising masks are required.

    The loss of confidence in the Fed to bail out stock, bond, and real estate investors at all costs is growing by the minute; take a gander at today’s ticker tape on Wall Street for confirmation. The Fed will be a much diminished institution by the time the dust settles on the market collapses we are not even out of the dugout yet.

    Trillions will go up in smoke for letting this bubble to-beat-all-bubbles get so out of control via Excessive Liquidity Pumped well after the financial/economic crisis was in the rearview mirror; I think we were totally out of the woods by 2012 or 2113. Shame on you, Fed Heads.

    • David W Young says:

      Correction: Sushi bar in NYC where masked are NOT required.

      • David W Young says:

        Another Correction: “out of the wood by 2012 or 2013”. Geeze, why can’t this old fool get it right the first time? He needs a full-time Editor!

    • Bruski says:

      Excellent articulate summary.


    • Swamp Creature says:

      I have a 25K CD that rolls over in Jan. I told my credit union not to renew the CD. I’m getting f$cking tired of not being able to even by a cup of coffee with the interest from the CD every month. Now in this Montcommie county that I live in raising parking fees to $2/hour from $1.50/hour I will not be able to pay the parking fee to buy the cup of coffee. So why should I loan money to a credit union and get nearly zero interest?

      • Wisdom Seeker says:

        So what you’re saying is that now, even parking-meter crime pays more than saving money!

        P.S. You can make more by spotting goods that are in scarce supply, hoarding and flipping them. Used cars have been a gold mine for traders this year, better than the S&P… Sadly I’m not one of them.

      • Peanut Gallery says:

        Convert your USD to THB or TRY and roll the dice – higher yield in other countries….. ;)

  15. Depth Charge says:

    The FED has been running a massive scam on the American public for over a decade, and they finally got busted. They were able to lie with impunity. Then, all of a sudden, a few of their officials were outed for front running the markets on their own inside info, and then their inflation narrative blew up in their faces. They have been ripping the American people off blind, stealing the future of the young to pad the bank accounts of the wealthy. These people need to face criminal charges for what they’ve done.

    • jon says:

      Although FED members have been ousted for fraud/front-running the market, there were so serious consequences for any of them. IN fact Powell has been rewarded with one more term.

      People like us know they are criminals but what can we do ? Absolutely nothing. We are in minority.

    • Jake W says:

      criminal charges? so they can get three squares a day in club fed? no, they need to face what ceausescu and his wife did almost 32 years ago.

    • Swamp Creature says:


      As I said before they should all be sent to GITMO and tried as terrorists, which they are. They have done more damage to this country than all the previous terrorists combined.

  16. Bruski says:

    We are experiencing the biggest Ponzi scheme in history.

    The question is: when will the investors begin redeeming and want their money back?

    My guess is the the money will be returned in much much cheaper dollars.

    But, the scheme continue to attract trillions of dollars. Bet on more money printing, monetization of debt and the Greenspan put.



    • Dan Romig says:

      Ponzi scheme & the Fed? No, it’s just the new normal, eh? I mean, sure, the Fed has printed up trillions of dollars since 2008, and now with the $2.63 trillion of MBS it holds, that only equals ownership to one out every thirteen homes out there.

      Median sales price of single-family homes in the USA as of 22 November 2021 = $360,800 (sourced from St Louis Fed).

      MBS holdings divided by median price = 7,289,357 homes.

      Number of single-family homes in USA = 97 million (roughly).

      97 divided by 7.289 = 13.3.

      Printing money out of thin air to own over seven percent of all homes in the USA is now just the new normal.

      • Depth Charge says:

        Which is why I’ve been saying for YEARS that the FED is printing homeless people. The impoverishment and moral decay of society lies right on the doorstep of the FED.

        • Jake W says:

          even many mainstream news articles say “any tapering is going to risk damaging future home price appreciation.” as though price appreciation of houses is a good thing. well, it is for people who currently own them, but it’s terrible for people looking to buy with money they actually have to earn.

        • Pea Sea says:

          “well, it is for people who currently own them, but it’s terrible for people looking to buy with money they actually have to earn.”

          Guess which group the people writing and publishing the articles belong to.

        • Wisdom Seeker says:

          Similarly, stock price appreciation is only good for current shareholders (i.e. retirees and the already-rich).

          For those trying to save for retirement, high stock prices are a disaster.

          (What would benefit both current and future holders is low prices with high dividend yields.)

          Retirement can be viewed as a service, one that can be purchased like any other future-service contract. The cost of a retirement annuity (up-front price for a steady income of, say, $100,000/year) has gone up over 50% in the past 12 years, and at the same time the value of the $100,000 has dropped another 20%+.

          The Fed’s policies have literally made retirement just as unaffordable as housing.

  17. Citizen AllenM says:

    In short, nobody believes that the Fed will tighten, or that inflation is temporary.

    But what if is successful?

    A soft inflation landing, followed by a Goldilocks economy?

    As for assets, what happens if they drop in value?

    After all, inflation in housing is infinite, right? Ignore the elephant in the room.

    If inflation was truly raging, gold and silver prices would be flying, instead of stuck in neutral.

    Stimulus package is dead, now comes the hangover.

  18. sailorgirl says:

    Who absorbs the principle losses if bond yields begin to normalize? Specifically all of those mortgage back securities help by the FED. Homeowners will not sell. I feel that the Build Back Better Bill died because no one wants to hold the paper. The broker dealers seem to be making their opinions heard. These loss have to go somewhere? Where is somewhere? Thanks

    • Petunia says:

      Most likely the agency MBS gets made whole by the agencies, Fannie, Freddie, Ginnie, etc. And then you and me get to make them whole after the fact.

      • sailorgirl says:

        @Petunia, I am confused. I thought the agencies only guaranteed against default by the mortgagee. Is interest rare risk is guaranteed by the taxpayer also? What happened in the 70’s and 80’s when interest rates were climbing. I would assume then like today you just didn’t move unless you had too. I just remember a clause in my mortgage stating that my mortgage and it’s interest rate were no longer assumable. My first mortgage was 12.5%. I was excited to move and get a new home at 10% four years later.

        • Petunia says:

          The agencies were public companies back then and the shareholders absorbed gains and losses. The fed wasn’t involved in buying MBS back then.

          The agencies now guarantee against default, but I think they also buy back anything from the fed at cost. Nobody is in a position to argue with the fed.

          I think some agency MBS is still assumable.

    • jon says:

      BBB died because of Senator Manchin. It is as simple as it looks.
      Also FED is not stupid generally speaking. They are doing all these with lot of deliberation.
      What we all see via Wolf’s articles, others also see the same

      • Depth Charge says:

        Everything the FED does is 100% deliberate, and I have always felt that people who question their intelligence are more than just a little naive. HOWEVER, there is one thing that I cannot wrap my mind around: How in the hell did they ever think that blowing such massive bubbles could be sustainable without ever-increasing support, and wouldn’t lead to a massive crash? It is reckless beyond words.

        • Pea Sea says:

          Hubris. Just because they’re smart it doesn’t mean they’re as smart as they think they are.

        • Jacob Hunt says:

          The great reset!!!

          You say it yourself, they knew QE wasn’t going to work. Japan had been going at it a long time. But, even if you argue they thought it would go a different route being the reserve currency. A few years in and it was following the Japan pathway…. they pumped this everything bubble for 20 years for a reason. They will continue to print until it blows, and the general public know it was their fault. Then a more global monetary system will save the day!

          I hope this comment stayed writhing your invisible lines wolf 😉

    • WES says:

      They are now going to Build Back Broke!

      • otis says:

        Too easy, low hanging fruit.

        Though I’d like, I’m not going to rearrange those B words and reference the Transportation Secretary.

    • Peanut Gallery says:

      I agree with almost all of your post but disagree on the “home owners will not sell”.

      At these elevated prices and a down cycle coming, don’t you think at least some non-trivial subset of home owners will try and make one last dash to the exit to cash out? Especially those that need the money to retire?

    • Peanut Gallery says:


      Not sure what you mean by principle losses? MBS held by the fed can be sold at whatever number. They can either hold it to maturity or run off, or they can sell it. And others can correct me if I am wrong, but they can sell it at whatever price without consequence – correct?

      For other non-Fed entities holding MBS, they still hold the paper and receive the payment streams. It is their choice whether to keep it or to sell it. If they sell it at a loss, then they are the ones that eat it. But I don’t believe they are under any obligation to sell the paper. They can hold onto it and continue to receive the payment streams at low yields – it is the opportunity cost that they are forgoing.

      So to directly answer your question, the non-Fed entities that hold MBS are on the hook for the MBS paper? Institutional investors, etc.

      Sally, Fannie, Ginny, etc. do they sell all of their mortgage paper to the Fed? Or do they portfolio some?

  19. Nick Kelly says:

    All good stuff but they won’t do number 5, ‘renounce QE forever’ and maybe they shouldn’t.

    It would help the Fed to have some guts and tighten to remember it can always reflate. Bernanke’s main field of study and obsession was the Depression and fear of a deflationary collapse. But as he said in a figure of speech the Fed could ‘drop money from helicopters’

    As I pointed out years ago, the practical version of helicopter money is e-transfer. The Fed could quickly cause X dollars to appear in every bank account, a lot of which happened already as Covid money.

    So the Fed should go ahead with the first 4 recommendations but hang on 5, if only to have the guts to do 1 to 4.

    • Wolf Richter says:

      QE is WRONG. Between the end of WW2 and 2008, there was no QE. And that worked just fine, despite all the issues that occurred during that time.

      • sunny129 says:

        Qe has no prior research or back tested ever before 2008! It is an idea which flew from the ‘seat of pant’ of Mr. Barnake. Go back read the articles on his explanation of these QEs to infinity. He could never explain how exactly it works but kept claiming repeatedly that it does work in practice! The MSM, Wall St in cNBC swaloowed it and ditributed the that kool aid. Yeh, it did work but for for TBTF Banks and the Wall St (including top 1% & 10% of the populace. Mainstreet didn’t matter these guys!

      • khowdung flunghi says:

        Since you mentioned WW2, thought I’d mention I’ve been watching a bunch of Warner Bros. cartoons made during the war. Just about every one of them mentions “buy war bonds”! Part of what we’re seeing is the result of the total misallocation of resources to “war” vs building and maintaining the infrastructure and industrial base in the US. Guns OR butter – we chose guns AND butter. Now comes the bill.

      • georgist says:

        The USA wasn’t completely hollowed out by rentier activity prior to 2003.

        The Fed sees the USA as a total mess that cannot exist without constant financial games.

    • Petunia says:

      I don’t like QE forever because the intervention signals a weakness of the banking system.

      The original function of the fed was to act as a clearing house for the banks in a liquidity crisis. For this they must maintain adequate reserves and some collateral. The level of collateral purchase since the GFC signal ongoing catastrophic failure.

      Either we have a functional banking system or we don’t. Either the markets function or they don’t. With QE we don’t know for sure. It’s time to find out.

    • Pea Sea says:

      No need to pick nits. They won’t do 1, 2, 3, 4, or 5.

  20. Danno says:

    From past experience with Powell, we all know he is going to do what is best in the banker’s interest, not ours.

    90% of the population has no clue whatsoever on the mess the Fed has created over the past 12 years and don’t have the will to learn why their savings accounts pay nothing, why everything has gone up in price, why wages are not growing.

    Until people are absolutely desperate, the powers that be KNOW they are safe and can continue doing what they want, when they want.

    And that my friends is a long way away as long as the masses are kept fat, dumb and stupid things will continue to be banker / 1% friendly and the rest of us will slowly suffer until we can’t suffer anymore.

    We have a choices. Keep trying to educate people like Wolf here or just sit back and try to enjoy what you have left.

    Happy Holidays.

  21. George says:

    A brilliant article, and precisely what should happen, which is why it won’t. The Fed no longer protects the financial system, they are protecting the wealthy and keeping interest rates low so government can continue to spend foolishly. If interest rates went to where they should be, the cost to the Federal Government would go up dramatically, and account for a significant part of the total budget, which is unacceptable. Fiscal and monetary policies are both out of control. They aren’t dumb, they know exactly what they are doing. In the meantime, those on fixed incomes are being killed. They earn nothing on their savings and inflation is going through the roof. Those investing in the stock market, which is highly overpriced, will ultimately suffer huge losses and much of their life savings. Policy makers aren’t putting the interests of America or the people first, it is all part of a larger scheme to transfer wealth and power to the elite and the global power mongers as we continue to lose freedom and move to a socialist/communist totalitarianism. Hopefully that is not a foregone conclusion.

    • Dan Romig says:

      true that George.

    • Augustus Frost says:

      I’ve read recent sentiments that current monetary policy is trying to replicate the post WWI experience, reduce the cost of servicing government debt through nominal GDP growth.

      It won’t work this time because the country’s economic position has deteriorated substantially, extensive social decay, and negative demographics.

      Fiscal policy was tightened substantially after WWI by chopping the defense budget and there was limited social spending. It’s obvious there is no intent to even attempt cutting spending (any of it), as evidenced by the political desire to create new entitlements which if implemented, will once again blow out intentionally ridiculously low estimates.

    • phleep says:

      I wonder if the government has degenerated into placating the rich (lobbying dollars, etc.: accepting bribes) and the poor (buying social peace: dispensing bribes). The sucker at the card table, the ultimate cow in the milking-line, seems the former middle class? And when its productivity is bled out, then –?

      • Depth Charge says:

        The middle class is vanishing at the fastest rate in history.

        • COWG says:

          The middle class started vanishing in the 70s when they started giving away the equity in their assets for the new and shiny life of promised prosperity…

          Reagan and Stockman started digging the grave…

          The Fed since 08 has been patting the dirt on top…

  22. jon says:

    There is no free asset market. The FED takes the support away and all asset market would fall including real estate as some people think real estate can’t crash ever.

    I don’t think FED would take the support away ever. They can do jaw boning but wont take the punch bowl away.

  23. Augustus Frost says:

    If continued to its illogical end, extreme interest rate repression will last as long as the currency holds up. That’s the ultimate restraint on any central bank.

    Yes, I know the USD is the world’s reserve currency. It still doesn’t change that there is no wizard behind the curtain at any central bank or government. Believing otherwise is the equivalent of believing something for nothing. There is still a limit to how much any central bank or government can plunder its currency holders.

    • Wolf Richter says:

      “…extreme interest rate repression will last as long as the currency holds up.”

      The other aspect of the currency is inflation. That’s where interest rate repression runs aground internally.

      • Peanut Gallery says:

        I agree with AF – basically you can repress interest rates all the way up until (but not past) the point of loss of faith in the currency.

        And Wolf I also agree with you too. Basically you two are saying the same thing. Uncontrollable inflation can be the cause to lose faith in a currency.

        What boggles my mind is that the entire world believes that UST is risk free (which is technically not true). The power of risk free money is an unfathomable, unimaginable privilege to whichever country holds it.

        And as they say, with great power comes great responsibility.

        This won’t last forever though. But throughout my lifetime? Maybe.

        • VintageVNvet says:

          True enough re responsibility comes with power PG,,, but WE the Peons on the short end of almost every ”stick”,,, SO FAR,,,
          MUST understand that, ”Power corrupts, and absolute power corrupts absolutely.”
          Our owners, the global elite/oligarchy, understand this concept very clearly, and while they have HUGE powers,,, they also have competing elites/oligarchs with whom they MUST continue to compete or lose their holdings.
          Surely, most if not all of those holdings were obtained by various levels of force in the last six or eight centuries,,, but that is just part of the very well known ”LONG GAME” as has been explained by authors from Kipling to now,,, and almost totally ignored then and now…
          I am still full of hopium that the internet, currently and going forward, will actually provide the venue for ever increasing actual democracy and ”POWER TO THE PEONS.”
          As has been steadily increasing, in the main, at least since the Magna Carta, in spite of the second derivative of the curve going negative at times, per the pendulum swinging as always…

        • Cryptogold says:

          3 trillies in crypto and 10 in gold are calling the central banks’ bluff.
          Regular people don’t understand all this finance crap but will pile up in what they instinctively trust.

  24. gametv says:

    There really is a much simpler view of the reason that interest rates are so low. The Treasury has been using money it raised with massive bond sales in 2020 to finance government debt through 2021. And much of this debt was bought by the Fed, so the market did not need to absorb it.

    But now that the debt ceiliing has been raised, the Treasury will need to add to the amount of debt rapidly. So we have much higher supply and lower demand for bonds coming.

    Notice that today, while the stock market fell, the bond yields rose a little bit. Watch this trend gain strength after the new year as the Treasury tries to sell more debt.

    The whole ball of wax might need to come unglued.

    • Augustus Frost says:

      IMO, UST yields not falling during a stock market rout would be the best indication that the bond bull market from 1981 is over. It may have ended in March 2020 but I was wrong every prior time I thought so.

    • Peanut Gallery says:


      …but what if UST continues to sell like hot cakes?? Even if there isn’t demand domestically, what about demand elsewhere?

      • gametv says:

        Peanut Gallery – Let’s consider where the demand will come from. Central banks – no. BOJ is not buying US Treasuries. China isnt.

        Foreign investors – maybe. If the dollar continues to appreciate and ECB continues to repress interest rates, then Treasuries offer a better yield relative to Euro bonds. But my thought is that overall, there are a number of countries pushing yields higher and if that is the case the competition for low risk investment money increases. I just think that will result in much higher interest rates over the coming months.

        Best idea is to watch the Treasury auctions. If demand is tepid at a few auctions in a row, that is when interest rates will take off, imo.

        • Peanut Gallery says:



          But I would also throw into the mix that the main / largest economies of the world are “collaborating” to ensure that balances are maintained. I mean, now they do it without even hiding it – G-7 summit?

        • Peanut Gallery says:

          But more important than volume / demand is at what price? I think tepid demand basically just means that the demand is not there at the current prices (yields).

          Would demand not shoot through the roof if rates went up just a little? And I suspect large institutional investors and other foreign countries out there are basically waiting with their fingers on the trigger to see if there is a little bit of movement upward in yield? Just speculation on my part. But I think if yield rises even just some meaningful amount, the demand will magically come out the woodwork.

  25. ANDREW says:

    I’m trying to wrap my head around treasuries/tips breakeven. We all know Fed debt holdings distort rates. But shouldn’t the actual spread always re-establish itself? For example, if Fed buys treasuries pushing rates down, this would “artificially” narrow the spread, arbitrage process would result in more tips purchases re-establishing equilibrium at market future CPI forecasts. Like two jars of water connected by a tube, Fed can add or remove water from either jar, but as long as there is still some “free” market, the levels will equalize to reflect inflation expectations. If this is not correct, someone tell me what I’m missing. Thanks!

    • WES says:

      You are missing the part about “free”! There is no “free”!

    • VR says:

      Also curious. What exactly is the mechanics or math of how the Fed can control the bond market by owning 20% of the market? Trying to understand. Would they not need to continue buying or is it that they calculated the effect on TIPS beforehand and bought proportionally to counter expected CPI or what?

  26. Phoneix_Ikki says:

    The bond market just shows Weimar Powell who is the b**** in this relationship.

    You can put on your big boys pants and talk tough but when all your past action is all about backtracking…as they say fool me once…

    On the side note, I do enjoy seeing Powell being treated like a toothless decision maker.

  27. Ed says:

    Amen Wolf!! It never ceases to amaze me when people cite what the bond market is predicting 3,5,10 years out. Unfortunately by the time the bond market becomes a reliable indicator again, our currency will only be good for toilet paper.

  28. R Russell says:

    The FED may not read WR, and it only took them the better part of a yer before they began to admit to even an understated rate of inflation, so now the question is how much dissemblance and mendacity over what period of time it will take for them to come around to creating a cover for them to follow WR prescription without admitting their fraud.

  29. DM says:

    Wolf, what do you say to the deflationists who point to Eurodollar spreads or the 10-2 year spreads that show a coming recession. Recessions typically cure inflation. 2008 and the GFC definitely ended $150 oil expectations.

    • ANDREW says:

      I think this time the recession may not cure it. We could have declining output and rising prices at the same time. Good old “stagflation.”

      • Swamp Creature says:


        We are already in stagflation. Just look around at all the closed businesses. All bankrupt. And prices increasing at between 13% and 20% defending on how you want to calculate it.

    • GotCollateral says:

      20y30y UST spread has been inverted for a little over 2 months…

      Also on largely ignored on wolfstreet is the whole securities lending industry and the rehypothication of collateral in general with the leverage on UST well surpassing how much Fed gov borrows (in the same vein of being ignored here, global credit expansion/increased origination or lack thereof since GFC). Single digit trillions of $ is nothing compared to HQLA collateral availability and the leverage on it that is 1000x that in OI created from bank balance sheets.

      Fed purchases (of anything,not just UST)/tapers/jawboning have served mostly as open throat operations, the market will do what it will, and like always policy makers will always react to the market…

      USTs have never been more intertwined with credit risk throughout the global corporates than they have today.

      FRBNY cannot cure the seriously depressed global $ flows that are not going into global commercial RE (where alot of “value” is still locked up and will remain locked up for a few decades). FRBNY cannot cure the seriously depressed global $ flows that are not going into global businesses.

      Zimbabwe is money printing (no new debt to offset new cash), Venezuela is money printing (no new debt to offset new cash).

      Positive yielding $ denom debt (UST) swapped for 0 yielding “cash” that largely stays on bank balance sheets and largely does not enter the real economy is an asset swap, one that implicitly leaves dealers short dollars in the future (relative to what they would get holding UST to maturity).

    • Wolf Richter says:


      I laugh. I would love to see a little deflation to make up a tiny bit for the loss of purchasing power over the years. But in my entire life, I’ve seen only a few quarters of mild deflation. The rest of the time, it was inflation and rampant inflation and inflation out the wazoo. And all along the way, our dear deflationistas predicted deflation right around every corner. It’s funny, really.

      And now you’re making the same mistake that the media made and that I lambasted in this very article: the assumption that bond markets actually predict anything at all when central banks are the hugest and most relentless buyers. Bond markets predict NOTHING in the era of interest rate repression, other than what they want the central banks to do next.

      • Ed Feten says:

        Japan has had more than a few quarters of deflation.

      • Harvey Mushman says:

        What about Japan?

        • Wolf Richter says:

          Ed Feten and Harvey Mushman,

          Japan has had 20 years of true price stability, a little bit of inflation followed by a little bit deflation followed by a little bit of inflation etc. Its CPI in essence is unchanged for 22 years. At the end of 1999, the index was at 98, today it’s at 99.9 with some fluctuation in between. That’s how it is SUPPOSED to be in my book:

        • Dazed And Confused says:

          The interesting thing about Wolf’s Japan CPI chart is that the era of price stability is widely viewed as one of economic underperformance (lost decades) while the inflationary era that preceded it is perceived as an economic miracle.

          Maybe in the bigger picture of economic performance and improving living standards, price stability is overrated.

        • Wolf Richter says:

          Dazed And Confused,

          … “widely viewed as one of economic underperformance (lost decades)” by the morons at the New York Times, which coined the expression, and which needs to have a lot of inflation so that it can raise its subscriptions fees and deal with its big pile of debt, and it was regurgitated endlessly by the brain-dead media and inflation-mongers in the West.

          But the Japanese don’t see it that way. You need to go to Japan and see. Open your eyes. There was no lost decade. That is ignorant horseshit that the New York Times spread in order to cover up its own problems, and that folks thoughtlessly repeat to make some kind of idiotic point.

          The “lost decade” is one of the most debunked idiocies out there.

      • JeffD says:

        Hear! Hear!

        And until the Fed actually reduces it’s balance sheet in every category of holdings, the government continues to implent pedal to the metal inflationary actions despite MSM appearances with lip service to the contrary.

  30. Michael Engel says:

    Great article, but : DET10Y @(-)0.363%. // Turkey 10% @+24%.
    JP adjust Fed inventory for Europe, not for Turkey.

  31. Michael Engel says:

    For entertainment only : 1) There will be no Xmas massacre #2.
    2) TUR, early in the morning was very seductive.
    3) If Xristin Eurozone look like Turkey, the Fed will be able to lift rates.
    4) JP tried to save Europe, but Germany did’t care.
    5) UST10Y minus DET10 reached 2.84% in Oct 22 2018.
    6) Results : Xmas massacre #1.
    7) Great article, smart, thanks.

  32. TimTim says:

    Brilliant, and unarguable so from my limited experience, but to me it feels the wrong article for the week.

    Where’s Nick Corbishley?

    Right now we really do need his insight.

  33. JG says:

    Wolf – the FED is not going to be able to finish the taper, let alone raise rates meaningfully. If JP thinks the economy is so awesome, why are we still at ZIRP? He knows he can do nothing but talk inflation down. The FED will us climate change, the latest covid variant, fairness, and whatever excuse possible to run from rate hikes. Your article was awesome and is what the FED “should” do. However, they will chicken out and the market knows it. I am furious the FED let it get this hot (7% CPI, 20% house price increases in one year, food and energy, labor all going higher). The real inflation is atrocious. Saving $ is costing you 10% a year and it is shameful. Look for more shenanigans like fiddling with the CPI calcs., 40 year home mortgages, forbearance, stimmy checks in 2022 to buy votes, and the like to leep it all going. End the FED!

  34. Barbara Rockefeller says:

    for my FX briefing tomorrow, a synopsis and then:

    Whew. We don’t buy all of it but Richter is making a valid point—anytime government interferes in a market, it results in a misallocation of resources. We wouldn’t call the Fed “reckless” but have said all along that QE doesn’t really make sense, at least not to a sane economist. Bernanke accepted it because he thought, good Boy Scout that he is, he was saving the economy from a 1930’s style Depression.

    Even though the Fed is hardly going to take this advice and dump all QE in one fell swoop, Richter is right that ending QE will give us increasingly useful rate and yield information, and end, perhaps, the utter confusion we all suffer trying to tie yields to anything in the real economy. We sometimes reach out to our bond buddies to explain something and can never get a fully convincing answer—in fact, “don’t know” is the usual response to why things do not make sense. News outlets are no better. Bloomberg at least reports on bonds, even if it’s wrong and stretches some points beyond credulity, but the WSJ and others gave up years ago. Go to the “Bonds” section and you get some silly story about something irrelevant and two weeks old.

    This is not terribly useful in terms of forecasting FX unless we buy the narrative that tapering is going to give us accurate readings on the return for risk and how it changes as various inflation data comes in. We still think the first hike could be March or it could be December, depending. But at the same time, we also know some countries are hiking (Canada, Australia) come hell or high water, while the UK might and Europe definitely will not. This leads us back to the strong dollar thesis—strong on rising and realistic yields and authentic inflation expectations, or strong on Covid getting worse for longer. We say Richter’s expose is his “emperor has no clothes” moment and worthy of consideration.

  35. Cobalt Programmer says:

    People come to your blog to read my valuable comments because,

    1. main stream media lies.
    2. MSM gaslight the common people
    3. They know. We know. They know we know.
    4. Administration can change. Lies don’t.
    5. I stopped hoping for truth and actions. Little people like us don’t matter for them.
    6. We are supposed to obey, buy and consume
    7. I am just watching Diehard with beer and take out pizza. Have a nice Christmas and happy holidays. As the year winds down 2021 is not very kind to me and may be the most of us. We are heading for another improved work from home and additional poke and closures. Not in here, even in EU or other parts of the world. I sincerely hope 2022 brings the best out of everyone and for us.

  36. Flea says:

    Easy peasy no more free stimulus checks or child tax credits everyone is broke

  37. perpetual perp says:

    Not to get too off shelf, but Biden’s $7 trillion spending over 10 years is about 2.3% of total GDP over those ten years, $335 trillion minimum. Now that Munchkin has slashed the total to what, $1.7 trillion, my understanding this cut in investment is the largest since 1947. No need to worry about debt or interest rates, we’re going into the tank.

    • Wolf Richter says:

      Nah. 5% growth in 2021 might not be duplicated in 2022. But OK, except for 2021, the US annual GDP hasn’t even been 3% since 2005. We’re usually pretty happy to get barely over 2%.

      • David W Young says:

        And all of the debt piled on high to get this declining annual GDP, Wolf, has shown the very classic diminishing returns with each additional Dollar of new debt. The Money Tree is really not the answer to Enhanced Prosperity. The marginal utility of debt is heading into the toilet.

      • georgist says:

        2% with most credit created via mortgages but inflation doesn’t include land prices, only the monthly cost of carry.

        The deflator isn’t real. Therefore GDP isn’t real. Stop referring to GDP as a valid figure.

        • Wolf Richter says:


          You can make up your own figure and throw it around all you want, fine with me. GDP is what we have, and GDP is what we use, and it doesn’t matter one iota whether you or I like it or not.

        • georgist says:

          Hi Wolf. I think taking their figures is a huge mistake. They exclude the largest item for credit issuance. Most of our economy is setup around pumping land prices, and it’s excluded. Then people HELOC, extract the fake profit and drive the rest of the fake economy.

          Not including housing in the narrative and the omission of housing from CPI (yeah the monthly cost is there but not the absolute, and the monthly is hidden by lower rates) is giving you a +ve GDP figure when it’s really -ve. That’s absolutely huge.

          It’s just not acceptable to say we have to use their figures.

        • Wolf Richter says:

          HELOCs are dead. Almost no one does HELOCs anymore.

          You take whatever figures you want. Up to you. Better yet, make up your own.

        • georgist says:

          Also sorry just to add one more thing: selling housing to foreigners absorbs USD for external players who have USD from trade surpluses who aren’t interested in UST.

          For example if they banned foreign ownership (and all the LLC stuff), you’d have a lot of USD looking for a way to be spent, which would be inflationary.

          But: USD is readily accepted for foreign “investors” into housing, which doesn’t show up on inflation figures.

          They have effectively put up a big signpost saying “launder your USD through land and no questions asked”. The UK does exactly the same thing to avoid a sea of GBP as we produce nothing and run huge deficits.

          Ignoring this contradiction at the heart of GDP ignores one of the key conduits.

      • Richard Greene says:

        I have to wonder if the claimed Real GDP growth in 2021 is high primarily because of the one-time rebound from the 2020 slowdown, plus an inaccurate (low) GDP deflator number.

        I know the consumer price index inflation is significantly lower using today’s methodology than it would have been if still calculated using either the 1990’s or 1980’s CPI methodologies.

        Given the long term productivity growth rate and labor force growth rate (with unemployment relatively low now), Real GDP growth of 3% or more in 2022 and future years is just wishful thinking.

        Since 1913, the Federal Reserve Bank has done a great job destroying the purchasing power of the US dollar. With all that experience, they have become experts!

        • Wolf Richter says:

          US consumers have gone a HUGE consumption binge. Every data point tells us that, from shortages of all kinds, including labor shortages, to retail sales and inflation. GDP growth would be far higher without the shortages. Consumption has gone nuts. This is the red-hottest economy I’ve ever seen.

        • Richard Greene says:

          I forgot all about the “free” stimulus / COVID money from the government in 2020 and 2021. I’m retired so didn’t ask for any money, or need it. I was going to send mine back but I didn’t know the right address. ha ha

  38. breamrod says:

    I think Wolf is right that its gonna take awhile to change the sentiment that’s so prevalent to “buy the dip”. I think a some point the stock market will correct in 2022. How much ? The Powell put is probably around 4100 on the s&p. And the 10 year to 1.75 to 2%

    • sunny129 says:


      As of today Nasdaq is alredy in correction zone. Omicron is yet to peak. Supply chain problems are still there. Inflation number next month might accelerate the slide, sooner than many think.
      But there is a lot of hopium out there. As I said earlier, there is a wider spread for Call option vs Puts on DIA ( DowJones index) indicates that many think the indexes will climb back, within a few weeks, but will they?

    • Richard Greene says:

      Stock prices rise as investor confidence rises.

      This year consumer confidence has declined, and that is likely to affect investor confidence too.

      When investor confidence peaks, so do stock market averages.

      Many smaller stocks tend to peak before the larger cap Dow Industrials, S&P500 and NASDAQ 100 averages do.

      Once investor confidence peaks, the Fed is powerless to prevent a bear market. Now more than ever before: How much lower could the Fed push interest rates? Real rates are already very low.

      When investors are losing their appetite for buying stocks, as in 2000, and 2008, the Fed tried, and failed, to prevent those two bear markets.

      M<eanwhile, using valuations that are excellent for 10 year stock return predictions, current valuations are the highest in stock market history.

      I prefer the Price to Sales Ratio
      Market Capitalization as a percentage of GDP

  39. sunny129 says:

    Fed cannot do any thing about Omicron, doubling every 2-3 days or about chain supply squeeze from delay and weather relalted events in SE Asia.
    What will be the inflation number next month? Denial of deteriorating fundamentals will go, until everything will burst, all at the same time!?

  40. rose says:

    Man. Wolff is finally waking up and turning into a conspiracist.
    Wow. Only took a decade or 2.
    The Fed routinely buys trillions of everything from Caribbean centers and swaps with other CBs but the truth is , it doens’t even need to do that. The bulk of the leverage is done thru derivatives. And they are settled in secret at the BIS.
    Everyone knows. At least the conspiracists know.
    They control not only the stock flows, the bond markets, the Tips but also the fake gold market (comex) and the real gold market (physical).
    It’s all a charade.
    That’s what central banks are for. To crush the feudal world for the benefit of …

    • Old scholl says:

      Warren Buffett and Charlie Munger have about 150 years of investing experience. They tend to ignore market conditions and focus on companies making stable earnings now and in the future using 10 year treasury with a safety factor as a hurdle for investment.

      If company makes a good product really valued by society then what is happening to the currency doesn’t matter that much. If there is inflation and people need or really want what you make then you can raise your price.

      Investing based on the future cash flows of a company or sp500 relative to 10 year is the most rational method for dealing with an out of control Fed. Market price is what things are worth now. Cash flows are what things are going to be worth over the next 2 or 3 decades.

      • Richard Greene says:

        Berkshire Hathaway (BRK) under performed the S&P 500 over the past 10 years.

        In 2020 and 2021 so far, BRK is under performing the S&P500 by about three percentage points each year.

        An S&P500 index fund would have been a better investment than BRK stock over the past 10 years, and especially in 2020 and 2021.

        Your compliments are not earned, based on the past ten years of BRK returns.

        • Jake W says:

          yeah, well, they didn’t think the fed would be as irresponsible as it’s been. no one did.

        • Nick Kelly says:

          2020 and 2021 are the peak insanity years preceded by 11 years of ordinary insanity, but still insane. 10 years is actually a very short time in the life of an economy, it just seems long to a human. It is also when QE became accepted as normal. Buffet and Munger are willing to give up a lot of upside to protect the downside.
          If someone was fully invested in the glorious NASDAQ, in 20 and 21 they were willing to risk a dot.com crash, which we know will happen because valuations are the same or worse.
          B and M aren’t.

          To say a guy did well in 20 and 21 is like saying he beat the casino over a weekend.

  41. kpl says:

    “That’s what it would take to free the bond market to signal a reality outside the reckless interest-rate repression scheme designed and created of the Fed”

    Why would the Fed allow something the polar opposite of what is has designed and created?

    The only way it will happen is if the Fed is forced to act due to inflation. But with Omicron on the prowl it may not happen.

    • Wolf Richter says:

      If anything, omicron is going to make inflation worse because it will aggravate labor shortages (people not wanting to go to work) and supply shortages (factories shutting down temporarily due to outbreaks). Powell has already pointed this out. Other central banks too. For now, nothing is happening that will lower inflation, but lots of stuff is happening that will fuel inflation.

      • kpl says:

        Will it not be offset by decrease in demand?

        • Wolf Richter says:

          Delta didn’t cause any decrease in demand either. There hasn’t been any decrease in demand except in March and April 2020. Demand from consumers is the hugest it has ever been. Enough Americans are flush with money, and they’re spending like there’s no tomorrow, and they don’t care what anything costs, which is the problem that has led to this rampant inflation.

          We tried to book some accommodation for skiing. Prices are totally nuts. About double what they were prior to Covid, and nearly everything is booked. I’ve never seen anything like this. And it doesn’t even involve supply chains and bottlenecks.

        • Depth Charge says:

          A lot of that is because of the housing bubble and cash out refis. “Hey honey, let’s take the new $80,000 truck to Tahoe for a week long ski trip with the whole family! What? We’re not even skiers? We don’t have equipment? Who cares, we’ll buy everything. YOLO!” Same as back in 2006. This pig is overcooked.

        • Dan Romig says:

          Wolf, perhaps Duluth, Minnesota is where you and yours could book a few days for a ski vacation.

          The State Nordic Ski Championships for high school is 16 & 17 February at the Giants Ridge Golf and Ski Resort nearby.

          Bring some warm clothes though …

  42. Bobber says:

    The key issue here is that we have a central bank making inexplicable decisions with questionnable motive and legislators who don’t care or don’t understand it. Not a good situation.

  43. TimTim says:

    Hello Wolf

    Good to see you a bit happier today :)

    But you made one critical error at the end of the article: you applied common sense.

    Not allowed in this world, the beatings will continue until nonsense returns…

    Only kidding, have great day.

  44. Michael Engel says:

    1) US bond prices : $USB rose from Oct 2018 lows to formed a backbone
    – Aug 26 2019 hi @166.05 // Sept 9 2019 lo @157.54. The peak, the buying climax was in Mar 9 2020. The response was Mar 16 low @167.59, above
    the BB. Bond prices dropped significantly, osc inside the BB, building a cause, perhaps a huge cause.
    2) JP long duration asserts created shortages and inversion between the 20Y and the 30Y.
    3) TY, US 10Y Futures price rose to the backbone – Sept 2 hi/ 9 lo 2019 – up to the peak in Mar 9 2020. TY osc around the boobs, building a cause.
    4) We don’t know if TY and USB are in accumulation for higher prices (indicating deflation) or in distribution (inflation). All we know is that both are in a trading range.
    5) The Fed hold only $326B in short terms bills, the rest are left for China and other entities.
    6) The front end of the yield curve serve the Repo market.
    7) The Fed hold $1.7T RRP, squeezing liquidity from banks and wall street.
    8) The Fed is not an island. JP live in a world of negative rate, bond
    traders, and inflated stock markets, led by five stocks.

  45. Michael Engel says:

    Wolf, can u draw a chart of MBS Payment activity, the RE market pulse.

  46. Michael Engel says:

    1) Option #1 : recession will send USB and TY higher, testing the peak.
    2) A “transitory” senate will induce inflation, sending TY to the BB or below.
    3) After building a cause, TY rise in a slingshot above the
    peak, to a new all time high. US10Y cross zero, sink to negative rates.
    4) JP will defend the zero line, the Fed last line of defense, but will be forced to retreat under pressure, enriching the Fed assets.
    5) Option #2 : a “transitory”senate will be “transitory” in repetition,
    inducing perpetual inflation, sending US dollar to the trash bin, recycling

  47. historicus says:

    I always thought we should know if any Fed Governors (like Kaplan for instance) were buying Cryptos…..essentially a bet against our financials system and our currency.
    I hope they get the question some day.

    But we did get a peek into the Senate Banking Committee holdings….the committee that oversees the Fed…

    “Sens. Pat Toomey (R., Pa.) and Cynthia Lummis (R., Wyo.) sit on the powerful Senate Banking Committee and have been advocates for a light government touch toward the growing— and largely unchecked—cryptocurrency market. They also own cryptocurrency assets. Ms. Lummis’s roughly $250,000 of bitcoin makes her the most heavily invested U.S. lawmaker in the digital asset. Mr. Toomey has smaller holdings in crypto-related investment vehicles” WSJ 12/21/2021

    Seems a bit contradictory to oversee one thing and then bet against its actions and the effects of those actions.

  48. Dazed And Confused says:

    Presumably there are some participants (e.g. life insurance companies, pension funds) in the treasuries market who are interested in maximizing their risk-adjusted returns.

    If the consensus amongst such market participants was that the 10 year Breakeven Inflation Rate should actually be say 6.5% rather than the approx. 2.5% indicated by the central bank manipulated market, wouldn’t such participants sell all their holdings of 10 year Treasuries which yield only 1.5% and use the proceeds to buy 10 year TIPS which would yield 5.5% per annum for the next 10 years.

    Wouldn’t that mean that only central banks would hold 10 year Treasuries while all the other market participants who want to maximize their returns would only hold TIPs?

    • VintageVNvet says:

      just looked up these tips bonds dac, and found they have two interest rates:
      One is base, and based on current FED rate, now about zero, and the other, adjusted every half year/six months, in current ”OFFICIAL” rate of inflation.
      If that is true, while today’s total rate is good, it can be changed sooner AND later, back to the base rate of zero…

  49. Dazed And Confused says:

    When a central bank intervenes in a market to buy bonds this artificially increases demand for the bonds which raises their market price and lowers their yield.

    So all the central bank purchases of TIPS should be lowering the TIPS yield below what it would have been without their intervention. BUT lowering the TIPS yield widens the spread between the 10 year Treasury yield and the TIPS yield which increases the Breakeven Inflation Rate.

    So if a central bank wants to manipulate the Breakeven Inflation Rate to be lower than it would be without their intervention, why would they buy TIPS at all?

  50. Franz Beckenbauer says:

    The Fed will Not taper and IT will Not reduce it’s Balance Sheet.

    The reason IS purely mathematical-mechanical: nö Major bank nowhere has Amy Balance Sheet capacity left to buy those treasuries, MBS and Corporate Bonds. The Fed IS the only bank that can still create Balance Sheet capacity by virtue of the printing Press and because they are the Central Bank. All Other Banks are stuffed to the hilt with Asset to equity ratios through the roof (it’s especially Bad in the Eurozone).

    Whether the Fed pretends to be hawkish, dovish or strawberry ICE cream IS completely pointless. Balance Sheets don’t Care. The Bond Market Knows that. By January, the taper will BE called Off.

    • Wolf Richter says:

      Franz Beckenbauer,

      “The Fed will Not taper…”

      That is factually wrong. Tapering started in mid-November and the pace of tapering doubled in mid-December (last week). That already happened. How could you have missed that? It was all over the news, including here.

      • Richard Greene says:

        One month of “tapering” is not necessarily the start of a long term trend. I’d like to hope so, but who expects the Fed to do the right thing.

        Some price increases I’ve faced (and paid) recently included a 60%+ increase in the price of getting my teeth cleaned, versus three months ago, and a 37% increase for a service performed by a doctor, versus five week ago.

        I know my Social Security check is going up 5.9% next month, but my Medicare fee will be going up by 14.5%, No one mentions that !

    • NARmageddon says:

      >>nö Major bank nowhere has Amy Balance Sheet capacity left to buy those treasuries, MBS and Corporate Bonds.

      That’s just patently wrong, Beckenbauer. Right this very moment banks have 1.8T USD in Federal reserves parked in reverse repo at the Fed. That means that the Fed could unload 1.8T worth of bonds and the banks (their customers) could absorb 1.8T, no problem.


  51. Michael Engel says:

    TY weekly linear backbone BB : Sept 2/9 2019 // 131.72/ 128.06. TY inside. TY had too much coffee this morning,. TY is trying to breach BB, to test a resistance line coming from : Dec 23 2019 low to Apr 6 2021 low. It will be TY second attempt.

  52. fred flintstone says:

    LOL……..what a way to run a centrally directed economy.
    The feds folks went on vacation for Christmas week so they blew the wad of 90 billion I.E. earlier in the month to suppress rates and now due to their vacation rates are exploding.
    Bet every person at the fed that has a wife or parents has an brokerage account that plays the interest rate market. Easy money if you can get it.
    What a pack of crooks. ……I mean government officials.

  53. DanS86 says:

    Sounds good, however, gov needs lows rates and how many zombies would go under?

  54. NARmageddon says:

    I like the Wolfstreet 5-point plan for the bond market. But one can only wish and hope.

  55. Eastwind says:

    Maybe what the bond market believes is that the fed will raise interest rates, but won’t get them above 1.5% before the economy rolls over into recession, and the fed has to reverse direction again.

  56. georgist says:

    Wolf. They know all the steps.

    You think the USA isn’t a busted flush, that it can cope without constant short term financialization.

    The Fed disagree, they think the USA is not a going concern. That it cannot cope.

    I agree with the Fed. An ideology of individual self interest cannot produce a viable country.

    • Wolf Richter says:

      You credit the Fed with too much concern for the US as a country. The Fed cares about asset holders and about the banks and their bondholders and shareholders. To enrich those two is its primary goal. Now inflation is threatening to mangle that goal.

      • georgist says:

        No that aligns perfectly with my point. You can’t keep asset prices up if you raise rates when the country itself can’t support real wealth creation, but you can when you keep doing fake financial tricks. The Fed and I are on the same page: the USA can’t generate a “real” positive return, therefore the lies and the can kicking must continue.

        • Bobber says:

          You are saying it’s OK to avoid problems by letting them grow. Dumb and irresponsible.

        • georgist says:

          Bobber – no idea how you read that in what I said. Read it again.

  57. Flownover says:

    BTFD will last until some really big event stops it. The Fed is in a box and can’t get out. Negative real interest rates do not promote growth, but only cause people to save more and remain apprehensive about their financial future. Out of control spending and huge monetary stimulus for over a decade has given us financial absurdity all around. The $29T debt seems likely to continue an accelerating parabolic pattern. I think the Fed’s moves are nearly the best that can be made by people in a desperate situation. It will likely get worse. Wolf, your map to bond market sanity and proper bond prices would require political courage that doesn’t exist.

  58. Greg D. Costeens says:

    “Don’t cry for me, Argentina-a-a-a-ah. We will soon be so much with you, in all your misery, your instability … We believed your socialism and all your pipe dreams. We’ll keep our promise, don’t keep your distance….”

  59. Kenny Logouts says:

    Remove QE from the CBs toolbox?

    So they unwind it all in March, crash markets in 2022, then they say they need new stimulus and it’ll be negative rates and helicopter money?

    Taking away QE won’t stop debasement of the USD or any other currency by its CB.

    All they want is inflation, and consumption.

    They’ve got half of the equation sorted, they just need to skip the middle man and get money direct to spenders… as we can see from the last 18 months experiment, money drops direct to consumers is much more efficient at boosting asset values and consumption, especially if interest rates are kept low.

    Now they have experimental data the Fed can tune the helicopter money just right to keep inflation at 2%

  60. Finster says:

    The relationship the Fed posits between its bond buying and bond prices isn’t so simplistic as it assumes. All else being equal, the additional demand ought to raise prices and depress rates.

    But not all else is equal. Among other things, when the Fed pulls back on QE, markets factor in lower future inflation, and this actually supports prices, in opposition to the first order effect.

    So the ‘markets aren’t buying it’ bit is nonsense … markets are very much paying attention, more than the narrative assumes.

  61. eg says:

    I don’t understand what the proposed measures in the main article are designed to achieve?

    The natural rate of interest for a fiat currency is zero (it’s a public monopoly and monopolists are price setters) — a central bank has to “defend” any overnight rate higher than zero either in open market operations (the old fashioned way) or by paying interest on reserves (the current setup).

    Why not just let it go to zero and use fiscal policy instead of trying to use monetary policy to achieve goals that it isn’t designed to achieve?

    • Wolf Richter says:


      It seems you don’t understand the difference between “fiat currency” (whatever that may be) and assets/debts denominated in “fiat currency.” Once you understand the difference, then come back and we’ll talk about the “natural rate of interest.”

  62. cb says:

    Wolf said: “By buying $110 billion in MBS a month, and by increasing its holdings by $40 billion a month, the Fed massively repressed not only the interest rates on mortgages, but also yields in the broader bond market.”

    And it pushed house prices through the roof. I like your steps. I like ending the FED even better ,,,,,,,,,,,,,,,,, and then making every one of the worthless bastards there break rocks.

  63. Hg says:

    The ‘red hottest economy’ Wolf has ever seen. All i can say is ‘something’ isn’t right. cb mentioned Jeffery P Snider. He’s calling BS on inflation, that the Fed will hike into a dump that will be the policy error of all time. At which point the 5K daily limit on withdraws from your credit union might have a decimal point misplaced, the stonk market will stop down daily for weeks ongoing, and fire will rain from the sky.

    • Wolf Richter says:

      The biggest “policy error” of all time was committed in March 2020 and every week since then by printing trillions of dollars — STILL printing even today — and by interest rate repression. THAT’s the policy error. Now the Fed is trying, too little too late, to undo some of the damage from that policy error.

      These gurus that claim that taking away small parts of the punch bowl constitutes a policy error make me laugh. It’s like the worst joke EVER.

      • Hg says:

        Properly speaking ‘Kick The Can’ is not a policy at all. It’s only an ‘error’ in the sense that it achieves precisely the opposite of the stated goaL. Or was it only a question of quantity all along and after two decades of money printing they have finally ‘stimulated’ the economy? Nupe~

Comments are closed.