Yields Spike, Stocks Dump, Futures Fall, Asia Sags, after Powell Explains How the Fed Will Crack Down on Inflation

The balance sheet is “substantially larger than it needs to be,” and “there is a substantial amount of shrinkage to be done.” We’ll put some numbers to it.

By Wolf Richter for WOLF STREET.

In reaction to the FOMC announcements and Powell’s post-meeting press conference today, the 10-year yield spiked nearly 10 basis points, to 1.87%, the highest since December 2019, and the two-year yield spiked by 15 basis points to 1.17%, the highest since mid-February 2020.

Stocks sagged from their bounce before the meeting. The Dow dropped about 600 points between 2 p.m. and the close, and the S&P 500 dropped 73 points, from being up about 1.5% to being down 0.15%. Futures are now down about 1% for the Dow and the S&P 500, and about 1.5% for the Nasdaq. Stocks in Asia are spiraling lower.

Markets had expected that Powell would soothe their rattled nerves, as he’d done before, and perhaps walk back some of the recent hawkishness, at least in tone, but that didn’t happen. The opposite happened.

Powell explained that “monetary policy will become significantly less accommodative,” that the Fed would “move over time to a policy that is not accommodative,” and that high inflation readings would have important implications for the path of the rate hikes.

“A significant threat to the labor market is high inflation,” he said. A long recovery, such as the last recovery which was the longest on record, requires low inflation, he said, thereby turning over the argument that the Fed couldn’t tighten because it would threaten the labor market.

The Fed has a lot of room to raise interest rates without damaging the labor market, he said.

This Fed loathes to surprise the markets.

Long-gone are the days of surprise rate hikes. The speeches of the Fed governors, Powell’s statements and post-meeting press conferences, and the statements and minutes from the FOMC prepare the markets for what is coming so that they can gradually adjust to it, over time, and not all at once, on one day – which could cause seizures in the financial markets.

Powell today explicitly praised the success of the Fed’s jawboning, that it had worked very well, because markets had already priced in multiple rate hikes for 2022. And today was a further effort at preparing markets for what is coming.

The FOMC announced today in its statement that it would end QE entirely in “early March,” and that it would start hiking interest rates “soon.” And after the rate hikes begin, the Fed would “significantly” reduce the size of its balance sheet.

In the post-meeting press conference, Powell then added more precision about the timing of the initial rate hike and the beginning of the balance sheet reduction.

Rate hike on March 16.

“The Committee is of the mind to raise the federal funds rate at the March meeting,” he said. That means March 16 for liftoff.

And the balance sheet reduction would begin “sometime later this year, perhaps, we haven’t made a decision yet,” he said.

When asked, Powell refused to rule out interest rate hikes at every meeting this year. He also refused to rule out hikes of 50 basis points.

By way of answer, he reiterated – as he’d already done several times during the presser to make sure everyone got it – that the Fed would remain “nimble” in this economy that was running hotter than anything seen many years, with inflation far above the Fed’s target, and with a “very, very, very strong labor market,” and a “historically tight” labor market, as he put it.

The balance sheet reduction looms large.

In a separate statement, the Fed announced plans “for significantly reducing” its balance sheet, and that in the longer run, it intends to shed its holdings of mortgage-backed securities (MBS) entirely. The Committee members voted unanimously for this plan.

The balance sheet reduction would take place “in a predictable manner,” the statement said.

Powell added that the runoff, once on track, would take place systematically “in the background,” in the foreground being the rate hikes.

When Powell was asked what “significantly reducing” the balance sheet means, he said that the balance sheet was “substantially larger than it needs to be,” and that “there is a substantial amount of shrinkage to be done,” but that the Fed wants that shrinkage to be “orderly and predictable.”

He said that the balance sheet was of “shorter duration” (holding more bonds with shorter maturities) than last time when the Fed reduced its balance sheet (2018 through mid-2019), and that the economy is much stronger, inflation much higher, and the labor market much tighter than it was back then, he said.

The balance sheet reduction would “move sooner and also perhaps faster” than last time, he said. Last time, after a phase-in period, the balance sheet reduction was capped at $50 billion a month.

How fast? Over $100 billion per month. But the Fed will cap it.

The Fed would reduce its balance sheet “primarily” by allowing maturing bonds to run off the balance sheet without replacement, according to the statement today. This runoff could be big if the Fed doesn’t cap it.

The runoff associated with the Fed’s $5.69 trillion in Treasury securities. To pick a time frame: In August, September, and October combined, $197 billion in short-term Treasury bills and $198 billion in Treasury notes and bonds will mature, for a total of $395 billion. If the Fed just lets them mature without replacement, the balance sheet would be reduced per month on average by $131 billion, just from the Treasury runoff.

Even if the Fed decided to keep its Treasury bills on the balance sheet, the runoff of the T-notes and T-bonds alone would amount to an average of $66 billion per month over the period.

The runoff associated with the Fed’s $2.67 trillion in MBS. MBS are different from regular bonds, and this is key: Holders of MBS, such as the Fed, receive passthrough principal payments when mortgages are paid off, such as when a house is sold or refinanced, and when mortgages are paid down with regular mortgage payments.

In 2021, the Fed received over $60 billion in passthrough principal payments per month. To increase its MBS holdings by $40 billion a month, the Fed in effect ended up purchasing between $100 billion and $110 billion a month in MBS.

This stream of passthrough principal payments will slow as rising mortgage rate typically cause refis to decline. But there will still be a lot of refis, and a lot of payoffs when homes are sold, plus the constant stream of principal payments from regular mortgage payments.

These passthrough principal payments are unpredictable, but given the huge size of the Fed’s MBS holdings would continue to be very large and could very well amount to $30-60 billion per month.

In other words, if the Fed doesn’t cap the runoff of Treasury securities and MBS, it could amount to over $100 billion per month, or a balance sheet reduction of over $1.2 trillion during the first year.

This is why the Fed will likely cap the runoff, and as Powell indicated probably at an amount higher than last time, when the cap was $50 billion per month. But back then, the cap wasn’t hit in every month because in some months, less than $50 billion in securities matured.

According to Powell, the Fed will decide these details, such as the cap, over the next few meetings. Once that is decided and the runoff kicks off, it will proceed “in the background.”

I will then, of course, pull this runoff from the background into the foremost foreground on about a monthly basis, to see how it is progressing – as I did last time.

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  257 comments for “Yields Spike, Stocks Dump, Futures Fall, Asia Sags, after Powell Explains How the Fed Will Crack Down on Inflation

  1. Depth Charge says:

    “The balance sheet is “substantially larger than it needs to be,” and “there is a substantial amount of shrinkage to be done.””

    Gee, how did it get so big? And why?

    ““A significant threat to the labor market is high inflation,” he said. A long recovery, such as the last recovery which was the longest on record, requires low inflation, he said, thereby turning over the argument that the Fed couldn’t tighten because it would threaten the labor market.”

    Gosh, it’s almost like every single line this guy was feeding us the past two years was bullshit.

    • andy says:

      Well I think it was pretty clear. There will be a gradual slowdown in acceleration of the rate of monetary base expansion growth with respect to labor force inflation expectations.

      • Buckaroo Banzai says:

        We will get some kind of massive financial market dislocation a la the repo crisis and Powell will reverse course in a hot minute. Probably that will happen after his first rate hike. Maybe it will happen even before he starts cutting.

        “If you want a vision of the future, Winston, imagine a Fed balance sheet exploding upwards, forever”

    • Swamp Creature says:

      Forget the last two years.

      Everything he is telling us NOW is complete bull s$it as well as anything he tells us in the future. Get used to it.

      • Wolf Richter says:

        Swamp Creature,

        “Get used to it”.

        Get used to interest rates going up and get used to the balance sheet shrinking, and get used to bond prices falling and yields rising, and stocks heading lower, and get used to the housing market to adjust to higher mortgage rates. That’s what you need to get used to.

        • Eastern Bunny says:

          Getting used will be short lived.
          I would say a 10% decline in the financial markets and the hysteria about the end of the world will reverse every thing, expect Powell to explain to the plebs how 7% inflation is better than not having a job.

        • Wolf Richter says:

          Eastern Bunny,

          “I would say a 10% decline in the financial markets…”

          We already have a 10% decline. The S&P is down 9.7% from the intraday peak to the close today. In addition, S&P e-mini futures are now down 1.3%.

          So are you talking about an additional 10% decline?

          Given how much stock prices have risen, an additional 10% decline would likely not bother the Fed.

          If the credit markets lock up, that would be an issue. But credit markets remain near the loosest they’ve ever been.

          You need to listen to the press conference. It’s an eye-opener. Listen particularly to what he says about the labor market.

        • dishonest says:

          Get used to more jawboning and, as a last resort, tiny baby steps.

          Jerome is no Volcker.

        • MonkeyBusiness says:

          Nah, that would be a straight line. But that’s not the motto of this site.

        • Anthony says:

          With Brent Crude up to $90.22 as I write and WTI crude $87.62 maybe we do need to get used to it… lol

        • David W. Young says:

          Go, Wolf, tough love is often necessary to set recalcitrant junior investors on a safer path! The era of freebies as to no cost money from the Fed and whopper stimulus checks from Uncle Joe are over, get over it, and pull in your portfolio long exposures if you don’t want to be a Walmart greeter in retirement.

          Think about Treasury Direct, but stay in the 30 to 60 day Bill category, because it looks like Uncle Jay is going to dish out some tough love of his own. Things are going to happen much faster than most Wall Street Apostles are currently expecting, even after the timing bombs exploded by Jay yesterday. The environment will demand it.

          So many other Central Banksters are not as pathetically behind the Inflation Curve as Chair Powell, and they do meet in Switzerland every year, so Jay does not want to buy all of the rounds of drinks for missing the boat so badly on his Woke moment on inflation.

          Cash is not trash, but you may want to look for interest bearing instruments, no guitars, in currencies other that the insolvent Dollar. We are also in the Loss of Confidence phase of most things Yankee.

          Wolf should be a substitute schoolteacher.

        • Jake W says:

          david young, when the student is ready, the teacher will appear. the students aren’t ready yet.

        • Jay says:

          Wolf,

          You’ve hinted at a “magic number” in terms of a mortgage rate that could tip housing into a downturn. I think we all agree with your sentiment. Can you characterize a range that you think it becomes likely that housing will start to decelerate?

          Personally, I think it’s somewhere between 4-4.25% for us to recognize we’ve past the top and we’re on the backside. I think 4.5% turns the housing market into a “concern” for the FED and then anything near or above 5% creates the potential for a crater.

          The real question will be what happens to lumber prices as mortgage rates rise and we see am increase in unsold / under construction homes.

          Thanks!

        • Wolf Richter says:

          Jay,

          This is really a magic number, as far as I’m concerned. It changes over time. We’ll see it with hindsight. But yours could be about right.

          Also note the lag with RE. It’s very slow moving. What happens is that each time mortgage rates go up a little, some buyers leave the market, and no one notices. And then, as rates continue to move higher, at some point, the cumulative exodus takes enough buyers out of the market to slow demand. And that’s also when some this shadow inventory starts showing up on the market. So you have less demand at current prices and more supply, and transactions slow until there is a meeting of the minds by sellers and buyers on lower prices. This is a slow process that is hard to see in real time. But there will be some dynamics you can see, such as slowing volume with more supply.

        • Swamp Creature says:

          Wolf

          I wish you were correct. I’d like to see a 1 point increase in the Fed Funds rate in March and 1 point every quarter after that. Unfortunately, this ain’t gonna happen. These 1/4 point increases stretched over years is not going to do squat to control the inflation nor the runaway housing/and other asset prices. When someone says they “hope” it will work, I quote a famous general who wrote a book titled “Hope is not a Method”

        • Old school says:

          Markets are tough. Fed pumped so much money already that profits will look good, negative real rates get people to buy stuff and assets and FOMO might take stocks and housing up for some more blow off. You never know for sure, but you would think it’s going to be a doozy when it blows.

        • masked ghost says:

          I have noticed a number of new “for sale” signs going up on land around town.

          “FOR SALE, OR BUILD TO LEASE”.

          Does that mean a bank now owns the property?

        • Turtle says:

          I’m moderately excited about to getting used to 15% on a CD.

    • Swamp Creature says:

      Powell is a political Fed Chief. He’s not independent. He let Trump bully him into stopping the QT and interest rate normalization when it was actually starting to work. And now he kept saying Inflation was “Transitory” and the day after he was appointed for another 4 years he took away the word “Transitory”. He lied and said he was focusing on the two Fed mandates of stable prices and full employment. The next thing you know he’s pushing Climate change and social Justice. Just go to a Wells Fargo ATM machine, and before you get your transaction completed you get lectured on both of these items.

      • Red says:

        Do tell how is the Wells Fargo ATM machine lecturing on climate change and social Justice.

        • sc7 says:

          To some people here, a message when you complete your transaction that says “we are going green, go paperless today” or anything resembling a note of recognition for a significant event impacting minority populations is an outright atrocity.

        • Swamp Creature says:

          Red,

          I figure the one place where I could go to get away from politics is a bank and an ATM machine. Unfortunately, this is not the case anymore. Already, now when you go to the gas pump, you are greeted with poiltically correct ads and videos on the screen while you pump gas. Where does it end.

        • El Katz says:

          To kill the sound from the video on the gas pump, push one of the buttons along the right side of the video screen (our Shell station has 4). I think it’s second from the top and all goes silent.

          Yours might be different, but there is a “mute” button.

        • Pea Sea says:

          It’s me, the guy who gets vein-poppingly mad over a commercial on a gas pump. I am definitely sane and normal.

        • Swamp Creature says:

          Red,

          Their ATM machine comes up with text accusing the user of INJustice. Then, the two letters IN are deleted. Next it says, “We’re all in this together”.

          I made a complaint to the Wells Fargo management about this, and they responded by saying they will provide coaching training to the machine. This bank has become a complete joke. for over dozen reasons. Rich Edelman (WMAL talk show host) told every one of his 1 million listeners to get rid of Wells Fargo after they were caught defrauding California account holders by opening fake accounts, and more recently 100 bankers were fired for defrauding the PPP loan program. I’m done with them for other reasons too numerous to mention. It will take 3 months to close out all my business with them.

      • Dazed And Confused says:

        It’s not clear that considering wokeness and social justice would make the Fed more dovish.

        On the one hand, targeting full employment for disadvantaged minorities would be dovish.

        On the other hand, loose monetary policy causes asset price inflation and increases wealth inequality which is disproportionately harmful to disadvantaged minorities.

  2. Depth Charge says:

    “In other words, if the Fed doesn’t cap the runoff of Treasury securities and MBS, it could amount to over $100 billion per month, or a balance sheet reduction of over $1.2 trillion during the first year.”

    At that rate it’d take almost 8 years to get back to historical levels. Many will have died by then, some on the sidewalk thanks to Weimar Boy Powell and his war on affordable shelter.

  3. Trucker guy says:

    All those buy the dip crowds will have one hell of a dip to buy and for quite some time it seems. It’s actually nice to see the Fed holding steady in the face of a slowing stonks! market.

    But I suppose they’re painted into a corner at this point anyways. Nothing they can do buy fight the inflation. They’re just trying to do as much damage control as they can it seems. We shall see I suppose but somewhat surprised ole J-Pow is holding the course.

    • JM says:

      Holding steady? They are still buying bonds/MBS with rates at zero. Hint: Rates can NEVER go up more than 2%. NEVER, or the entire system implodes.

      • andy says:

        Perhaps the entire system already imploded and we just don’t know it yet.

        • Wisdom Seeker says:

          When the Minsky Moment arrives, there are always an enormous hidden number of black-hole balance sheets, whose speculative assets have imploded, but which have enough cash to still squeak out monthly interest payments for now.

          The managers can either be found in the pubs drowning their sorrows, in churches praying for recovery, or in lobbyists’ offices trying to buy a political reprieve with their last capital.

          The owners sleep peacefully, for now, in blissful ignorance.

        • Old school says:

          Yes, they got the debt bubble too big and now the system can’t work with a positive real interest rate.

      • John H. says:

        JM-
        “Never” is a long time.

        Might want to review Homer & Sylla’s ‘History of Interest Rates,’ or Friedman & Schwartz’ ‘A Monetary History of Interest Rates In the U.S’ for sweeping panorama of interest rate possibilities…

      • Dazed And Confused says:

        The Fed are trying to engineer a soft landing – a gradual low-drama adjustment to higher real rates.

        Since the Fed pivot, it actually seems to be happening and if current trends continue, real rates will be much higher by year end across the yield curve.

  4. Marco says:

    Words are words and actions are actions …
    If the economy slows sharply or the Markets drop by 50% how much of this FED guidance will be actioned or even achieved ?
    I hope that you are right on their intentions but what about the old quote about expecting a different result, may be it’s the sign of investment insanity to expect each-time a different result/action from the FED ?
    I still feel the Fed will take the cowards way out of their own mess and inflate it away and let us all pay for their incredible failures and recklessness …

    • Depth Charge says:

      All the insiders made all their money. Most are out of the market now. Wouldn’t be surprised to find out the FED and all their buddies just exited.

    • phleep says:

      A close listening to the public statements of the day says Powell said that if needed, adjustments will be made. Obviously if the variables swing far outside of expectations, the path will be adjusted.

      I fault Powell’s Fed for earlier leaving the path of normalization to juice the economy in the Trump years. But when an actual emergency did happen (COVID, as often ignored by many posters here), the stage had already been pre-set for some bad side-effects, and those have arrived. Then again, points off for Powell’s missing the inflation magnitude. But Powell appears aware in real time of the situation now, and appears to be doing sensible correction at this stage, IMO. If he follows through. Many here seem to expect prescience in steering big sprawling institutional things in a fog of war. You will never get that, outside of lots of luck, even with the best Fed leadership.

      To Biden’s credit, he does not seem to be brazenly jawboning the Fed as Trump predictably did. Yet, anyway; an election year is at hand. I understand the lurid combative style of this era has sifted into blog comments and the press as well as politics. Kudos to Wolf for keeping a clear head and voice amidst the noise.

      • Augustus Frost says:

        There is no “correct” monetary policy because no central planning committee (the FOMC) can possibly know the “correct” interest rate or credit conditions.

      • nick kelly says:

        Source: The Plague Year, New Yorker, Jan 4, 21

    • Old School says:

      Lesson from Mississippi bubble is do not turn your country’s economy over to a central banker. Greenspan, Bernanke, Yellen, Powell have blown the everything asset bubble and then facilitated everything inflation.

      Something big and bad is going to happen. It might be over night or it might be a 20 year grind. High asset prices are not the same as long term prosperity.

  5. ivanislav says:

    Make money on the downside and then switch to land, pm’s, and foreign assets. The economic and financial system cannot handle additional bouts of money printing like we just saw without a loss of confidence, but the Fed and government will go back spraying money in every direction in a year or two, if that.

    • Depth Charge says:

      Land is the most overpriced it has ever been in history. Raw land is highly speculative and subject to much more vicious price swings than houses. Unless it’s prime farmland that you can lease out, it is a money suck. You pay taxes every year and get nothing in return. The costs to develop land are the highest ever, and a huge deterrent to development. Many locales have adopted overly stringent standards and fees.

      Desert scrub in areas of the southwest should be selling for less than $500 per acre, instead bid up to the hundreds of thousands via speculators. If you want to see some financial amputations, watch what’s going to happen to those idiots. In 5 years time, you might be able to get a deal, but right now land is one of the dumbest “investments” ever.

      • Swamp Creature says:

        I heard the Chinese are buying up massive amounts of our farmland. They think long term.

        • Wolf Richter says:

          Wait till the farmland bubble bursts, as it did before.

        • ru82 says:

          I read Iowa farmland increase 29% in the past year.

          I read it is big companies and would not be surprised if it is foreign governments hiding behind LLCs. I know Saudi Arabia has been buying a lot in the US to secure and send food back home.

        • RU82 says:

          Wolf… what could be different us in my example, no farmland price is too high for a country that needs food.

          I know a few years ago it was becoming a big deal in Missouri that they were thinking about putting limits on foreign farmland ownership

        • Dan Romig says:

          From my 29 November Farm Net News weekly update & from the KC Fed on 23 November:

          https://www.kansascityfed.org/agriculture/agfinance-updates/farm-real-estate-values-rise-sharply/

        • MonkeyBusiness says:

          PPT now stands for Powell Put Team.

          If we shut down flights from China, it does not matter if the Chinese own one farmland or a billion farmlands. Long term? Don’t make laugh.

          Speaking of private owners, our friend Bill Gates is the biggest private owner of farmlands in the United States.

        • Turtle says:

          Yes, we really should stop foreigners from using American real estate as a place to store their wealth. In Canada, don’t they have mansions in Vancouver sitting empty for years on end? No bueno.

        • fajensen says:

          What are they going to do if the US declares its domestic food production a “strategic ressource” and then expropriates that farmland?

        • Morbaine says:

          I work in ag finance, I’ve been floored how quickly alternative protein is gaining market share.

          I think farmland has mote headwinds than tailwind the next 20 years.

      • ivanislav says:

        You either own land or rent it – you’re paying either way. I don’t think the Fed will wait 5 years before the next money volcano erupts and then everything, including that overpriced land, will shoot up in price. Ideally one would wait until max pain, but who knows when they’ll next intervene. I did not say to buy land now, but do try to get in before the next round of printing blows everything up. I agree about being careful about the jurisdiction / local government.

        • Depth Charge says:

          Not always. Many poor people have taken to living on public lands in their cars, RVs, and sometimes even tents.

      • phleep says:

        As the current excesses are wrung out, it is really hard to find a good deal to buy into assets. It may take a fairly deep recession to wring out all the easy-come-easy-go money still sloshing around, that has bid everything up. So my game plan (thankfully with a fair portfolio of assets bought in different times and steadily paid off), is to preserve liquidity and await opportunity. My real estate is the inflation hedge side of the portfolio. Meanwhile I have a nice allocation, to cash in when the VIX spikes, when I predict the slower-witted investors crowd out of assets they crowded into for the last few years. In a social media age, one must be vigilant based on how fast crowd sentiment might lurch in another direction.

        • Augustus Frost says:

          Not one recession, but either a massive depression or serial (multiple) severe recessions.

          What’s been going on for the last several decades isn’t going to be corrected by another GFC.

          The typical American’s financial position has flatlined since 2000, even with this asset mania, fake economy (since 2008), and the loosest aggregate conditions and lowest interest rates ever.

        • sunny129 says:

          ‘ it is really hard to find a good deal to buy into assets’

          Why?

          B/c they have been bid-up mindlessly, courtesy of ultra lose monetary policies for 12-13 yrs.
          Money ( if you are inclined, trained and experienced) is on betting ( against the mkts) on slow, intermittent and some time sudden, large leak of hot air from the 3rd largest ‘everything bubble’ of 21st century! Reversion to the mean, has already started.

      • Seneca’s Cliff says:

        Back I the 80’s I had a part time job while in grad school working for a consultant who did some sort of energy planning for rural counties in Oregon. One of my jobs was evaluating the town of “Christmas Valley Oregon”. This was place in arid eastern Oregon that had been developed in the 1920’s and the lots sold to investors from the east coast who thought land was always a great investment and hedge against the crazy stock values of the time. Only one house was ever built and the rest of the lots just have cows grazing on them . The titles to the lots are all stuck in various dusty safe deposit boxes throughout the eastern seaboard because they are worth so little they are not even worth selling. Too bad people have to relearn old lessons. Today Christmas Valley, tomorrow Phoenix or Vegas.

      • RedRaider says:

        When was it the Florida real estate bubble crashed? In the 20s right before the 1929 stock market crash?

        Maybe this is the template this time around too.

    • andy says:

      Or, get foreign land. Two birds with one stone.

      • ivanislav says:

        If you have a second passport and while we still have a relatively strong currency.

        • MonkeyBusiness says:

          A second passport might be the best investment one can make at this time.

          Talk about diversification.

      • phleep says:

        I think political risk is pretty high, as globalization hits rough patches. Vacationers recently discovered an instant (COVID-laced) version of this. One can place bets from here (USA) in new convenient ways, but there are agency problems: it is hard to monitor the far-flung investments of some fund or other. An example of the downside of that was investors piling into east Asian funds in the early 1990s. When the macro climate shifted (principally the USA via Alan Greenspan’s Fed hiked interest rates), lots of firms in the Asian “tiger economies” with nice-looking financials were suddenly exposed as mismanaged. Governance even in some foreign central banks (surprise!) turned out dodgy, and their currenices and exchange rates did really weird things. Years of loss and working out messes followed.

        • sunny129 says:

          phleep

          “lots of firms in the Asian “tiger economies” with nice-looking financials were suddenly exposed as mismanaged’

          B/c most of the developing Nations loans are issued in US$ (most will NOT buy the bonds issued in the local currency) Same re occur once the rates go up!

  6. JM says:

    If the FED controls the money supply and PPT can be the market maker buying bonds, stocks, ETF’s, everything, then why not QE and raise rates simultaneously? It seems against common logic, but could be the best of both worlds, at least for a short time. This all minus the consideration of debt load and impending collapse of the entire financial system and USD, which will happen regardless.

    • andy says:

      I don’t think the USD will collapse. Not until the Fed buys NFTs or crypto currencies some time next year.

  7. JM says:

    No asset is safe, everything coming down. Cash could be king in 2022 if the FED actually raises rates more than 2x. I just hope bloated gov pensions are reduced at the same rate as the coming wave of deflation.

    • Gomp says:

      Problem is some gov pensions are state constitutional. Meaning taxpayers obligated no matter what. Colorado Tabor law says tax increases must be voter approved. No tax increases, but taxpayer funded pensions. Uh oh. Catch 22.

      • Old school says:

        When property taxes are $15,000 in one state and $1,000 in another state for same size house you know what is going on.

      • Augustus Frost says:

        I haven’t heard that states can keep their residents from leaving, yet. It doesn’t matter what the state constitution says, if enough of their tax donkeys leave, benefits can’t and won’t be paid.

        Federal government won’t be able to bail out everything and everybody either, not where it can pay promised benefits in current purchasing power. When state pensions become a systemic issue, it will be competing with other constituencies for a bailout.

    • Brant Lee says:

      Precious metals paper futures are dipping a bit but actual bullion coin markets are a whole nother smoke. Premiums on silver and gold bullion and collector coins continue to rise steadily, there are no bargains.

      There is a rising disconnect in pricing between controlled futures and the hard stuff. It’s already too late to jump into bullion coins unless you want to pay hefty premiums.

      • Augustus Frost says:

        It will probably take a deflationary asset crash to decrease the premiums to pre-COVID levels. To trigger forced selling by “weak hands”.

  8. Confused says:

    We are very fortunate that Fed Chair Jerome Powell attended law school rather than medical school. I would hate to have my doctor tell me that I have cancer and then explain that he cannot begin treating me for two years because the cancer is transitory and he does not want to spook the funeral industry.

    • WES says:

      Yes, lawyers specialize in ensuring their words do not match their actions! Otherwise you might become confused!

      • Up north says:

        : )

      • Matt says:

        “Their faded eyes were icy, lacking ruth
        And all their tongues were forked to split the truth
        That word and deed might take diverging ways.”

        We’ve been doing this for as long as we’ve been a country. No reason to stop now!

  9. Finster says:

    As far as conventional policy goes, it may not be necessary the Fed to radically tighten to quell inflation. It will have to tolerate some asset price declines though, and if it does feel the need to step in with a “Fed put”, be content to stabilize markets and refrain from repeating past mistakes by inflating them further.

    The Fed’s dug itself into a hole. It can at least stop digging deeper.

  10. RH says:

    What will sooner or later happen with the economy is the result of massive corruption that has occurred, so the “Federal” bankster Reserve has funneled billions or trillions in QE commissions, dividends, ultra-low interest rate loans that enable the bankster to pay 2.5% or less per year to borrow trillions then charge you and I 23% or more on credit cards, etc. That will continue forever unless the public forces change. The corruption exists now in all states, reportedly, not just in some and in the EU, China (even greater corruption) and Russia.

    The corruption is also prevalent in corrupt US courts and prosecutors’ offices, also, must be cleaned out. Just read about the latest, most famous pedophiles, sexual abusers, serial rapists, creators of honey traps to trap politicians and powerful people for another country, etc., in the news. They only got “punished” (to the extent that is real) because of the massive publicity that caused the public to demand action.

    Most got away with it repeatedly and probably are getting away with it RIGHT NOW. Now, in LA County, for example, to file a lawsuit most victims have to be utterly insolvent or else, they have to pay a large filing fee, large fees for them or their lawyers to appear by telephone (Court call), large fees just to file necessary documents with the court (e.g., over $200 just to file an opposition and declaration), large legal fees to be represented, face huge potential liability for costs, etc. That is why attorneys of modest means must refuse most cases unless a busload of nuns witnessed the crimes/abuses and the television news first covered it in a documentary.

    The system is rigged to discourage victims from ever filing even lawsuit. If they dare to file a lawsuit, the judges will not require the perpetrators to produce the documents because discovery laws have been made into games in which wealthy defendants are given special treatment and protection by corrupt judges; the lawyers habitually will destroy documentary evidence or bribe witnesses or judges (post or pre-bribes, since many judges are only elected through financial support from large law firms or companies, which is why the contributors to judicial candidates are kept utterly SECRET, when they should be disclosed to all litigants).

    If they get to trial without being intimidated or harassed by the discovery by ultra-rich defendants forcing them to answer hundreds of questions, etc., the judges will intimidate witnesses with impunity if they start to testify against perpetrators out of the jury’s presence(e.g., abusive landlords that refused to correct properties rendered effectively uninhabitable by leaks, rats, etc., even in properties that appear decent), charmingly try to lead the juries with charm and attacks on the counsel for victims, and exclusions of evidence, convince court reporters to change transcripts of trials, etc. The commissions responsible for investigating or prosecuting judges are jokes who only prosecute powerless and/or non-control-group-connected lawyers, not lawyers of groups that are clannish.

    • RH says:

      Watch the BBC Newsnight interview of Weinstein’s assistant on youtube and what her lawyers told her to do after an alleged rape, which will tell you exactly how things truly work.

    • RH says:

      CORRECTION: … only prosecute non-control-group judges who are not from clannish groups that protect them, like the bar associations only prosecute powerless or poor attorneys, never attorneys from control-groups or from groups that are clannish. Thus, our “justice” system should be called our “injustice” and cover up system.

    • hillcountry says:

      Great comment.

      Ran across a plaintiff lawyer dealing with victims of a mold-disaster in high-end apartments (The Domain; Austin, TX). The shoddily-written Word-doc “agreement” for engaging her services, was authored by a paralegal she’d worked with in Houston; who at the time of the mold-disaster was working for the Simon Group, the ultimate land-lords of The Domain, which was on-the-hook for material damages, serious personal illnesses, etc. Nothing like having an inside-track on the lawsuits and the associated advantages of dragging them out, mitigating pay-outs, managing litigants expectations to their own detriment, and so on.

      • RH says:

        Yes. In particular, class actions are now used by wealthy companies to LIMIT liability and lawsuits against them: too many are brought by corrupt, crony law firms that settle for very, very little for victims (even just coupons for wrongdoers’ products!!) but large legal fees for themselves. Without class actions, wealthy sellers of addictive drugs that kill, for example, become liable effectively if they lose one case for all subsequent lawsuits, because their misconduct, etc., become established through collateral estoppel. Class actions are used to avoid that risk.

        If not reformed, the class action option should be ended.

  11. Ghassan says:

    Seems to me that Fed’s tone and actions are still tamed and to slow to seriously reduce consumer inflation, unless they intend to get more aggressive as markets realize the new reality I don’t see how 1/2% rate and no QT before fall will fight inflation. It might effect the stock market for a while but not enough to make substantial dent.

    • Depth Charge says:

      Weimar Boy Powell has always taken a squirt gun to a raging inferno. That’s how he rolls.

    • SnotFroth says:

      I dunno the stock markets choked and fell over today after his press conference. Seems like more indigestion is coming.

      • Depth Charge says:

        It’s now gone parabolic, up over 400.

        • Brant Lee says:

          Buy the dip in Amazon and Tesla, they be back to $3400 and $1200 at least a few times before this is all over. I don’t know how but I have faith in the Fed to manipulate the markets at least through 2022.

      • Swamp Creature says:

        Buy Robinhood. It’s almost below $10/share. You get more shares for the same amount of dollars. You can’t get hurt!

        Buy, Buy, Buy as Jim Cramer is fond of saying.

  12. Prophet says:

    Once QE is over, and QT begins, why not flat-out sell bonds/bills/notes and MBS in addition to balance sheet run-off?

    • Wolf Richter says:

      If they just let the runoff proceed without cap, the balance sheet might shrink by $180 billion a month initially. This is huge. Check out the numbers in the article. I ran some examples on actual maturities in the Fed’s portfolio for Aug, Sep, and Oct.

      So the Fed is going to put a cap on the runoff. Maybe $75 billion a month… just guessing.

      The only thing they might want to sell are their very long-dated bonds because otherwise, after two years of runoff, that’s all they would have left on their balance sheet.

      • hillcountry says:

        If they sell long-dated bonds do you see an impact on insurance company balance sheets per annuities? Thanks.

        • John H. says:

          Hill Country’s question about insurance company portfolio’s is a good one.

          A word or two about the knock-on effect on pension portfolios would be helPful too!

        • Wolf Richter says:

          hillcountry,

          Higher yields are good for insurance companies when they buy bonds at issuance with higher yields. Obviously, the bonds that they bought before at lower yields are now trading below face value. But insurance companies mostly buy at issuance and hold bonds to maturity, and when their bonds mature, they get their money back. So they’re not too worried about the price fluctuations in the markets.

      • Reader says:

        Wolf,

        Could you please explain what would be the issue of having the balance sheet shrinkage by $180 billion a month? As you have been showing us, since 2020 the balance sheet received a huge increase (more than $4 trillion) .. even having that shrinkage rate ($180 billion per month) it would take almost 2 years to deflate….In my naiveness I thought that to correct a huge increase in the balance sheet it would be required a huge reduction. Or in case there is a cap on the runoff of ~ $75 bilion a month, then we are talking of aproximately 4 years of balance sheet reduction… Could you please further elaborate the criticality and the reason to cap the runoff ?

        • Wolf Richter says:

          Reader,

          Look, it doesn’t matter what I want. I’m trying to explain how the Fed might do this. If the Fed removes $180 billion a month in liquidity through this balance sheet reduction ($2.16 trillion a year), it would certainly create some havoc in the markets, including in the credit markets, and probably globally. I don’t think a central bank will go for that.
          That havoc in the financial markets (including much higher long-term interest rates, such as 10% mortgage rates) would however stop inflation in its tracks :-]

      • Dazed And Confused says:

        “The only thing they might want to sell are their very long-dated bonds because otherwise, after two years of runoff, that’s all they would have left on their balance sheet.”

        If that happens, it might cause yield curve inversion which might be misinterpreted as warning of an imminent recession which they might want to avoid.

        More generally, was there any hint of the Fed aiming to shape the yield curve as part of their QT strategy?

        • Wolf Richter says:

          “If that happens, it might cause yield curve inversion…”

          The Fed’s selling its long-dated securities outright would drive up long-term yields, and thus steepen the yield curve.

          I think the Fed should do this from get-go. A steeper yield curve would be good. But they’re not going to do it, from the looks of it.

  13. The price action in the futures market continues to be erratic every time I look at it, whether the market is up 2% or down 2%. The only other times I’ve seen this is in late 2018 and in March 2020. Both times, the Fed had to act very boldly to prevent the markets from going bidless.

    In 2018, the market remained nervous for about 2 months until Powell finally relented. In 2020, it was about a month before the Fed acted boldly enough. The average of the two is 6 weeks. The S&P 500 broke its channel a week ago. So if history repeats itself, we can expect 5 more weeks of nervous markets before Powell is forced to postpone rate cuts.

    A different interpretation of the markets is that the leverage is higher this time, so markets will lose control more quickly. If this interpretation is correct, Powell will flip-flop within 2 weeks, and stop tapering.

    • andy says:

      5 more weeks sounds reasonable. Before they cut rates in March meeting.

    • ivanislav says:

      Clearly you need to spend a little time on /r/wallstreetbets. Everyone knows futes don’t mean jack squat!

      • Reddit is like Facebook and Google. They censor too much and this makes them useless.

        Here is the sequence:

        1) Futures trade erratically.

        2) Option-adjusted spread on US High Yield Index shoots past 4.5% (currently at 3.4%)

        3) Jerome panics and does whatever it takes.

        • Abomb says:

          Reddit…. Censorship…. You sure? Most corners of Reddit are like the wild west compared to Facebook. It’s crazy in there.

        • I never used Facebook much, but I hear they have this thing called Facebook jail.

          I made a few posts on Reddit until I said a few things that were unkind to billionaires. Now when I log in using a different IP address, I don’t see my own posts. I’ve been shadowbanned.

    • 8_mile_road says:

      //So if history repeats itself, we can expect 5 more weeks of nervous markets before Powell is forced to postpone rate cuts.//

      Powell has 2 choices:
      1. keep the interest rate unchanged, and embrace >10% inflation annually.
      2. Increase the rate by 0.25% (the higher the better). It will pop the stock bubbles, but it may bring down inflation a bit.

      • Wolf Richter says:

        8_mile_road,

        Powell and the Fed have a million choices, and he isn’t going to listen to me or you. They care about the credit markets, and if they lock up, the Fed will end its tightening. But the credit markets are near the loosest they ever, and the Fed is specifically trying to tighten the credit markets.

        So enjoy the show. This is going to go on for years.

        • dishonest says:

          How many of us will go on for years Wolf?

        • Depth Charge says:

          As we have seen in the past, those credit markets can slam shut faster than a disgruntled wife’s legs.

        • Wolf Richter says:

          Yes, correct, credit market can slam shut very quickly! But there is way too much liquidity out there now (incl $1.6 trillion in reverse repos) to make this happen.

        • drifterprof says:

          DC: “…credit markets can slam shut faster than a disgruntled wife’s legs.”

          There’s so much available liquidity around that one does not need to stick to one’s traditional source. It will probably be easy to find outsourcing options that are eager to lend out for a reasonable interest charge.

        • sunny129 says:

          drifterprof

          ‘There’s so much available liquidity around that one does not need to stick to one’s traditional source. It will probably be easy to find outsourcing options that are eager to lend out for a reasonable interest charge’

          Once the credit squeeze comes, very few are willing to risk their capital to some one’s else, especially now, where the stocks (including buy-back shares) have been bought with borrowed’ money + leverage!

          Read how Lehman went bancrupt in 2008. They HAD a credit line of 5 billion with with JPM but JPM flatly cut off the credit. Things can change over night! If there major globank failure or unable to meet the demands of due payment, things will have domino effect in our globalized and inter connected global banking system

      • Swamp Creature says:

        8_mile_road

        Agree with 1.

        #2. Disagree. Increasing the Fed Funds rate by .25% will do absolutely nothing. Zero! It will be more of the same. Increasing it by 1% every quarter will do something. It will create a recession and bring down inflation and the economy all at once. That’s the only way out of this mess.

        This is an election year. The Fed will do nothing substantial. #1 is closer to the truth.

    • Old School says:

      Not sure if it is true, but I heard a financial expert say that the market structure is different than it used to be and that once stock market falls below a certain level insurance companies have a lot of down side protected annuities that will start kicking in protective options and that market will feed on itself to the downside.

      Time will tell.

      • DougP says:

        “Financial expert”. Like calling the local weatherman a weather expert.

        They all guess at best and end up like the proverbial stopped clock

      • sunny129 says:

        Old school

        No one was buying protection ‘PUTS’ until this year. Try to buy a inverse leveraged ETF like DOG(1x) or DXD (2x) against DJIA. The spread ( bid-ask) used to be quite wide last year. NOT any more. B/c investors know the BEAR is close and growling loud now, unlike any time in the last 13 yrs. They go down very little even if the indexes jump, like today! I know b/c I trade them frequently over the last 15-20 yrs. To cutdown whip lash I always pair with long ETFs ( apprx 4 to 1) Definitely NOT for the novice!

    • Wisdom Seeker says:

      @Orthodox –

      Confirming your intuition about large price swings:

      If you go back through market history and graph the daily change in prices (or even better, the daily range, or even the day-to-day range to account for overnight gaps), you will indeed see that large daily moves do cluster together, and those clumps occur during corrections, crashes, bear markets etc. Large down moves and large up-moves (bounces) all jumbled together. Mayhem all around.

      The Volatility Index (VIX) doesn’t track this exactly, but it tracks the anticipation of large price changes as seen in the futures markets.

      • Yes, the daily swings are large, too, but they are not as unique as the erratic behavior of the second-by-second fluctuations of the stock index futures. I’m seeing the price jump from let’s say 14228 to 14222 and then to 14231 within seconds. In a stable market, you might see this briefly, but now it’s going on pretty much 23 hours a day, on the way up and on the way down.

        • Wisdom Seeker says:

          Yes, liquidity dries up too, the bid/offer stacks are smaller, and so price quotes become much noisier.

          But if you’re only seeing the 4th or 5th digit changing, the market is still functioning ok!

          Let us know when the 3rd or even second digits start carrying all the noise…

  14. andy says:

    In good news, Tesla’s net income is up some 760%, per CNBC. Very undervalued on PEG basis.

    • Depth Charge says:

      Accounting gimmicks. “Cooked books” is the new, widely accepted accounting standard.

    • Wolf Richter says:

      Tesla’s GAAP income for 2021 was $5.5 billion. If I give Tesla the benefit of the doubt, I would pay 25 times net income = $137 billion. Compared to its current market cap of $941 billion. So the stock is overvalued and would need to drop by 85% before it would be valued appropriately at 25 times earnings.

      • Kunal says:

        I think TSLA will be earning $200B within 10 years, so their market cap should be 5T. There is a risk of lets say 80% that they will falter thats why the discount today.
        Not sure why you do not see that they can be the next AAPL, but 5x bigger. And they are certainly execution machine, compared to every other auto company. Cars will be like second homes for people in the future, providing entertainment, shelter, transportation, information, assistant, chauffeur, well everything you can imagine. It is 100x bigger opportunity than a 6 inch screen which gave AAPL 3T market cap.

      • nick kelly says:

        And the BIG GUYS are entering the arena. VW and Toyo to name the biggest. Bet neither have their bumpers fall off.

        • Kunal says:

          Reminds me of Nokia and Motorola (the big guys) getting serious about smartphone after AAPL released first iPhone.

  15. Kunal says:

    I want to believe what he said but Fed has been lying for 15 years now. Why wait when full employment mandates are met and real inflation running at 10+%. He did not even commit to raising rates in March. The man is full of BS.
    Whenever markets crash, Fed drops the rate immediately. Now that it’s high time to raise rates, he is doing nothing and just lying through his teeth. No action and more BS.

    He is more political than our politicians. Sugar coating poison pills for the sheep. Some sheeps do believe his lies that’s why yields and stocks are moving but elite knows that Fed is in bed with them.

    • KPL says:

      “Whenever markets crash, Fed drops the rate immediately”

      Yes that is what they have been doing last since 2008.

      But that was when inflation was not running at 7%. Now there is this…

      “Will you take a question on inflation?” Doocy asked. “Do you think inflation is a political liability ahead of the midterms?”

      (President not knowing mic was hot)

      “No, it’s a great asset,” President deadpanned. “More inflation. What a stupid son of a bitch.”

      Market losing 5% or 10% is not going to cut it this time. The credit market has to seize up.

      However they are going to do it ever so slowly – my guess is the Fed is hoping that inflation will come down alongside.

      If the next inflation reading comes in hotter then?

      • Jake W says:

        i agree. they were content to print for stocks when there was no apparent cost to doing so. now, the ultrahigh inflation rate, is the cost staring us right in the face.

        what the fed cares about more than anything is its credibility and the power of the dollar, as those two things are where its power derives.

        the fact that we’re discussing this right now means that their credibility is mostly shot. they have to rebuild it, and they know it.

        • Augustus Frost says:

          Key USD level is around 70 on the DXY, the low in 2008. It’s currently at 95.

          If the USD “freefalls” below 70, there may be doubts in others minds but not mine that the Empire will be preserved at all costs while the public, asset markets, and billionaires will be thrown under the bus.

      • Kunal says:

        They do not care about inflation. They serve the rich elites. Everything else is smokes and mirrors.
        The sooner commoners understand the less poor they will be.

    • Old school says:

      It’s like a hot air balloon, you have to account for the time lag between once you cut the gas and the change in altitude. Even though they are slowing QE dollars feeding the system, your ascent is 7% per year and rising probably for next while.

      When it comes to protecting government well being the big whigs have a license to lie.

  16. SnotFroth says:

    I listened to Powell on AM radio while getting lunch. He sounded less confident and more stammering than usual. I chuckled thinking he was probability praying that all journalists were vetted well enough to not bring up “transitory”.

    Later looked at the Nasdaq and it had keeled over. Seems like markets had an epiphany today.

    • phleep says:

      Keeled over? Yeah, the markets are volatile, but closing some days flat. The buy-the-dip crowd (with its lofty cash and recent sentiment highs) isn’t wrung out yet. Some more sleepless nights and 5 percent down days (maybe closing that way) may be just the tonic to instill sobriety. Rockets to the moon do crash with a fair frequency, as do their linked neurochemicals. Mister Market is pretty jangled, but still tippling. But the really big crowds have not got the memo yet.

  17. ivanislav says:

    Oliver Renick on twitter: “The good news is, stocks are getting cheaper. Price/Sales of the S&P 500 is now just 20% above the dot-come level.”

    • phleep says:

      Price/Sales seems the non-GAAP gimmick of the day. It would be like counting bloated assets on a balance sheet without a glimpse at liabilities.

      • Old school says:

        Price to Sales is very good metric for overall stock market because it can’t really be fudged unlike earnings. Nobody can precisely value stock market but P/S can currently be rounded to 3 where long term value can be rounded to 1.

        • Wisdom Seeker says:

          Price/Sales IS a good metric, but as a valuation it assumes stable profit margins. There’s significant risk of margin compression; that’s going to be part of what drive P/S back towards 1.

          Profit margins are near all-time highs, with several plausible sources of margin compression out there. Even without inflation in either materials or wages, supply chain chaos wreaks havoc on operational efficiency.

        • Augustus Frost says:

          Revenue recognition isn’t fool proof either and standard has been revised under GAAP recently. It’s a lot better than earnings though.

          The reason no one can precisely value the stock market (or anything else) is because value only exists in people’s minds. That’s how we get a 20+ year asset mania (the one we are in now) while the economy and living standards lag badly or flatline. Value isn’t actually connected to the “real” world.

  18. Escierto says:

    The USD believes Powell is serious. It shot up like a rocket today. Gold was annihilated. So much for the inflation trade!

    • drifterprof says:

      DXY up .76%

      USD/THB up only .23%

      I’m hoping USD/THB returns to its November high, which was about 10% higher than it is now. I want to convert another tranche the Thai baht because U.S. volatility is making me more nervous now.

  19. OutWest says:

    In other words, it’s a top and everyone has been warned…when does the average american start to sell to lock in those precious gains?

    • Alku says:

      at the bottom :)

    • Prophet says:

      OutWest,

      If you’re nervous about losing those paper profits, by all means, lock them in! But don’t ask anyone when the time is right to get back in, you’ve got to make those decisions for yourself. Having said that…

      My worst-case RULE in converting a paper profit into a real profit is when I’ve given back 50% of the *maximum paper profit*. Normally, I don’t give back 50%. However, experience has shown me that losing 50% of the maximum could well turn into losing 100% (all of it) and that, OutWest, is a SIN!

      If you lock in your profits, be happy with your decision! If the markets reverse and make new all-time highs after you’ve sold (not saying they will), be happy with your decision!

  20. Bet says:

    The SPX can fall 50 percent and still be in a bull market. It’s had an 11 year run and the last 18 months was batchit up relentless crazy. Time to pay the piper. Get used to it. Let the markets work again and find true value . When Home Depot runs up 100 percent in a year and Deere 200 points. You have a problem I don’t feel sorry for outright greed Time to book em Dano

    • KPL says:

      “The SPX can fall 50 percent and still be in a bull market.”

      Yes and this is something the guys used to the market going up for ever do not want to wrap their head around. All the more reason for the Fed to be not bothered about it as long as it happens ever slowly and not all at once and also it does not seize up the credit market.

      That means, for now, as long as the inflation is hot and credit market is awash with liquidity, it is going to be rate hike and QT time.

      So we again go with do not fight the Fed.

      However the question does remain how long can it go on (rate hike and QT) without credit markets seizing up?

    • sunny129 says:

      Bet

      During GFC S&P lost nearly 60, would have lost if not intervention by Fed in the March of ’09. Nasdaq lost nearly 90% during dot com (peak to trough apprx 30 months)

      I think this time, this 3rd largest ;everything’ bubble born and fed on debt on debt (+ leverage) by Fed will have it;s own record

  21. Harrold says:

    Looks like we’re all thinking the same thing. Suddenly this clown is going to stop lying and do what he said. I’ll believe it when I see it.

    This is all a bit too unprecedented to me. First time they’ve been transparent about when rates will be hiked, instead of sneaking up on everybody with a baseball hat. First time ignoring the election year politics. Biden’s people must be having a fit. (Biden himself would too if he woke up long enough to notice). First time not letting the “special” people front run and steal from everybody else.

    If he really does all this we might actually get the rate normalization without the markets crashing. This kind of transparency really could let the markets discount the future calmly without the usual fireworks we get when the “gurus” slam us upside the head.

  22. Seattle Guy says:

    I like Cycles….seems we have a 7 year Cycle coming on us .
    In 1966, the United States experienced a “credit crunch”. In August of the same year, the U.S. Treasury market suffered a “liquidity crisis.
    In 1973, the “first oil crisis”, with economic problems and stagflation.
    In 1980, Wall Street forced the Hunt brothers to stop hoarding silver , to avoid brokers bankruptcy, Prime Rate hit 18%
    In 1987 October, the Dow fell 22% in one day on “Black Monday”.
    In 1994, the FeD raised interest rates six times in a row, and interest rates rose sharply from 3% to 6%, resulting in famous bond massacre.
    In 2001, Dot Com Bust and 9/11 triggered a severe setback in the global stock market, stock market closure from 9/11 to 9/14, the stock market fell 14% in one week.
    In 2008, Sub Prime Real Estate Bust – Lehman and Bear Sternes and Bank Failures, Hong Kong stocks and U.S. stocks plunged.
    In 2015, Hong Kong stocks collaped 45%, Grexit Drama, German and Swiss bonds and U.S. stocks drop on 1st rate hike in 10 years.
    IN 2022:?

    • Elvis' Bass Guitar says:

      2022: Paris Hilton discloses a sex reassignment. SP500 loses 30%.

    • Old school says:

      I just saw a chart on real 10 year returns in the stock market. If the pattern continues the next 10 year real return is negative.

  23. will says:

    One interesting observation that’s related to this new seriousness about the inflation (assets or CPI/whatever).

    I’m sure everyone’s aware of the Biden ‘hot mic’ “what a stupid son-of-a-bitch” episode from the other day. Personally I quite liked his response, not that what I think matters.

    But what it really illuminated, to me, is just how politically and institutionally toxic the inflation issue has become. They went from having almost 2 decades of virtually consistently wishing they could have “more inflation” (except for a small spell before the housing bubble collapsed), to doing a complete 180-degree turn and feeling like inflation is the evilest thing in the universe and seeing it as a massive liability for their jobs.

    On a related note, ‘inflation=bad’ seems to be the only thing that there’s a political/social consensus on currently.

    There hasn’t been much talk of it, but I’m assuming that the Central Bankers, and the appointees in particular (such as Jerome Powell) are also experiencing existential thoughts about their legacies. It’s interesting that there’s also bi-partisan consensus on believing that Paul Volker is a hero. I’m sure Jerome doesn’t want to be remembered as “Weimar Joe” and more than Biden does..

    Stephen Roach just published a decent write-up on how behind the curve the Fed is on the ‘Project Syndicate’ website. It’s illuminating to have it put into numbers.

    Thanks for listening to the Fed minutes Wolf, so that I don’t have to. Cheers.

    • Old school says:

      I always like Stephen Roach. I will find his piece.

      Big problem with current system, is politicians and central bankers know they can solve every crisis with fiat money not properly considering unintended consequences. If you had asked critics of founding of the Federal Reserve even they could not have conceived of a Fed with a balance sheet of $9 trillion and a dollar devalued to a penny or two

    • Augustus Frost says:

      I’ve said it multiple times, FOMC members aren’t robots. They don’t ignore perception. Most people like to be liked, even if they care about the opinions of some (their peers in the economics profession, member banks, and Wall Street) more than others (everyone else in some order).

  24. makruger says:

    The Fed’s loading up on US treasuries and MBS’s is analogous to a Costco shopper in the early days of the pandemic going through the checkout with multiple shopping carts full of paper towels & toilet paper.

  25. Franz Beckenbauer says:

    Humpty Dumpty sat on a wall
    Humpty Dumpty had a great fall
    And now all the king’s horses and all the king’s men
    cannot put Humpty together again.

  26. RU82 says:

    I am trying to figure out the housing scenario. In the last post there were many charts of new homes being built. Yet we are hitting an all time low in housing inventory for sale.

    I have a couple of rentals and I am still getting several calls and postcards and text messages every week offering cash for my rentals. I would like to know who is selling my cell phone number to these people.

    I also just read in the WSJ how local cities are now also jumping into the housing market. The city of Cincinnati just outbid four big investment companies on 194 homes. They are trying to limit how many homes get sold to investors. They plan on renting these homes to low income families and then eventually sell the homes to these families. The article said 4000 homes in Cinncy have been bought by investors over the past several years. The city is going to issue 500 million in bonds to buy houses.

    I read something similar about Kansas City. Black stone went into some low income neighborhoods and have bought over 300 homes recently. . These neighborhoods used to be 85% owned by families that lived in them but now most of the neighborhoods are 70% owned by investors whose businesses are in New York or foreign investors from overseas. The newspaper that ran the article said they are all LLCs so it is hard to track down the real owner of the home. It is crazy but there is still a land grab going on.

    Guess what is even more ironic. Now the Mayor of Kansas City wants to pump tax payer infrastructure money into these neighborhoods that are all owned by corporations. Thus will raise the value of all those houses they bought. Why did they not make these area better before wall street bought the houses. We know who wags the the tail.

    It is causing issues as many low income people have lived for years in these areas but now cannot afford to. They are struggling to find somewhere to live.

    • fizee says:

      RU82 I think we are seeing a drift into a feudal system. Still the same peasants but the Lords now are the oligarchs of Wall St, Washington, town hall etc. Some would prefer a monarchy, (think the Donald), but the constitution doesn’t quite stretch to that yet.

      • ru82 says:

        I just read Blackstone also started a BREIT a few years ago. They have now accumulated over $50 billion of various properties and it keeps growing.

        At some point they need to put a limit on how much land and property an individual or corporation can own. This is a democracy and not a feudal systems with kings, knights and and a royalty class

        • sunny129 says:

          ru82

          ‘This is a democracy and not a feudal systems with kings, knights and and a royalty class’

          LOL!

          USA is democracy in name only but ruled by Oligarchy along with Corporatocracy for DECADES! Top 1% have more than 50% of Wall St wealth, are the one calling the shots! 65% of all US senators are multi millinares!

    • Jake W says:

      i’ve said it before and i’ll say it again. there’s no such thing as “low inventory” in a vacuum. inventory is low because investors are buying properties with no intent on renting them out. further, people who would otherwise sell won’t because they don’t want to sell hard assets during a period of high inflation and worry that they won’t be able to find an alternative place to live.

      remove the credit conditions that are leading to investors buying up properties, and there will no longer be “low inventory.”

    • phleep says:

      “These neighborhoods used to be 85% owned by families that lived in them but now most of the neighborhoods are 70% owned by investors …”

      That was before those families got greedy/foolish in the 2000s and started living off trading away their equity via credit cards and refis. There was a big generational bump toward serfdom. We can blame the bankers and private equity funds but actually the people should have lived within their means and figured out how to protect their own vital interests. Harsher versions of this happened with the arrival of feudalism post-Roman Empire, and the massive grift that created contemporary Russia. The little guy took the short money and ended up in the street. That’s why Christians and Muslims denounced interest-bearing debt so much. The masses had a hand in their downfall though. The devil most readily gets in the living room via invitation.

      • ru82 says:

        I think you are generalizing low income neighborhoods. Sure there is maybe 10% to 20% that did live that way and some of them where targeted to take out Home Equity loans because they were not aware of the pitfalls and being misled and told they could live beyond their means.

        I remember the real estate commecial being played a lot in the 2000s where the husband says…I don’t think we can afford it but the relator says yes you can. I told my wife that commercial is going to get a lot home buyers in trouble.

    • Gen Z says:

      “You will own nothing and be happy” doesn’t sound like a conspiracy theory anymore.
      The average Joe and Jane couple cannot afford a starter home in many American and Canadian cities and backwater towns.

      • Depth Charge says:

        They don’t want you to own anything. They want it all to themselves, and want you stoved up in a Soviet era-like housing block, eating bugs and walking if you need to go anywhere. Wouldn’t want useless eaters like you to continue to pollute THEIR planet. But they’ll continue with the limos, the private jets, and all the other spoils, because, you know, “do as I say, not as I do.” The billionaire globalists are mentally ill megalomaniacs.

        • Danno says:

          Very true..I visit Cuba often and the Communist leaders there are no better than what we have here.

          2 classes, no middle.

          Same outcomes, different names.

  27. 2BFrank says:

    As usual the Fed is a dollar short and a day late, the time to have started this was last April, then it could have been a lot slower process, I have never yet seen the Fed get the timing right, I wonder what the cumulative costs have been of the constant mistiming of the Fed and the consequent boom and bust cycles since 1913, I expect the cost is probably the same as the entire US economy by now.

    • Wolf Richter says:

      The Fed should have never done QE like this. They should have used repos in March 2020 to calm the panic and then get out of it. And they should have raised interest rates by June 2020. Everything the Fed does going forward to tighten is just a way to mitigate the damage they have already done.

      Here is part of the damage that they have done with their policies since March 2020: they have created the biggest wealth disparity ever:

      • Depth Charge says:

        According to the FED, they have nothing to do with “wealth disparity.” They’ve gone on the record saying as much.

        • phleep says:

          It’s called the rule of law. They have their defined marching orders, as defined by the consent of the people, through their elected reps who delegated the limited powers and their general scope via statutes. Winging it, for whatever ill-conceived greater good or cause or justice or whatever the label is, is called dictatorship. If the people don’t like it, they have a remedy: elect someone who will correct it, though that path is usually as fraught as any other. And if nothing else, there is a president with huge megaphone to make comments, though not binding. Like a legislator, the president can be de-elected. There are gatekeepers and pundits. the people took their freebies without complaint. I always look suspiciously at the crowd first, because without their acquiescence, none of this can happen. As in 2008, so now too. Greed of the masses fed the fire.

        • sunny129 says:

          phleep

          ‘suspiciously at the crowd first, because without their acquiescence, none of this can happen’

          What crowd?

          Bottom 90% have less 10%, top 10% 90% and theb top 1% have more than 50% of Wall St wealth!
          The bottom 40-50% don’t have $400 in savings. Most live on check by the next! That ‘CROWD’ is inconsequential to those, running this country!
          B/w who would say NO to FREE money/ ( stimulus++) Get real!

      • ru82 says:

        I agree but it is just not the FED. It is the Government allowing companies to become monopolies in almost every industry.

        All the local money flows out your community to corporate headquarters and the investors of those stocks.

        Almost every industry has only 3 choices.

        Hardware stores: HD, Lowes, ACE, and a few regionals
        Pharmacy: Walgreens, CVS
        Autoparts: Autozone, Advanced Auto, O Reilies
        Department stores: Target, Macys, Kohls and a few regional
        Office Stores: Staples / Office Depot

        Then you have Walmart and Amazon for almost everything else and all of the above.

        Internet Search and ads: Google, Microsoft
        Social Media: Facebook, Twitter, Microsoft (linkedin)
        Computer OS: Microsoft
        Computer Word processing: Microsoft
        Cloud: Amazon, Microsoft
        Cell Phones: Apple, Samsung, and a couple of smaller ones.

        • sunny129 says:

          ru82

          Do you wonder why NO politician in either of the parties are interested in the REAL reform of Campaign Contributions by the Corporations in this Country. They own the Congress via K-street.
          In 2014 even SCOTUS (5-4 you can guess, who that 5 were!)) declared that a Corporation is a CITIZEN! The guys/gals on the main street have no chance but only to debt slaves and serve the Billionares. Just 7 Billionares have more than bottom 50%!

      • Dazed And Confused says:

        “The Fed should have never done QE like this. They should have used repos in March 2020 to calm the panic and then get out of it. And they should have raised interest rates by June 2020.”

        In Q2 2020, unemployment reached a 70+ year high and there was an all-time record contraction in GDP. Almost the whole country and much of the world was locked down and it was unclear how long that would last. The emergency response of Fed and Govt did not seem unreasonable under the circumstances.

        Fast forward to Q2 2021, safe and effective vaccines were widely available and successive waves of covid variants had less and less impact on economic activity as people and businesses adapted. Unemployment was below 6% and trending down while inflation was above 4% and trending up.
        At this point, it was completely unfathomable why QE wasn’t quickly tapered to nothing followed by rate hikes and QT.
        Fed funds might already be 75bp and the balance sheet a $1T lower.
        This might have subdued asset price and consumer price inflation and stopped things getting really out of hand.

  28. historicus says:

    “people who would otherwise sell won’t because they don’t want to sell hard assets during a period of high inflation and worry that they won’t be able to find an alternative place to live.”
    indeed.
    Why are 30yrs 4% below inflation? The Fed. Why?

  29. Mark says:

    “You need to listen to the press conference. It’s an eye-opener. ”

    Why ? Just to listen to more blatant lies and deliberate mis-information ?

    Like we’ve been hearing for years , from the criminal Fed ?

    This one sick cartoon.

  30. Dazed And Confused says:

    Was there any update from FOMC on forward guidance of the trajectory of interest rate hikes e.g. dot plots of the number of hikes this year and next, and Fed predictions of unemployment rate and inflation in 2022?

    • Finster says:

      They’ve abandoned the Summary of Economic Projections at least for the time being. This included the “dot plot” etc. They’re misguidedly trying to do “forward guidance” but finding little they can commit to. Look how Powell has already had to backtrack on his commitment to ultra easy money through 2024. You could say the Fed has left markets “dazed and confused”…

      • Depth Charge says:

        Because Powell is flying blind and nothing but a bullshitter. What good is forward guidance if it is just plain false? This whole telegraphing FED policy so as to coddle “the markets” like they’re some delicate baby is pathetic. The FED is a bunch of cowards.

      • Finster says:

        Wolf corrects this below. They’re doing the Summary of Economic Projections every other meeting.

    • Wolf Richter says:

      Dazed And Confused,

      Not at this meeting. The next meeting will have a dot plot.

      The economic projections, including the dot plot, are only done at every other meeting, so four times a year, about quarterly.

  31. JustTruth says:

    More lies and deception from the chief liar in residence, the FED, with a 9 trillion dollar balance sheet. They have yet to raise rates and QE continues on, so the balance sheet grows. The only tightening going on is Powell’s jaw when he speaks, since his soul knows how corrupted he is.

    • Dazed And Confused says:

      Tightening is already happening – a couple of examples were explicitly mentioned in the article:

      “The 10-year yield spiked nearly 10 basis points, to 1.87%, the highest since December 2019, and the two-year yield spiked by 15 basis points to 1.17%, the highest since mid-February 2020”

      • Old school says:

        Gunlach has interesting long term chart that the Fed funds rate always follows the two year. Two year rate jumped up in the last few months and Fed had to move. They have to get some rate increases in before 2/10s invert as that has always triggered recession.

  32. Gilbert says:

    “And after the rate hikes begin, the Fed would “significantly” reduce the size of its balance sheet.”
    Count on me to be at the front of the buying line.

    • Old school says:

      I think Fed has to say they are going to run down balance sheet, but they know it’s not really going to happen other than a few hundred billion at the most. They monetized 8 trillion dollars of government debt and that is going to stay on the books till they have monetize some more.

      Japan and Europe destroyed their banks with negative rates and zero rate long bonds. Fed isn’t going to do that, they are going to do QE.

  33. Michael Engel says:

    JP entertained a bearish option : the downturn cont til Feb, thereafter a low quality rally til Mar, for DM #13.
    The big one, later.
    Live JJ alone !

  34. Michael Engel says:

    Leave them alone !

  35. Gen Z says:

    Meanwhile, TIFF Macklem at the Bank of Canada refused to hike interest rates yesterday.
    Why are the Toronto elites so adamant to protect the Canadian housing bubble?

    • Depth Charge says:

      Because pajama boys love the CCP.

      • Gen Z says:

        I don’t want the Hong Kong standard of living in Canada.

        Yet there are dozens of college students sharing a basement floor and paying C$600+ a month to boot, almost like the cage apartments in Hong Kong.

    • Old school says:

      Government always like the housing bubble it’s the bust that is the pisser.

    • Danno says:

      They have nothing else but oil and that won’t re-open til little Justin is gone.

    • Old school says:

      It’s like a PE ratio. Earnings can stay the same, but if market runs PE up from 10 to 30 then everybody feels rich although nothing really changed.

      House prices tried. Still the same old house.

  36. Winston says:

    “The Fed has a lot of room to raise interest rates without damaging the labor market, he said.”

    And inflation will be transitory…

    Everyone just pretends that these clowns have any idea whatsoever about what they claim to be the authorities on. What a sham, make believe world. The South Park segment showing them throwing a decapitated chicken in a ring whose floor was marked with potential actions to be taken during the GFC is more accurate.

    On the “labor market” thing, that’s a safe bet, it’s already heavily damaged and the Fed “promises” to end QE entirely in “early March” (why not NOW?) and that it will start hiking interest rates “soon” (sure, and if the everything bubble begins to burst as it will they will reverse course).

    They are trapped in a impossible situation of their own making and made by governments who in gladly believing their garbage economic theory think “deficits don’t matter” forever.

    • Old School says:

      They can think the system is going to collapse on Monday, but they can’t tell you that or it would collapse today.

    • Augustus Frost says:

      It is a pretense. There is no “wizard behind the curtain” any more than there is in “Oz”.

      There is no reason to believe that any FOMC member upon assuming their position gains any additional insight than they had before. There is no reason to believe a central planning committee (the FOMC) knows what the “correct” interest rate should be or what represents appropriate credit conditions. There is no reason to believe the FOMC through monetary policy or government through fiscal policy can “print” and spend the country to greater prosperity.

      Yet this is what most who think about the subject believe even though it’s idiotic. It’s a belief in magical thinking, unquestioned faith in an economic priesthood.

      It’s also idiotic to believe that the US or any other country is exempt from the reality and limitations that apply to others, both now and historically.

      Add it all up and yes, it means the typical American is destined to become poorer or a lot poorer over the indefinite future.

  37. Citizen AllenM says:

    LoL, easy investment money has now peaked for my lifetime.
    Hope you all enjoyed the ride. Now comes that pesky downside.

    The amazing part is this has been a long time coming. And yet nobody believes it could be true.

    The Fed has done nothing to damage the investment markets since the early 80s so, therefore, it never will.

    Like so many things, baby things change.

    The old folks remember, but they are not welcomed for it.

    Winter is coming, and Powell will do very hard things to save the dollar. And it will come at a very high price indeed.

    If they have teh courage to do it.

    10,000 days of amazement await.

  38. David Hall says:

    The stock market is rising on double digit EPS growth.

    Higher oil prices might bring more oil drilling, more oil production and fewer oil price increases.

    Higher soybean prices should allow farmers to invest more in farm equipment.

    • Dan Romig says:

      2022 should see 92.3 million acres of soybeans & 90.3 M of corn planted in the USA.

      For 2021: in Minnesota, soybeans averaged 47 bushels per acre; ND @ only 25.5 Bu/Acre (down 8.5 Bu/Acre from 2020 yields); SD @ 40 Bu/Acre.

      U.S. tractor and combine sales had double-digit gains in sales in 2021.

    • Tom15 says:

      Would check input costs for 2021 vs 2022.

      Fuel, fertilizer, roundup….all up this year.

    • Augustus Frost says:

      Earnings aren’t real money. You can’t spend it. It’s an accounting abstraction and a very poor indicator of (relative) value.

      Dividends are paid out of cash flow but the yield is close to the dot.com bubble low, one indication of a mania. The rest of it? Buried in the balance sheet where it’s mostly going to stay and the typical “investor” has no ability to monetize it.

      “Investors” cannot monetize it because they aren’t actually investors, business owners. They aren’t buying “part of a business” but a piece of paper with a handful of common characteristics. They can vote for corporate directors (one characteristic) but have as much actual say as the public in most elections. In other words, none.

  39. Jim Cramer Fan says:

    Great GDP print! I don’t see this bull market ending anytime soon. We just had a healthy correction. I hope ya’ll bought the dip. If not, you better hop on this rocket ship while you still can!

    • Winston says:

      “Change in private inventories added a whopping 4.90% to GDP, up from 2.2% in Q3, a huge increase which accounted for over 70% of the bottom line 6.9% GDP print.”

    • Jake W says:

      how is a 6.9% increase in gdp, which is below the rate of inflation, a “great” print? it means the economy contracted.

  40. Phoenix_Ikki says:

    Well Wolf the joke is on you. Thanks to the dedication of the PPT…the boys are back in town. 500pts up earlier and 350pts up as of now, if I am a betting man, I say it goes to Mars by end of market close today, 500 – 800pts up at close perhaps?

    The hopium is strong with the market..nothing but up up and up. PPT keeping American market since 2018, a salute to these American heros.

    • Gomp says:

      Dead cat splat.

    • Wolf Richter says:

      In this volatile market, every comment about stocks being up or down will be obviated by events a few hours or a day later.

      • DawnsEarlyLight says:

        You can’t obviate an event that already occurred. Sort of like COLAs can not obviate past inflation for which they were ‘adjusted’ to correct.

      • sunny129 says:

        Wolf

        Agree.

        Not just volatile but furiously volatile with indexes turning red to green and vice versa. Definitely NOT market for investors but only experienced Option traders with high tolerance!

    • Brent says:

      Now that we reached Permanently High Plateau and even Higher Plateau beckons some people feel dizzy,can’t breathe and suffer from oxygen deprivation.

      Financial Mountaneering is not for everybody I guess.

      Per Aspera ad Astra,my friends !!!

    • Wisdom Seeker says:

      Well that bounce didn’t last long… NASDAQ and RUSSELL red again, S&P and Dow looking as droopy as fund-managers’ eyelids after all the sleepless nights…

      • Phoenix_Ikki says:

        The day is not over yet..have some faith in our PPT, they do amazing turn around last half an hour of the market. I am confident they can pull this off and reverse the market up, maybe not 800pts up but definitely up.

  41. HR01 says:

    Wolf,

    Many thanks again for parsing out the critical points from the Fed press releases and Powell’s presser.

    See a number of your readers here remain in denial. “Fed can never raise rates. Can’t reduce the size of the balance sheet.” Shouldn’t single out the readers here, we see these comments at all financial and economic websites. They’ve been conditioned to believe that monetary policy over the past 12 years is not only normal but that the Fed was late to the party as Japan has been on this path for over 30 years.

    The other fallacy that we see published many places goes like this:

    “The Fed is about to commit a major policy error”

    This last one really irks this reader. No, the errors of Fed policy are all in the rear window. Every wave of QE was a massive policy error that imprisoned price discovery in solitary confinement.

    Financial asset price crashes are a feature, not a bug, of quantitative easing.

    As for monthly caps, agree that the Fed likely will implement some limit in the Treasury column of the ledger. As for MBS, they’ll just have to let the chips fall where they may. Fed has been itching to get out from under its long-dated pile of mortgage securities. They won’t be purchasing any more simply because some magical monthly cap amount is breached. Rather we should expect to see outright sales at some point.

    • dishonest says:

      50 basis points, wow!

      • DawnsEarlyLight says:

        Yeah, hold on to your thong/strap, because the ride is incredible!🤣

    • Phoenix_Ikki says:

      I wouldn’t call it denial but more like conditioned to believe based on Weimar Jawbone Powell’s past action. Like Wolf had mentioned before, they still got the foot on the pedal even now. Have not started aggressively reduce balance sheet…same for rate increase..wait until March. Should we wait for inflation to spike more in March too? Good golly…that .50 basis points is going to save the day with what we see in asset price inflation.

      The market is a joke too, they should just rename Dow and NASDAQ to Powell index instead. Wildly swing up and down just based on his hawkish or dovish tone from FOMC.

      Said it time and time again, would love to be prove wrong 100% on how negative people are towards the FED but action speaks louder than words. Also, make no mistake, Powell is no Volcker but to be fair to Weimar, the condition between then and now and the damage that many of his predecessors have done, not sure Volcker would have the balls to lift interest rate any close to mid single digits now if he is in charge.

      See a number of your readers here remain in denial. “Fed can never raise rates. Can’t reduce the size of the balance sheet.” Shouldn’t single out the readers here, we see these comments at all financial and economic websites. They’ve been conditioned to believe that monetary policy over the past 12 years is not only normal but that the Fed was late to the party as Japan has been on this path for over 30 years

      • ru82 says:

        Remember that the Weimer party purposely was printing and trying to devalue the mark for the WW1 repercussion payouts.

    • Cookdoggie says:

      “Fed has been itching to get out from under its long-dated pile of mortgage securities“

      What was stopping them?

  42. Ace says:

    Mostly, I am shocked by the reactionary stance of the fed given the flashing red lights. Yesterday Powell said he would continue to rely on yet-to-be-published data to drive their actions, but it seems that will only exacerbate inflation. Lookie here, inflation is now 10%, ok, lets wait until its 10.5, then act.

    As you’ve mentioned, Wolf, this is going to take a very long time. I would like to see some proactive speak, but, a proactive fed is scary.

  43. stoneweapon says:

    U.S. food prices have spiked to levels not seen since 2008 at the onset of the credit and derivatives collapse that brought about tens of trillions of dollars in Federal Reserve bailouts.

    The Fed has intentionally created a Catch-22 outcome.

    Inflation/stagflation will continue or even accelerate as the Fed tapers.

    The global transition away from the dollar, toward inflation-resistant investments, has already begun

    The reality is that inflation is the cause of supply chain disruptions, not the result of supply chain disruptions.

    The pandemic is the perfect cover for the inflationary end game.

    The outcome is a trap for the people, not the FED.

    The Fed triggered this crisis deliberately because it serves purposes of international banks and the agenda of globalism.

    Since 1997 the EU and China ran a combined $9 trillion trade surplus with the US.

    International Monetary Fund and World Economic Forum is openly seeking a one-world digital currency system.

    The Fed takes its orders from the BIS.

    As the stagflationary crash plays out, never forget who was really the cause of the public’s suffering.

  44. CreditGB says:

    Just great, soon the mandatory withdrawals start just as the 401k is dropping, have to pay at least 25% more for goods and services with more to come, and taxes and fees are all going up. Checked your water bill lately?

    Hope they find someone else to tax to pay their added juice on the debt, cause this boy is just about tapped out.
    Thanks a lot for nothing.

  45. stoneweapon says:

    Trade Balance 1997 through 2021

    CHINA EU
    97 49,695.50 16,964.60
    56,927.40 28,582.80
    68,677.10 45,228.10
    83,833.00 58,719.70
    83,096.10 64,637.20
    103,064.90 85,692.20
    124,068.20 97,871.60
    162,254.30 110,729.00
    202,278.10 124,462.10
    234,101.30 118,594.80
    258,506.00 110,243.40
    268,039.80 95,807.40
    226,877.20 61,201.50
    273,041.60 79,672.90
    295,249.70 99,395.20
    315,102.50 116,382.90
    318,683.80 125,415.00
    344,817.70 144,334.40
    367,328.30 155,899.10
    346,825.20 146,681.30
    375,167.90 151,575.10
    418,232.90 168,404.60
    344,312.00 178,591.80
    310,263.50 184,250.40
    21 350,000.00 201,682.60
    5,980,444.00 2,771,019.70

    American elites and the Federal Reserve sold out the US helping China and the EU win.

  46. Harold Finch says:

    Wolf,

    There was an article on MarketWatch in the last couple of days reporting that Former Federal Reserve Governor Randal Quarles said, “We will see positive real interest rates, I think we will see that sooner rather than later because I think that is what will be required to get on top of inflation.”

    When I read this, and think of where this would put the Federal Funds Rate (henceforth FFR), it seems there are three possibilities:
    1) This is total malarkey. The Fed will not move the rate to 7.5+%, and to think that it would do so “sooner rather than later” is absurd.
    2) This is true, but what’s implied is that other events/policies will bring down inflation so that the FFR and inflation meet in the middle resulting in a positive real rate.
    3) This is true. The Fed is about to go full-on Volcker with regard to FFR/inflation.

    Can you give your thoughts on this?

    It is very interesting that this is coming from a man who just ended his term on the board, not some outsider.

    It is very interesting that this is coming from a man who just ended his term on the board, not some outsider.

    • Wolf Richter says:

      Harold Finch,

      Inflation is a moving target. Now it’s 7%, in three months it might be 6% in ten months it might be 9%, etc. If the Fed starts cracking down enough, inflation might come down a little after a while, but not enough, so maybe 5%. Then the Fed raises a little further, and inflation might go to 4%, and then the Fed can raise to 4.25% and be above the rate of inflation. I think that’s the kind of scenario Quarles had in mind. This is sort-of the best-outcome scenario.

      But if inflation goes double-digit, the Fed might dump is assets in large amounts and cause financial markets to crash, and stay down, which would likely bring inflation way down, without killing the economy they way very high interest rates would.

      In terms of the “outsider”: it is not uncommon that former Fed governors turn into hawks, having missed years of opportunities to be actual hawks while on the Board of Governors. Dudley pulled that one too. As did others.

      • Harold Finch says:

        Thank you for answering my question Wolf. Honestly, I kinda feel famous by proxy now. I appreciate the work you do on this site.

  47. stoneweapon says:

    I wrote this comment to Adam Hewison in 2016 explaining the rise of China as it relates to the capitalist mode of production. When I said the US Administration lacks an explicit plan for achieving its manufacturing goals, I was being naive at the time, not being fully aware of the deeper levels of corruption that had captured the levers of political governance. The magnitude of multinationals and central banks as a joined world order carrying out a destructive capitalist manifesto to enslave the world wasn’t illuminated for me until after Trump won. I’m intrigued that Germany/EU receives almost zero attention in the media for their rise and windfall of a $3 trillion surplus at the expense of good paying American jobs in manufacturing which corresponds with the rise of China and its standard of living.

  48. DawnsEarlyLight says:

    Until we get at least a 50% correction on stonks, this daily action is nothing but lip gloss on a pig!

  49. raxadian says:

    Nothing goes to hell in a straight line… until it does.

    Thing is, until the Corona and the everything shortage gets resolved, at minimum, the prices of actual stuff won’t go down and if they go it will be from ridiculous to still more that before the pandemic. ​

    • Old school says:

      Fed is using Pandemic as an excuse. Nearly every item is up whether there is supply chain problem or not. Congress air dropped too much money

  50. gametv says:

    We have not really seen much in the way of interest rate changes or bonds selling off yet. Yesterday, bonds touched a support line that has uptrended forever. And today bonds are sharply higher and yields lower.

    Everyone is talking about higher interest rates, but it is just jaw-boning. However, we are now at a breaking point. Once bonds fall below that uptrend line, it will rapidly change. It is only a matter of weeks away. There are actually two support lines, so it might take up to a month to work down through those lines.

    Money is still flowing into bonds due to the fear in the markets, but pretty soon the increased supply of bonds and lack of Fed support will finally hit those bonds.

  51. DR DOOM says:

    I don’t hear the sophisticated mature investors armed with their multiple displays driven by Wall Street written software trading platforms yelling ” Cash is Trash”! a lot. It seems un-leasing my Springer Spaniel pointed toward peanut butter globs smeared on pegs on a spinning wheel of fortune to pick stocks would yield a winner every time when the Fed is providing endless QE and zero cost of money. Everybody sounds like a genius when the Fed is Pumping the bubbles up. If the Fed does fight inflation bubbles will burst. It will be painful. If the Fed reverses course ” Cash is Trash ” will be heard again across the land. I might start a news letter called The Spainel Picker. He will work for peanuts or peanut derivatives.

  52. Brendan says:

    Anyone want to take odds they don’t fuck this up? No. I didn’t think so. I wouldn’t either.

    • Wolf Richter says:

      Brendan,

      They already fucked this up when they started it in March 2020. Now they’re trying to mitigate their existing fuck-up. But they already fucked up their mitigation of the existing fuck-up by doing way too little too late.

      • Prophet says:

        Described differentially, your comment might take the form:

        d^4(fucked-up)/d(Fed)^4

      • cb says:

        They have been screwing it up for decades. But what we consider screwing it up is in question. Odds are, they have doing exactly what they have intended, as directed by their masters.

  53. Xaver says:

    The ultra low artificial interest rates have damaged the economy in an enormous amount. Powell too caused this damage. Small increases in interest are killing the stock market. It will be interesting to watch how long the Fed will stay the course (of letting rates rise).

    Goods price inflation is here to stay anyway.

  54. Swamp Creature says:

    Markets in a free fall this Friday morning. A 20% drop between now and March and the Fed increases interest rates??? Ain’t gonna happen. What you may see is another stimulus package. It’s an election year.

  55. Swamp Creature says:

    Screw the stock market. I’ve got an $800 bet on the 49rs tomorrow to pull an upset over the Rams and head to the Super Bowl.

  56. cb says:

    Wolf said: “If the credit markets lock up, that would be an issue. But credit markets remain near the loosest they’ve ever been.”
    ——————————–
    How and why would credit markets lock up? What does thst even mean?Lenders want to lend and borrowers want borrow. At the right price (interest rate) business is conducted.

    • Wolf Richter says:

      It means that high-yield debt stops trading and of those trades that do take place, yields spike to 25% or 40%, which happened during the Financial Crisis, which means that companies cannot refinance maturing bonds, and it means that even the Treasury market turns illiquid which started to happen during the March 2020 crisis. This is a real issue with cascading effects. Credit markets are already not very liquid to begin with, unlike the stock market. Credit market seizures are not price discovery. They’re a complex system lockup with cascading effects.

      • cb says:

        Thanks for the explanation. That sounds like trouble for marginal planners and the imprudent who made inappropriate bets and didn’t match inflows with outflows, taking into account risk and variance of expectations. It sounds like an opportunity for the well prepared and prudent to buy those discounted high yield bonds and profit by from the return that risk in a market truly demands.

        A lot of this high yield trading has been our problem. It has allowed risk to be mismatched with return, and has floated speculators who should be sunk And the trickle through has supported the price of Treasuries, the policies of the FED and the interest rate suppression and market distortions that the FED has caused.

      • cb says:

        Wolf said: “which means that companies cannot refinance maturing bonds,”
        ______________________________

        Then the company will be restructured, as it should be. There is risk to be both a debtor and a lender. We have too long promoted debt and protected lenders. Hence, where we are with our current interest suppression, debt servitude and distorted markets.

      • cb says:

        Wolf said: “Credit markets are already not very liquid to begin with, unlike the stock market.”
        ___________________________________

        I always hear that the bond market is much larger than the stock market, though I understand that doesn’t mean it is nearly as liquid. Who should want to buy bonds at current yields, particularly risk adjusted yields. If yields rose to compensate for risk, liquidity should meet the call.

        I assume the credit markets equal the debt markets and are reflected by the total bond market.

        • Wolf Richter says:

          Each corporate bond issue is unique. A bond issue may only be $500 million, and it comes with a contract that is unique. And there may be no trades for months at a time for this issue. So if someone wants to buy or sell a specific bond, it might take a while to find someone at the other end. Loans are even more illiquid. Each has its own contract. After you find a buyer, it still takes a long time to close the deal. This is in good times.

      • cb says:

        Wolf said: “Treasury market turns illiquid which started to happen during the March 2020 crisis.”
        ———————————————————
        That would only be because they didn’t allow the Treasury prices to fall enough where you, I and millions of others would buy.

        • Wolf Richter says:

          No, it was much more complex than that. The Fed discussed some of the issues. These securities are used as collateral, and suddenly the prices were all over the place.

          I understand your thinking, and in principle, I agree with your notion that the market should be allowed to work this out or just blow up and get it over with, once and for all.

          But I think you’re being too cavalier about the consequences of this type of event.

        • cb says:

          Thanks Wolf. I would like to see type of event to see what would really happen. I suspect a lot of political turmoil with reduced concentrated wealth and a move away from debt servitude and a rentier society. In the meantime, it is imperative for the FED and their Masters to create Boogeymen and fear to justify the very bailout policies which drives the wealth gap, concentrates wealth and makes much of America wage, debt and rent slaves.

  57. cb says:

    Wolf said: “the FOMC prepare the markets for what is coming so that they can gradually adjust to it, over time, and not all at once, on one day – which could cause seizures in the financial markets.”
    ————————————————-
    The cover of “market seizures” is used for the ongoing interference and manipulation of interest rates and dollar creation. Sounds like propaganda to equate price adjustments and risk tolerance adjustments, some severe, with “market seizure.” Why should price discovery and adjusting risk tolerances be fluid?

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