Could it Be the Fed’s Mega-QE Created so Much Liquidity that Tightening Doesn’t Work until this Excess Gets Burned Up?

Financial Conditions loosen further: credit markets blow off the Fed to make sure “higher for longer” gets entrenched? That would be funny.

By Wolf Richter for WOLF STREET.

One of the big surprises this year is that the Fed’s 5.5% policy rates and $1.1 trillion in QT have neither meaningfully tightened financial conditions nor slowed the economy.

The Fed has been “tightening” since early 2022 in order to “tighten” the financial conditions, and these tighter financial conditions are then supposed to make it harder and more expensive to borrow which is supposed to slow economic growth and remove the fuel that drives inflation. “Financial conditions,” which are tracked by various indices, got a little less loose, and then they re-loosened all over again. It’s almost funny.

The Chicago Fed’s National Financial Conditions Index (NFCI) loosened further, dipping to -0.36 in the latest reporting week, the loosest since May 2022, when the Fed just started its tightening cycle. The index is constructed to have an average value of zero going back to 1971. Negative values show that financial conditions are looser than average, and they have been loosening since April 2023, after a brief tightening episode during the bank panic (chart via Chicago Fed):

You can see in the chart above how financial conditions tightened in March 2020, but not for long – by May 2020, as the Fed was dousing the land with trillions in QE, they were already loose again.

So, despite the rate hikes and QT by the Fed, financial conditions are as loose as they were when the Fed had just started tightening in May 2022, and they are far looser than the long-term average, though they have become somewhat less loosey-goosey than during the free-money era starting in mid-2020 through early 2022.

The long-term chart below of the NFCI shows what happens when financial conditions tighten so much that they strangle the economy, as they did during the Financial Crisis. The March-2020 spike barely registers in comparison.

The St. Louis Fed’s Financial Stress Index takes a similar approach and measures financial stress in the credit markets. The zero line denotes average financial stress. Negative values denote less than average financial stress. In the current week, it dropped to -0.56. The green line shows this current value across time and denotes that credit markets are still in la-la-land.

The BB-rated junk-bond spreads are another measure of financial conditions. Corporate bond yields should rise or fall with Treasury yields. But a wider spread between those corporate bond yields and Treasury yields indicates tighter financial conditions; a narrower spread indicates looser financial conditions.

The average spread of BB-rated bonds, the less risky end of high-yield (my cheat sheet for corporate bond rating scales) narrowed further yesterday to 2.57 percentage points. So this is going in the wrong direction, in terms of what the Fed wants to accomplish.

Sure, some sectors are stressed and financial conditions tightened in those sectors, such as the office sector of commercial real estate, but the troubles in the office sector have structural causes, including working from home and the corporate realization that they don’t need all this vacant office space that they have been hogging for years, and will never grow into.

And home sales have plunged because potential sellers don’t want to give up the 40% to 60% price spike they got over the period of pandemic QE; and buyers just laugh at those prices and go blow their down-payment on all kinds of stuff and services, including travels and cars – new vehicle sales surged 20% year-over-year in Q3 – contributing to consumer spending.

And subprime lending has tightened all around. In terms of auto sales, selling and lending to subprime-rated customers is focused on older used vehicles, often by specialized dealers and lenders — often owned by PE firms — some of which have now collapsed. Securitizing subprime auto loans has become difficult as investors are now taking losses. And the subprime segment, a small portion of the auto business, has tightened up, but with essentially no impact for new vehicle sales, where subprime loans are just a tiny portion.

And sure, the major stock indices are down from their highs a couple of years ago. Sharply higher yields (lower bond prices) have put pressure on bank balance sheets, and a few, run by goofballs that failed to manage this properly, have collapsed.

But consumers are working in record numbers and are making record amounts of money, after receiving the biggest pay increases in 40 years that in 2023 are finally outrunning inflation, and they’re spending huge amounts of money and are still able to save some. We’ve been lovingly and facetiously calling them our Drunken Sailors here since at least March.

And companies, flush with cash from selling a tsunami of bonds at low rates during the Fed’s 0% era, are investing, including in a huge construction boom of factories. And they’ve raised their prices, because, you know, this is inflation, and they got away with it.

And the true Drunken Sailors, the folks in Congress, are throwing trillions of dollars a year in still easily borrowed money at the economy to fuel growth and inflation.

So the Fed’s policy rates that went from 0.25% to 5.5%, and its $1.1 trillion in QT so far have failed to broadly tighten financial conditions and slow down this train.

Could it be... that so much central bank liquidity was created during and before the pandemic that financial conditions cannot meaningfully tighten, despite the Fed’s tightening, until this liquidity gets burned up?

The Fed alone, not counting other central banks, created $4.8 trillion within two years of giga-money-printing, as Musk would say; it has now removed $1.1 trillion of it via QT.

Could it be, with so much liquidity still out there, that it might take a lot more and a lot longer to tighten financial conditions enough to where they have even a chance of removing the fuel from inflation?

And that’s kind of funny because if financial conditions don’t tighten enough to slow the economy and remove inflationary fuel, and if it then turns out that this dip in year-over-year inflation rates was just a “head fake,” to then resurge again, as Powell said he suspects it might, the Fed will go at it with more rate hikes. Powell made that clear. With credit markets still blowing off the Fed, are they trying to make sure that “higher for longer” gets entrenched? That would be funny.

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  400 comments for “Could it Be the Fed’s Mega-QE Created so Much Liquidity that Tightening Doesn’t Work until this Excess Gets Burned Up?

  1. saskatoon says:

    wage are increases ARE inflation; they are the cost of labor.

    • kramartini says:

      Unless the wage increases are matched by productivity increases.

      • white, bob says:

        They’re not, unless you think the same workers are 20-30% more productive than prior to 2021. I see no evidence of it in my industry.

        • joedidee says:

          the workers however do get to pay more income taxes
          remember ‘inflation’ is made up word
          meaning = devaluation of fiat $dollar
          or THEFT BY GOVT

        • fullbellyemptymind says:

          If we’re hung up on nomenclature call it reparations for 40+ years of uncompensated productivity gains – or maybe wage deflation (less triggering to the triggerable). But we can all do this math at home. Just get some FRED data, start the clock in Jan 1980 and you’ll see:

          GDP (adjusted for population) +568%
          Hourly earnings +342%
          CPI +294%

          If you believe in math then we (the haves) owe the working man a ~50% pay hike, from the current $29/hr to $44, just to keep pace with how much more we’re getting from him every hour.

          And in case anyone thinks I’m cherry picking dates start the clock at Jan 2020:

          Population adj GDP +27%
          Hourly earnings +22%
          CPI +19%

          More confirmation that being poor is expensive

        • sufferinsucatash says:

          So white Bob

          You would increase prices and leave wages alone?

          Letting the workers fend off hire prices with no cover?

        • Einhal says:

          sufferinsucatash, I don’t think that’s what white bob meant. What he meant is that if the average worker’s wages go up by 20%, but prices stay the same, assuming that the wage rate is set by the market, then that means that the average worker is 20% more productive. This has happened throughout history through technology.

          If a worker’s wages go up by 20%, but prices go up by 20%, that’s just inflation.

          That’s what we’re seeing now.

      • Bandon says:

        Labor productivity (output per hour) for non farm labor is just shy of its 2020 peak in q3. It is continuing to rise, but no, it’s not 30% more than prior to 2021. I do find it interesting that productivity has started climbing since people are returning to the office. Lends credence to actually being in the office.

        • TomS says:

          This is to Wolf. OF COURSE IT DOES!

          Not trying to be mean, but are you just now figuring this out or is this just the first time you’re rhetorically posing the question?

          You don’t create $9T without that having vast consequences for inflation. As I’ve said many times, I want to see the RRPO facility to go away at least in terms of the monies being parked overnight. I certainly don’t understand the full inner workings of how the Fed maintains liquidity, but it’s very obvious that their move away from reserves has created even greater problems.

          Furthermore, the Fed should be statutorily barred from purchasing treasuries 7 years or longer. Mucking with the longer-end of the curve is downright criminal. Consequently, this means the Fed shouldn’t be allowed to purchase MBS.

          Rates associated with MBS should be market rates, and the consequences of their failure should be held by the MBS market. When the next recession hits, Congress is going to trot out rent & mortgage relief again and this is criminal.

          The Fed & Congress are stuck in this perpetual game of picking winners & losers which is just wrong. WRONG! WRONG! WRONG!

      • Imposter says:

        Ha ha ha..productivity increases, that’s a good one.

        • Herpderp says:

          “Be more productive”
          “Oh cool then I can afford a house!
          “Well no…”
          “Oh well at least afford to start a family!”
          “Also no… we will import the new workers for the next round…”
          “Oh… well then at least pay down these loan?”
          “Also no, listen I’m doing you a favor here. I created this job!”
          “What’s this all for though?”
          The stone will produce water soon enough.

        • NBay says:

          That’s good.

      • dang says:

        Good article that articulates, without bias, the measurements that are continuously made on the economic patient that we are all concerned about, whether we admit it or not. One thing that stood out was the sentence:

        “Corporate bond yields should rise or fall with Treasury yields.”

        IMO, one of the indicators of a synthetic economy, which we are living in, when the first derivative of the price of corporate bonds as a function of the T yields, the margin above the T yield.

    • Sams says:

      Or it is a monetary thing. Increase the amount of money tenfold, increase all wages and prices by addeing a zero and there is inflation, but everything is much the same.

      Well, less those that had money in the bank have just one tenth left. Those who lent money is no better of, the money they get back is worth just one tenth.

      • Cas127 says:

        You put your finger on it…inflation is *all* about the printing entity’s (G) appropriation of the historically accumulated savings of the saving entities (private sector).

        The G does not earn or save…but it can print.

        The public earns/saves…but it isn’t allowed to print.

        That is the absolute crux of the power relationship in the economic realm.

        At any time, the G has empowered itself to dilute away (and appropriate unto itself) the value of accumulated human savings.

        It takes a village…but only a tiny sliver control it.

        • Bay Area person says:

          The problem is that the rate of earnings and savings has a massive spread, hence wealth inequality. Too many people at the bottom with no pre-pandemic earnings or savings delta, this charade becomes completely unsustainable.

        • Einhal says:

          Bay Area person, the charade becomes unsustainable because all government “help” comes at the expense of other people. Basically, the Fed has decided that holders of dollars, both foreign and domestic, should pay for the entire pandemic “response.”

          Asset holders came out whole, as the prices of their assets rose to meet the new dollar amount in circulation, and the Fed has no intention of pulling even a majority of that new money out.

        • dang says:

          Well, I think it is significantly simpler than all that.

          It is the real world data point that the libertarian low tax policy sold to America beginning with the improbable election of the ultra right wing, the John Birch Society like candidate,Wrongald Rayguns, is more destructive than was warned about.

        • cas127 says:


          But the Keynesian pitch is that government spending (even at the cost of 50 years of paradoxical deficits or money printing) will lead to macro-economic growth, allowing for “self- financing” by the G.

          But $32T+ in debt argues that that Keynesian utopia is an illusion.

          I’ll buy that there has been some level of under-taxation at the highest levels…but uncontrolled, unfunded G spending has contributed far, far more to the problem – and things are so fiscally horrible now that my guess is that outright 100% wealth confiscation of billionaires/millionaires (with *huge* consequences) would *still* be inadequate to balance the G’s books.

          (One note – estimates of cumulative US private “wealth” can be pretty misleading…based on eminently volatile asset “valuations” that can change pretty damn quick – all the more so if dramatic changes/confiscations take place. Increased taxation at the margin is one thing, but dramatic policy changes have dramatic consequences too. As with *any* balance sheet/bankruptcy, America’s “asset values” are pretty theoretical, its “liability values” much more concrete.)

        • NBay says:

          So, I assume you can hardly wait til the government is “drowned in a bathtub” too, and replaced with a “well run and businesslike” police state wherein YOU are one of the protected?

          Get ready to be surprised…..unpleasantly……the “sliver” doesn’t need or want you at all.

          Me either…..just to be cordial per the rules.

        • NBay says:

          Oh yeah, that completely ridiculous guess of yours is evidence of an ignorant debating style similar to, “Like you have never seen before”.
          Intended it to be the “accent” on your garbled comment?

      • grimp says:

        Please tell my large private sector employer to add a zero. So far they have used inflation to cut salaries.

    • YacosModernLife says:

      Pension are inflation, fake wallstreet evaluations (see overblown ‘tech’ companies like WeTwerk) are inflation, fake housing appraisal are inflation, non producing gov cogs are inflation, sports ball is inflation….anyone working to actually produce something of value could be getting 10x and it would still be deflationary because many, most, 75% percent or more produce nothing. Or collect the 10x difference between wages and inflated quasi gov business, clown bucks. The grandparents robbed the kids and there kids and then they have the audacity to spill this nonsense slave-justification propaganda on behave of the American-conglomerate-nanny state-corporation

    • Rob says:

      Having large deficits doesn’t help the fed does it?

      Running persistently large deficits ultimately injects liquidity doesn’t it?

      Some percentage of these massive deficits does work its way to main Street after all.

      • dang says:

        Actually, the massive deficits are made possible by the savings which cannot be invested productively in the home market as long as the dog eat dog practice of offshoring is encouraged by our dear Government.

  2. Taxcat says:

    Could it be, with so much liquidity still out there, that it might take a lot more and a lot longer to tighten financial conditions enough to where they have even a chance of removing the fuel from inflation?

    So much liquidity – yep you are absolutely correct. First, the Federal Reserve during the QE timetable provided ($7 trillion) free money which caused artificially low interest rates to create a magnificent asset bubble. Our sailors are drunk. Then Covid Hit. To help our drunken sailors, government must provide unprecedented stimulus to help both business and individuals to the tune of roughly $9.6 trillion (6 major tax acts starting in 2019 – 2022). So, $17 trillion dollars pumped into the enconomy and the Federal Reserve has been only able to reduced it by 1.1 Trillion. So much Liquidity. And

    • Mike says:

      Currency debasement causes hyperinflation which….starts as inflation. Moody realizes this and just rated USA negative. This can’t be fixed.

      • Wolf Richter says:

        It didn’t “rate” the US negative. It still “rates” the US triple A. It changed its outlook on its rating to “negative,” all that means is that it might downgrade the credit rating in the future.

        Moody’s chickened out. It should have downgraded the US, but left it at triple-A and instead said that it might downgrade the US in the future. It was just chickenshit. Buffett owns Moody’s. That’s why.

        • Jackie says:

          So where does this leave the everyday consumer who has debt because of high interest rates on credit cards, why is there no help for the everyday poor consumer who has to pay high prices with the same money and can’t get a loan because interest is to high.

        • Ben says:

          They shouldn’t spend money they don’t have, Jackie.
          No one owes anyone cheap money.
          We’re in this mess because of cheap money.
          As a wage earner, my savings shouldn’t cost banks 0.1% to lend to other people.
          Finally savers are getting 1% or so real interest which should be the norm.

        • dang says:

          The US economy is the cleanest dirty shirt, the AAA rating is the best guess that the borrower will pay you back.

          At this juncture, the US is the AAA lender and the idea that hucksters like the bond rating agencies, paid for their opinion, spew anything but bullshit, is preposterous.

    • Harrold says:

      It takes a long time for higher interest rates to filter thru. As ultra low interest bonds mature, they have to be replaced by ones with higher rates. Companies that are barely profitable now may not make it with vastly higher interest expenses. Or at least their earnings will be reduced.

      As wolf pointed out, congress is still blowing bubbles faster than the fed is doing QT. What I haven’t seen him mention is other central banks (hello japan) are still keeping rates near zero. It’s a global economy and big corps can borrow there too.

      • Wolf Richter says:

        Japan is the big exception, last NIRP country out there. But it’s taking baby steps to move away from it. I post articles on Japan from time to time. Not a lot of people read them, so I don’t do it often.

        • MM says:

          Wolf – I’m hoping you’ll do anther Japan article soon.

          Specifically curious to hear your thoughts on the BOJ’s recent YCC adjustment. Seems like they’re flirting with the idea of letting rates rise.

          I recall reading that the BOJ owns half of the entire JGB market. Not sure how alarming that is but I imagine its somewhat responsible for the weak Yen. USD:JPY has been >150 lately.

      • dang says:

        Well, Wolf’s article is about how the obese Fed balance sheet is nullifying the normally expected economic response.

        Reading between the lines, the markets are in danger of imploding without the monetary stimulus of the QE philosophy, a financial crisis averted by a financial solution.

    • joe2 says:

      As a small business owner I can tell you that all the government programs during the pandemic – county grants, PPP, ERC – were not enough to offset losses – rent, taxes, utilities, insurance, licensing . I am sick of hearing how businesses “made a killing” on government “stimulus”. I lost about $100K and had to get an SBA loan. And I know others who had to also. And that loan will not be “forgiven” like student loans.

      It was the biggest transfer of capital from small business to big business in history.

      • joe2 says:

        BTW, Wolf. I found a good new lease and did not sign any personal guarantee. Only 3 months security deposit. This landlord knew I had walked away from other deals and needed a good tenant as he had to evict the previous one for non-payment. No one always holds all the cards.

      • Bs ini says:

        I agree with you the shut downs that occurred and continued put large numbers of businesses out of business many forever. I thought horrible then and still do today and a fund to help you is worthwhile in my opinion . Fraudsters should pay back triple.

      • Gattopardo says:

        Joe2, no offense, you’re using n=1. For every one of you, I know (first hand) of others with small businesses who did make a killing…. received millions. They bought ski boats and in some cases, jets. Maybe we’re just differing on the definition of “small”.

        I view PPP and all the other stimulus as the biggest ripoff ever.

        • Einhal says:

          Agreed. Congress was either stupid or evil to dole out money to businesses that didn’t suffer a revenue loss.

      • GN says:

        Don’t forget the employee retention credit that was halted by the IRS for fraud and reached $30 Billion in August

      • dang says:

        I agree. The entitled that have taken control of the world that others forged, masters of the harvest.

      • Candyman says:

        So true. Same to me. The SBA, sends the payment due notice on a timely basis every month. Now, not only has RTW been slow (in the business district of Boston) but I have loan payments on lower sales.

    • John says:

      Exactly, all that money has to come out of the system to restore the stolen purchasing power

    • Nadine says:

      Atlanta Fed has a Taylor rule calculator. The jaws between the EFFR and the rule based estimates are closing in Q4. We will find out how ‘resilient’ the economy is soon enough. My guess is a couple of quarters until cuts cause “they don’t want to interfere with election”. So we’ll get more inflation *and* unemployment in 2024.
      Also behold the huge gap that opened in 2021, when they should have raised. They knew exactly what they needed to do, chose to ignore their duties, and will pay no price for it. Our institutions reek of late USSR stench, and the corporate media is their Pravda.

  3. Lucca says:

    It’s been obvious for months now that whatever the Fed has been doing hasn’t been enough. That’s why so many people are frustrated with their puny .25 increases.

    • Brian says:

      It’s not but the problem for them is what happens when it finally is.

      If it’s like reeling in a long (perfect) elastic then the tension felt by the other end increases slowly but proportionally.

      If it’s like reeling in a long slack rope then the other end feels nothing until all slack is removed at which point the other end feels a jerk proportional the the speed of tightening at that moment. If you’re tightening too fast when the slack runs out, the results can be disastrous. And we have no measure of how much slack remains.

      Wolf’s analysis seems to indicate that reality is closer to the latter than the former.

    • Bobber says:

      I’ve been saying this for two years. QT should have proceeded with the same force and pace as the QE. If you don’t take it out quickly, it gets embedded and increases asset prices and debt levels, and increases financial instability. It’s the extreme level of asset prices, stocks and residential RE, that is causing the excessive inflation and spending, relative to savings and historical trends.

      They need to ramp up the QT and sell the MBS before too many more people buy overpriced homes with overpriced mortgages.

      We are three years into this thing, with CPI 20% higher, asset prices 200-300% higher, and the Big Seven priced to walk on water, and the Fed is still putting more cards on the house that it built by not withdrawing sufficient liquidity.

      • Bobber says:

        However, if the goal of asymmetrical QE/QT was to permanently ramp up consumer and asset price levels by 20-30% in five years, what the Fed did makes total sense.

        Given the Fed isn’t talking about achieving its 2% average inflation promise during the 2020s decade, we know the motivation, which may stem from intentional misdirection or kick-the-can spinelessness.

        To assess true motivations, you have to look at results.

      • Lucca says:

        I couldn’t agree with you more.

      • Gattopardo says:

        “I’ve been saying this for two years. QT should have proceeded with the same force and pace as the QE.”

        No. I hate QE and think QT should be more rapid. HOWEVER, what you’re suggesting makes little sense. QE was lightning fast in response to an acute crisis. Drastic environment, drastic solution. To have ripped QT down at that pace, when no acute crisis was evident, would have been reckless in the opposite direction. It would have caused another crisis itself. What we have been facing is a more chronic and slow moving problem, in no way justifying a giant rushed contraction of the Fed’s balance sheet.

        I can see it now, plenty of readers here crowing about the crisis of inflation since 2022. I get it. But sorry, 15% CPI cumulative is nothing compared to the -25% GDP (or whatever it was) of 2020.

        There is an asymmetry in crises, and thus an asymmetry in Fed response.

        • Einhal says:

          2020 did not have -25% GDP. Where did you get that nonsense from?

        • Gattopardo says:

          Einhal, not nonsense — Q2 2020 was -30%. It’s on Statista. Acutely acute, I’d say, warranting more drastic action than today’s or 2022’s inflationary environment. Yes, Q3 snapped back by nearly that, which argues drastic action either worked or was no longer needed. But that’s another issue.

          I’m merely explaining why Fed action need not be symmetrical.

        • Einhal says:

          Gattopardo, that was not 30%. That was 30% “annualized,” meaning it assumed that the 7.5% or whatever it was would continue each month. It didn’t.

        • Gattopardo says:

          Einhal, I know. I apologize for not saying annualized, as I thought that was clear (enough). My underlying point is the same — that was a nutball, acute and scary (though self-inflicted) crisis. It makes perfect sense for the Fed to have reacted quickly and powerfully, and to react much more slowly on the backside.

    • white, bob says:

      The rate increases do little to reduce inflation. The increased interest expense to the borrower is offset by the increase interest income to the lender. It slows down economic activity a little. QE/QT is where it’s at, but the Fed is afraid of pulling liquidity out so fast that they cause a depression.

    • Jason B says:

      FED broke price stability by printing extravagant amount of money during the pandemic.

      In early 2020, the FED balance was around ~4.3T. This was already elevated when compared to late 2019 (~3.8T). In just two years between March 2020 and March 2022, it printed another ~4.6T, raising the balance sheet to ~8.9T. In other words, in just two years, the balance sheet was more than doubled.

      FED said they are starting so called “QT” in June 2022. In almost 18 months, they only shed about ~1.1T and reduced the balance sheet to ~7.8T, which is still gigantic (more than twice of 2019).

      This gigantic balance sheet and the market’s expectations that FED will stop QT soon (probably in 2024), is constantly fueling asset prices, inflation and reducing the value of dollar against real assets (but not against other currencies because nearly all CBs went nuts and they all printed recklessly).

      Just like target rates, FED must have “target balance sheet” and it must be close to the prepandemic levels, which were already inflated. The only way to go is to sell mortgage BS.

      • Jason B says:

        I think the Wall Street expectation is that FED will stop bond roll off very soon and balance sheet will never ever go under 7T. That expectation must be decisively broken by declaring a solid target balance sheet and starting to sell mortgage BS, even though it may be at the minuscule levels (like 10B each month).

    • dang says:

      One good thing that’s happening is that wages are increasing which is not inflationary, given the deficit between the increases in profits and the increase in productivity over the years since the early seventies and the increase in pay.

      Wouldn’t it be wonderful if that was what “our” Fed was trying to do, instead what they probably are doing.

  4. Big Bongo says:

    I hope it is a head fake so we get more rate hikes and faster QT. Drop the cutesy “bank term funding program”. Sink or swim. No more bailouts.

    • white, bob says:

      Easy to say now, but if it causes a depression with 25% unemployment, who gets the blame?

      • The Real Tony says:

        It can’t because soon retirees will outnumber workers. The retirees are all getting wealthy with higher interest rates and spending big time. In the future higher interest rates will produce more inflation instead of less as retirees outnumber workers.

        • Wolf Richter says:

          “The retirees are all getting wealthy with higher interest rates and…”

          LOL, no one “gets wealthy” from 5% interest payments when inflation is 5%. Or even when inflation is 2%. But retirees might make some cash flow that they can plow back into the economy, which is good for the economy, and the younger workers in it.

        • phillip jeffreys says:

          Wish you were correct…but alas….

          As a retiree, my costs are rising much faster than investing in short term bills and manipulated stock market pricing can compensate for. The basics should be obvious but are easily lost in the averages over the last 2-3 years: HOA fees, insurance fees, gasoline, service fees (“sure we can sked an a/c check for next Wed, but we charge $150 just for the drive to your place”), medicare deduction increases (from soc sec), auto maintenance fees, red meat per lb costs, and on and on….all working to reduce standard-of-living. Buttttt……..PCUs are certainly faster and large screen smart TVs cheaper – can never own enough of those!

          Yup…Wolf is correct about the huge excess liquidity being a key driver…as is seriously deranged political autocrats creating current and future debt obligations beyond imagination.

          I do not have a crystal ball…but it is unsustainable. It is impacting a very large number of people at the middle and lower rungs, it will create (my guess) difficult budget decisions for most retirees within the next 3-5 years. Just the imbalance in wealth distribution keeps getting worse from an already de-stabilizing social coherence pov.

        • phillip jeffreys says:

          Excuse….CPUs. Didn’t sleep well last night….

      • dang says:

        That is the fearful scenario that more often than not ,suggests itself. A sudden repricing of the value of overpriced assets, the bubbles, collapsing, housing selling price falling 45 pct, stock prices by an astounding 60+pct.

        Well, it certainly has happened several times in my lifetime. Hardly, as if, it were a tragic, unheard of event. What makes it really scary is that is the logical conclusion.

    • Bailouts4Billionaires says:

      I am totally WITH you, BB, but am not exactly holding my breath on that. Our whole financial system has now morphed into a series of convoluted bailouts for all institutions (including homeowners, screw the renters and the poor), that I’m afraid we’ll always be stuck with in some form or another. I don’t think there’s any hope for the poor or the younger generations going forward. Sad state of affairs.

      • Gattopardo says:

        “screw the renters”

        Are you insane? You must not have paid attention for the last, oh,….forever years. Especially in CA. The “system” protects renters at the expense of landlords and neighbors to an extreme.

        • phleep says:

          Maybe so, but a different problem on a different level is a young generation taking their paycheck and handing all directly to landlords. No personal capital is formed. I look at my college students knowing many are in the serf stratum. At some point that brings political heat (or in some place in history, worse). It’s a good time to be born in a family with assets!

        • Einhal says:

          Yes, in some places, the system protects the renters. But there are plenty of booms who bought rental houses for $100k in the 80s, and now rent them out for $10,000 a month, all while screaming about how brilliant they are.

        • Gattopardo says:

          Einhal, you must think this home inflation is new. In the late ’70s, my dad, a very hardworking professional, bought a $125k house, and barely could afford it. Neighbors who had bought 30 – 40 years before him had paid $10k – $20k+/-. His house is now worth about 10x. The rate of appreciation is approx the same over those periods.

          I try to avoid age/generational warfare, so I won’t comment on your ‘boom’ line.

          phleep, I’m not convinced the economic environment is really all *that* different than decades past. Most of us were in the serf stratum when in college (10, 20, 30, 40 years ago) and for a decade after (or longer), breaking out only with hard work (genuine hard work, not the 40 hr/wk imagined “hard” work) and/or some luck. And it has ALWAYS been a good time to be born in a family with assets!

    • GN says:

      “CAN” BUT WILL NOT. It’s still $8 Tril .

      • Wolf Richter says:

        Assets are dropping at a pretty good clip, and you’re behind the curve, already down to $7.86 trillion. Going to be $7.7x trillion on the Dec 7 balance sheet. They’re already down $1.1 trillion, despite the bank panic depositor bailout. The Fed has already shed 27.5% of the $3.27 trillion in Treasury securities it had piled on during pandemic-QE.

  5. Veritas says:

    Good analysis Wolf, but that chart from the Chicago Fed grossly underrepresents the financial pain/dislocation associated with the onset of the pandemic. Many astute observers of both 2008/2009 and 2020 found moments of the later substantially worse than 2008/2009.

    That was before the Fed came in and made financial markets ‘comfortably numb’ 🎼💰💰🥴

    • Wolf Richter says:

      All the financial conditions indices picked up the stress during March 2020. I don’t know what your problem is.

      There was huge turmoil in the Treasury market! It went completely haywire. That’s what they’re referring to. Hedge funds were starting to blow up because their basis trade backfired and all kinds of stuff related to Treasuries was happening, including Treasury money market funds threatening to cause grey hairs. But that’s not really “financial conditions” in the credit markets. The Treasury market is supposed to be safe and smooth, not chaos, since there is no credit risk.

      AIG and Lehman blowing up and along with the mortgage crisis attempting to take down the entire global financial system was a MUCH bigger event for financial conditions than March 2020. At the time, businesses weren’t even sure their payroll account would still be functional on payday. Those were the times!

      • Veritas says:

        Easy Wolf… I just meant that visually the St. Louis Fed chart shows a 5X ‘financial stress’ event whereas the Chicago Fed barely shows a historical blip.

        March 16, 2020 Dow decline of -12.9% was truly historic (-37% from Feb. 12-Mar 23). And the bond market was a mess too as you just pointed out. Briefly negative oil futures yet the Chicago Fed chart makes that period look like ‘a molehill’. 😏

      • perpetual perp says:

        I believe the issue is that hiking interest rates doesn’t do anything to solve what is primarily a supply side collapse. Those raises affect demand, not supply, problems. Congress needs to pass progressive tax rates. That helps to fight inflation caused by demand. l

        • Wolf Richter says:

          Inflation has been in services for over a year, and there were never any supply problems in services. Services are over 60% of consumer spending. But not all services have consistent price increases, as I pointed out.

          Durable goods prices have fallen for over a year. Durable goods CPI is negative. Used vehicle prices have come down a bunch. Prices of electronics have come down a bunch, etc. The supply problem was in durable goods, and those issues got resolved a while ago.

          Yes, higher taxes would take some demand off the table. But less deficit spending would also take some demand off the table.

        • white, bob says:

          You got it backwards as usual. Tax rates didn’t decrease after 2021. Government deficit spending increased. That is pushing inflation.

      • BS ini says:

        I remember those days after Lehman and Lehman crushed my income, employment, moved cities , and several hundred thousand of Lehman bonds poof. Other banks bailed out but not Lehman ?! I was left holding the bag of worthless bonds . Not to mention I was in the oil business and our revenue disappeared. 140 dollar oil to something south of 40 dollar oil. I don’t want a repeat of that one . Slow and steady QT .

        • Fed Up says:

          Problem is we don’t know slow and steady in this country. I’ll be surprised if the Fed sticks with it long enough to finish the job. Hopefully, I will be pleasantly surprised.

        • 91B20 1stCav (AUS) says:

          Fed – when the ‘thought processes’ of digital tools start to dominate the thought processes of their digital ‘masters’?…

          may we all find a better day.

        • 91B20 1stCav (AUS) says:

          …(damn, this went WAY off-piste!), should have read “…analog ‘masters’…”.


          may we all find a better day.

      • Roger Pedactor says:

        Banks are upside down, Wolf. The private surplus is enormous, particularly at the top. This is the golden age of private credit. Junk spreads don’t matter because borrowers prefer private credit for lower origination fees, even with rates on loans as much as 6% higher (fees were/are predatory.) Leveraging your receivables is a hell of a lot easier than jumping through bank hoops for lines of credit and loans. Alot of profitable small businesses are getting screwed by banks without the liquidity to lend to them. Yield seekers with big money are getting 10-12% yields on no-brainer underwriting for private credit BDC’s and the financialization of leasebacks goes even further. There is no income tax until capital is returned.

        Tens of thousands of small businesses were started with pandemic stimulus. Those businesses could very well be profitable. But the banks are looking for unreasonable conditions to lend to them.

        The only thing that is being slowed by the Fed are the extreme fringes of Private Equity, Venture Capital, and housing and even then, the builders and flippers take bridge loans from Private credit and then buy back points on their sales.

        On the other end, giant conglomerates that should have anti-trust suits against them probably 6 years ago at this point but prop up the entire American pension/401K system have gigantic stashes of cash. And in-flows to the SPX continue because, well, where else is there to go? The “Mag 7” carry the entire SPX.

        Really weird times. I don’t see how it ends until something breaks and the system seems to be self-sufficient and robust because it has so much to fall back on.

        • Luke says:

          The Fed is irrelevant now. At least until they are ordered to do QE & YCC and monetize the government debt again, which will much exacerbate inflation.
          We are in fiscal dominance regime, which is more like war time finance and economy.
          Most debtors are insulated from interest rates because after 10 years of ZIRP the effective interest rates of individuals and corporations are much lower. Of course the hyper financialized economy cannot run on higher interest rates, so eventually it will reset.
          In the meantime the holders of old debts are underwater- banks and the Fed.
          You cannot deflate a debt bubble, it will eventually implode. Reset is coming. Paper assets will become cheap compared to real assets.

    • The Real Tony says:

      They should have taken or take all the money out of the worker’s vacation pay for the next 20 years to pay back all the money they should never have gotten during this Covid scam. For the next twenty years your vacation will be spent working for no pay.

      • Ben says:

        You love hating workers, don’t you?
        They’ve been screwed by employers for decades where wage increases lagged behind productivity gains.
        Rabid capitalists love hating workers.

  6. SoCalBeachDude says:

    Powell: Biggest mistake Fed could make would be to fail to get inflation under control

    • FedSux says:

      It seems he already has…

    • HowNow says:

      Seems to me that if inflation isn’t cut back, then these rate hikes will only add to the inflationary pulse.

      The good news is that the rate of inflation has diminished. That’s not to say that it can’t worsen. But economic cycles aren’t stationary; they rise and fall.

    • ru82 says:

      He has a tough battle when the Government is issuing $2 trillion in debt this year.

      • ru82 says:

        Looking forward

        Though the feds may have declared a temporary truce on their monetary inflation, they’ve increased inflation pressures on the fiscal front. So while the quantity of lendable money is restrained, the world’s biggest borrower – the US government – spends more money than ever.

        A two-trillion-dollar deficit must be financed, there is also the old debt that must be refinanced. There is $7.6 trillion in Treasury debt that will mature in the next 12 months.

        That will bring the total funding requirement to nearly $10 trillion. Whatever else might happen as a result, interest rates will probably go up.

      • Yort says:

        I read 34 of 46 states reported year-over-year declines in tax revenue, inflation adjusted, over the last fourteen months. Draining the liquidity swamp seems to be taking longer than expected.

        The Game of Fed is perhaps half way completed, but don’t tell Wall Street, as I need the SP500 to get to 4900 first…HA

        • Fed Up says:

          Wall Street is the problem.

        • white, bob says:

          Government deficits of $1.7 trillion per year isn’t the problem? Government bailing out Wal Street isn’t the problem?

        • Fed up says:


          Of course government is also the problem, but Wallstreet is very much the cause. I was responding to a post that was mentioning stocks. Geez!

        • Fed up says:


          Meant to say a big part of the cause. Of course there are many factors, wall street being majorly complicit.

        • HowNow says:

          Fed Up, you’re trying to find a villain and found “Wall St.” Evil incarnate.

          It’s a casino. Is the casino the villain, or the patrons, or the casino owner, or the state government, or the public who want gambling casinos?

          Origin of stock market?? Amsterdam, during the tulip mania, 1600s. Dutch East India Company was the first company that traded shares (and gave dividends).

          Why is it that every belief system has to have an evil force to keep it in business? Answer: you can’t have a good guy without a bad one.

        • 91B20 1stCav (AUS) says:

          How – Mr. Youngman today might say to today’s audiences: “…now, casinos-take my money, please!…”.

          may we all find a better day.

    • Yort says:

      The Fed is playing with” inflationary-psychological-wildfire”, as the US consumers’ long-term (5-10 year) inflation expectations increased to the highest since 2011 according to Bloomberg, rising from 3.0% to 3.2% (large relative increase).

      The trend is not the Fed’s friend, in regards to inflation, the stock market melt-up, and the idiotic idea to tie rate expectations to an indicator as volatile as the “financial conditions” indexes. Come on Jay, just make it Tesla’s stock value and lets get immediately to the end game..>LOL!

      Fed seems concerned as “Fed Whisper/Mouthpiece” Nick Timiraos posted the U-Mich survey this past week, stating the year-ahead inflation expectations up at 4.4%, with September reading at 3.2% and October at 4.2%.

      The Game of Fed has begun and 2024 is coming…

      • dang says:

        OK, where is your proof that the ” inflationary-psychological-wildfire” will be unleashed on Tom, Dick, and Harry ?

  7. John H. says:

    With the ill-advised monetary actions taken by the Fed in the last 50 years, and the consequential fall in purchasing power of the dollar, how can it be that we are not questioning the Fed’s mission, scope and modus operandi?

    It defies all logic and common sense. Commanding the economy to create jobs via monetary manipulations is no more effective than were wage and price controls in the 1960’s.

    Haven’t we learned anything over the last 110 years?

    • NGDPLT says:

      I would like to point out that, in fact, stable NGPD growth _is_ effective in maximizing employment and economic growth.

      (Where wage and price controls are not)

      Acknowledged that CBs have made huge errors that seemed obvious to some of us at the time, and are blindingly obvious in hindsight.

      • John H. says:


        I hate to reveal my non-academic background, but what in the world is “NGPD.”

        In an attempt to educate myself, I searched NGPD, and got Newman Grove Police Department, and Next Generation Prenatal Diagnosis, but neither seems appropriate (the latter was listed under the heading of “midwifery.”)

        If what you are referring to is some sort of attempt at economic stabilization policy, I’d love to see evidence for your statement — evidence of a society where the policy worked over a series of cycles, with no nasty side effects, and still exists. Kindly direct me.


        • vecchio gatto veloce says:

          National gross domestic product?

        • rojogrande says:

          Given the context, I’d guess it’s nominal gross domestic product. I’m guessing that because the name is “NGDP”LT, so I’m thinking NGPD in the comment is a typo.

        • NGDPLT says:

          Sorry – I totally typo’d – nominal GDP, as another commenter deduced.

          Australia, for example, was largely able to avoid the GFC (Global Financial Crisis).

          I didn’t mean to imply that central banks had a great track record – on the contrary, I think there is a good case to be made that the Fed cause both the GFC and the Great Depression.

          But unlike with price controls – bad in theory and in practice – monetary policy can stabilize the economy, in both theory and (only spottily so far) in practice.

          Like the difference between shamanism and 18th century medical – both can kill you instead of helping, but one of them actually could work with improvements.

          Level-targeting would help a lot – a promise to “make up” in both nominal shortfalls or excesses (because, say, high spending today means hard times tomorrow, so people and businesses cut back to prepare, and do a lot of the stabilization work).

          Not sure I’m allowed to link elsewhere but I’d highly recommend Scott Sumner’s blog or books (but the books might be dense if you’re completely new to macro).

        • John H. says:


          I’d be interested in hearing a summary of Austalia’s experience with NGDP targeting, especially:
          – When did it begin?
          – How has it fared at controlling inflation?
          – Has the $AU fared well?
          – How has systemic debt trended? (Gov’t, financial, corporate, and household)

          Also how does NGDPLT avoid this problem that you identified earlier:
          “Acknowledged that CBs have made huge errors that seemed obvious to some of us at the time, and are blindingly obvious in hindsight.”

          Thank you in advance.

      • John H. says:

        Thanks Rojo and Vecchio-

        I think I found it: Nominal Gross Domestic Product – Level Targeting. Scott Sumner and David Beckfield, among others.

        I would still be very interested in evidence of how this targeting has worked in action and over time. It looks scientific and mathematical, and would be really interesting if the realities live up to the elegance of the theory…

        (Sorry if this dragged site of subject, Wolf!)

        • NGDPLT says:

          No central bank has NGDP level targeting as their policy target (yet?). It was only in 2012 that the Fed adopted a formal 2% inflation target, so… yeah, things move slowly.

          I will note that people who used NGDP growth as a framework for evaluating the stance of monetary policy were much more likely than average to correctly expect that:
          – the post-GFC monetary stimulus (say 2010-2016) wouldn’t cause inflation
          – the 2013 budget cuts would not hurt the economy
          – the 2021 period looked poised to blow up inflation
          – we currently have 6-8% annual NGDP growth, so inflation is going to be way above target until that comes down (lmao when people say monetary policy is “tight.”)

          Which is to say – empirically, using NGDP is a superior mental model and probably 95% of professional and academics are fundamentally confused on how macro works.

          Separately, level-targeting brings inherent stability (like a super-effective version of forward guidance).

          Sorry if this is too much, or too little, or the wrong kind of, information. I hope it points you in some directions you find interesting.

          (I deleted a lot already… but there is a whole other rabbit hole about “what alternative could there possibly be to monetary policy”)

        • John H. says:


          1. Not sure how these two statements you made above jibe:
          “I would like to point out that, in fact, stable NGPD growth _is_ effective in maximizing employment and economic growth,” and
          “No central bank has NGDP level targeting as their policy target (yet?).”

          2. I don’t see your second paragraph as rigorous proof that NGDP is a superior mental model, and to the exclusion of all other mental models (though I’m guessing that you sincerely believe that it is). I do agree that 95% or maybe more (mostly Keynesians IMHO) are confused. The confussion lies less with how to successfully administer the economy than with the belief that monetary and fiscal stimulus can be used to SUSTAINABLY alter the economy without eventually paying an ever-rising price. “Deficits without tears,” as Jacques Reuff entertainingly referred to them.

          3. Does “super-effective guidance” bring inherent stability? I’d love to see some empirical evidence showing that!

          4. Does your last paragraph, mentioning the “rabbit hole,” include a new gold standard? If not, does it include some other automatic limitations placed on central banks to keep it from mushrooming as ours has these past 20? If yes to either, I’m all ears.


        • Letro says:

          Big pile of twenties
          My favorite ! Now off to farmers market LOL

        • NGDPLT says:

          For point 1 – if a central bank “successfully” balances inflation and employment, that virtually requires a stable path of NGDP. NGDP doesn’t have to be the policy target to be useful in evaluating whether or not a CB is screwing up.

          I don’t really want to invest more in this, I’ll just say that “Commanding the economy to create jobs via monetary manipulations is no more effective than were wage and price controls in the 1960’s.” was a very strong claim and highly unusual claim. So I’d assumed there was a lot of research into it and tossed out an additional avenue of investigation – feel free to explore further, or not. :)

          PS: It’s certainly a rare pleasure to have a corner of the Internet with productive discussion with curious people.

        • John H. says:

          I appreciate the line of conversation too, NGDPLT.

          For any nerdy or curious commenter who wants to read some up-to-date thinking on the endgame of fiscal/monetary control of economy, google “calomiris + fiscal dominance”

          Calomiris is Henry Kaufman Professor of Financial Institutions Emeritus at Columbia Business School,. The article is published on St. Louis Fed site.

      • Bobber says:

        Stable GDP growth that relies on increasing the debt-to-GDP ratio is anything but “stable”. It’s elementary.

        • Sams says:

          A system with a constant growth ratio do grow exponetially. No system with exponetial growt is stable.

          Basic math and control engieneering.

        • 91B20 1stCav (AUS) says:

          …old bumpersticker from the (formerly) redwood timbering area I live in:

          “Earth First! (we’ll log the rest of the planets later…)”.

          may we all find a better day.

    • andy says:

      It helps if you start with the assumption they will do exactly the wrong thing at exactly the wrong time. They will not disappoint. It is self-evident tautology. Good question though.

    • dang says:

      The US is the best bet for business currently available.

      Logic and common sense thought the Civil War was a good idea.

  8. Kevin says:

    Speeding up QT could be the answer. 90 billion a month clearly is not enough. But the Fed doesn’t want to shock the bloated market.

    • WolfGoat says:

      You mean the ‘bloated BOND market’? Remebemr, those are their REAL customers!

  9. curiouscat says:

    Law of unintended consequences.

  10. Economic Armageddon says:

    “The Fed alone, not counting other central banks, created $4.8 trillion within two years of giga-money-printing, as Musk would say; it has now removed $1.1 trillion of it via QT.

    Could it be, with so much liquidity still out there, that it might take a lot more and a lot longer to tighten financial conditions enough to where they have even a chance of removing the fuel from inflation?”

    This is like over-stretching a rubber band, then trying to somehow force it to become taut again. Sure, there are ways to do it, but in all honesty the most important financial condition that will repair this mess — ceteris paribus — is TIME.

  11. Economic Armageddon says:

    I resisted using this comparison. Same with the ‘doorknob’ or the ‘tragedy of the commons / community pool’ examples.

  12. Rossco says:

    Until those dollars get destroyed by defaults or otherwise why shouldn’t they just keep circulating? With higher rates comes higher velocity.

    • andy says:

      Per John Hussman the only way dollars get destroyed it to go back to the Fed to be retired.

      “Every dollar of liquidity created by the Fed must be held by some investor until the Fed retires it by shrinking its balance sheet. That liquidity can be held in only three forms: currency in your wallet, bank reserves that you hold indirectly as a bank deposit, or funds on “reverse repo” with the Fed that you hold indirectly as a money market fund deposit. It can’t turn into anything else.”

      • BS ini says:

        This may be true but I would think my Lehman bonds that were defaulted on were retired. That “money” was burned because I did not get any of the bond value . If the Fed were to hold any corporate bonds if those default that balance sheet value is destroyed. The government bonds are different since the government issues unlimited new bonds for the cash and as Wolf says always can raise rates to find buyers

      • Ltlftc says:

        What is a check?

      • Wolf Richter says:


        Hussman seems a little confused here. I mean VERY confused.

        His line…

        “That liquidity can be held in only three forms: currency in your wallet, bank reserves that you hold indirectly as a bank deposit, or funds on “reverse repo” with…”

        …is BS.

        There are $3.3 trillion in reserves parked at the Fed, but there are $17.3 trillion in deposits at commercial banks, plus lots more deposits at credit unions and thrifts.

        So there’s $14 trillion ($17.3 minus $3.3) in cash from deposits at commercial banks that they did not lend to the Fed (reserves).

        Guess what commercial banks did with that $14 trillion in cash from those deposits? Buy Treasury securities that are now under water (see SVB), lend to consumers, companies, and even governments, engage in trading of securities, buy derivatives, etc. Banks send only a small portion of their cash from their deposits to the Fed (for liquidity purposes primarily and now also to earn 5.4%). The much larger portion, they use in running their basic banking business (lending).

        • andy says:

          Wolf, that is why I start with “per Hussman…”. I know you’d correct any misunderstandings. Thank you for that.

          He is pretty good though. Check out one of his monthly comments sometime (he repeats 90% from month to month). He is not great on market timing, not even close. Sorry for double post.

        • Wolf Richter says:

          Yes, he’s very good on a lot of things.

      • spencer says:

        The only way to reduce the volume of bank deposits is for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a banks service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., bank stocks, debentures, etc.

      • bill says:

        Also per Hussman- The long history of business cycles illustrates that rising inflation precedes recessions. And it’s the FED, in responding to one crisis the Fed has created another crisis, which is a process of booming the booms and slumping the slumps.

        BTW Does anyone follow the Output Gap analysis?
        The difference between actual output and potential output is called the output gap, which is expressed as a percentage of potential output. The short-run fluctuations of actual output around potential output determine the business cycle —economic expansions and contractions, or recessions.

        Here is the NowCast Atlanta Fed OUTPUT GAP-
        Output Gap 2023Q4: 2.9% (nowcast

        Somewhere there is a chart that tracks the output gap with inflation, they seem to correlate.

      • Sams says:

        Then there is the money not created by the FED. An example is the money generated by interest. The math of interest is that accrued interest are money generated.

        Historical side node, that is the reason all gold standard and gold money system have to fail if interest are allowed. And maybe the reason why the Bible probit lending with interest. Someone did know their math.

  13. Phoenix_Ikki says:

    Pow Pow is the greatest pilot of all time. We are going in for super comfy plush ultra soft landing or maybe the plane will just keep flying…no landing and no fuel needed…

    Thumbs up Pow Pow

  14. DJ says:

    I took all my stimulus money as twenties and put it in the safe. This week I took out the last of the twenties and will spend it over the next couple of weeks. I can’t be the only one.

    • Letro says:

      Yes paid property taxes for 2 years ++ with stimulus.
      I always have big pile 40k to 50k of twenties. BPOT
      “Make Cash Great Again”. MCGA as per CAF Solari.
      Now in Hawaii 2 months for scuba, farmer markets and relaxation.
      My observation folks are spending to enjoy life NOW !
      My opinion at 70 the government and all institutions have broke our country since 1960. I do not waste time on the false narrative. I just enjoy the fruits of our labors. Spending millions in retirement is a joy.

      • JeffD says:

        I paid my Federal taxes with the last California stimulus check. Thanks, California!

  15. Shawn says:

    Liquidity is only part of the reason I believe. How much international money was poured into US equity from abroad YTD because of the AI hype? In my capacity working in Private Banking HK, I have seen so much more buy orders into US tech from Asian investors. Maybe it’s also good to investigate international money flows apart from focusing solely on Fed liquidity movement.

    • white, bob says:

      Where does international money come from?

      • Letro says:

        Pile of US dollars in foreign banks.

        • Wolf Richter says:

          Plus dollars borrowed by foreign entities, through foreign banks in the US, through US banks in other countries, through foreign banks in foreign countries with a relationship bank in the US, through USD bond offerings by foreign companies and governments. Look at the stock offerings and ADRs by foreign companies in the US (Arm was the big one recently) that all raise USD.

  16. Glen says:

    More like ‘what gets bigger the more you take away from it?’

  17. Glen says:

    Going to be interesting how this aligns with the massive interest on debt that continues to grow. Theoretically they could cap yields on bonds but that would just lead to greater inflation and likely have a lot of other negative effects. With Hollywood and auto makers back to work things actually pick up in the economy rather than slow down.

  18. Debt-Free-Bubba says:

    Howdy Folks. Our Govern ment would never try and paper over its problems. Everybody trusts that the Govern ment knows what it is doing.

    • white, bob says:

      There are many who don’t believe that government deficits of $1.7 trillion per year is a problem. They believe the real problem is that workers and retirees aren’t paying enough taxes to fund all of the wars and government grift.

      • Einhal says:

        Wait, how are those different? If workers and retirees were paying enough taxes to fund all of our spending, then the government wouldn’t be running $1.7 trillion deficits.

        • MM says:

          “how are those different?”

          That’s like saying “I don’t need to cut back on $8 lattes every day, you just need to give me a 30% raise”

          Its a spending problem, not a revenue problem. Gov’t needs to tighten its belt and learn to live within its means; sadly this won’t happen until the bond market revolts.

  19. Desert Dweller says:

    I’m a partner is a small commercial real estate mortgage brokerage, and all of the regionals that we deal with in California have significantly tightened their lending criteria starting back in Q1 of this year. It’s getting more and more difficult to get anything done. Sooner or later this will further impact the CRE market, which eventually should have an impact on the overall economy. We subscribe to a commercial real estate service that tracks NODs and defaults, the numbers are moving up steadily month over month, but they still have a long way to go before an earthquake hits.

    • Wolf Richter says:

      CRE is cooked.

      • Desert Dweller says:

        You can stick a fork in it! We are in the process of switching our business model to buying distressed properties for a series of LPs. The number of SoCal NODs and foreclosures are still low but they have started to accelerate over the past 6 weeks or so. Best guess, the bargain hunting will begin in earnest Q2 next year.

    • CRE Dude says:

      I had a zoom call with a big CRE firm about placing one of my alpha properties for sale in a pre-covid top 10 US city. Mostly I wanted to see what they are thinking and what they are seeing. The take aways from them. They did a full package analysis:

      1. Comps do not matter. Comps do not matter. Comps do not matter. No recent data to reflect current reality.
      2. Developers are in charge, so you have to give them 2-3 years of holding time. Developers can only develop what they can borrow. So best use of the land does not matter.
      3. Banks are not lending.
      4. As a landowner, if you need to sell, you will take a huge haircut, like shave your head bald. My property was valued at 1/3, no really 1/3 of the recent comp value. So, if it was $15 dollars, now they are saying $5 dollars. This is truly a Class A property which I got unsolicited offers all the time, but I am getting really, really good rents. No FOMO or regrets, but mostly a kick in the teeth of what is going on.

      I am talking to another big CRE firm to confirm this. I didn’t know the previous guys, so maybe they are snakey fuks, but my gut tells me no.
      With longer and probably higher, things are not looking good for CRE. Maybe, I will pick up some bargains, but I am keeping my powder dry.
      Good luck all.

      • Desert Dweller says:

        I have regular discussions with CRE credit managers and portfolio managers, and the picture is not pretty. Most all of the banks and private money CRE lenders that we work with have cut max loan size in half, dropped LTVs from 65% to 50%, bumped DSCRs to 1.50+ and are more focused than ever on income, security & PGs in addition to the subject. They are now turning down deals that would have been an easy yes last year.

      • truthseeking says:

        @CRE DUDE. If you’re in the right commercial building at the right location you’ll be doing just fine.
        Selling? It all depends on cap rate. Here where I live most commercial for sale are listed at average 5% cap rate.
        Retails strips are all the rage. I just tested on Loop Net a potential lease and was swamped with requests.

        • white, bob says:

          Only 5% cap rate when risk free for 5-20 years is the same? I would be looking for 7-8%.

        • Wolf Richter says:

          It’s tough today to get a mortgage for a property with a cap rate of 5%, because the mortgage rate is going to be 7.5%, and you will not even be able to make the interest payments, and when you explain this to the lender, they will tell you to go into detox. You’d have to put a massive amount of cash down to persuade the lender to give it a shot.

        • CRE DUDE says:

          That’s the rub, figuring out cap rate with longer and maybe higher rates with wonky comps and inflation. Meth smoking pro forma are LOL to read. It’s all about cash flow and good tenants. The dirt of this particular property is worth way, way more than some cap rate due to location, zoning, permitted use, special incentives, and no mortgage. But now, that is on hold until the bad air is cleared out. I’m good for 5+ years with good rents and tenants.

          These CRE dorks are seeing if I am willing to blink first and went lowball with me with comps do not matter bs. Persona non grata. I see lots of hungry brokers, architects, and loan officers, oh my, in the near future. Take care.

  20. Scott says:

    I took all my stimulus money and traded them for gold coins

  21. CuriousZiggy says:

    Or could it be…real rates are really still negative. The cost of goods & services are actually rising faster than the government says they are and its still profitable to purchase now because prices are increasing more than current interest rates.

    • Wolf Richter says:

      in October, we got the cheapest direct flights from San Francisco to Europe that I found in the 18 years I lived here. Airline tickets are a service in CPI. There is big deflation in airline tickets.

      The email service I use for this site just lowered its monthly fees — not by much though, LOL.

      I changed broadband suppliers again and cut my costs from $70 a month to $25 a month. That’s a service in CPI.

      My healthcare expenses plunged when I came on Medicare. It saves me hundreds of dollars a month if I don’t need medical services (just in premiums), and a lot more if I do use medical services.

      People don’t ever look at the stuff that gets cheaper, and then their perception gets skewed.

      • El Katz says:

        Wolf.. to your point of reduced cost/pricing. The one thing that has to be pointed out is that you have to look for the decreased pricing – it won’t come to you. I did the same thing as you a while ago with our broadband. Moved from cable ($119 a month plus plus plus) to 5G at $25 a month with no degradation in service. There are multiple examples of that in our life…. we don’t just keep paying bills and kvetch because the rates have risen… we look for alternatives and often can find them. Heck, I just went to the grocery store and saved 51% on what I bought simply by using their dopey app.

        • Wolf Richter says:

          Yes, that’s the only way to keep inflation down: consumers and businesses have to fight price increases — if they have to by taking their business somewhere else.

      • tangojennifer says:

        FWIW, my husband works at UCSF and nearly all of the health insurance plans option’s monthly premiums are going up enormously. In our case, our monthly premium is going up 79% if we opt to stick with Kaiser HMO, but some PPO options are going up by over 100%. It’s so much, that we are likely going to switch to the catastrophic plan with the higher deductible (3k each or 6k for both of us) as it has a $0 monthly premium, but makes more sense than paying 5k a year in monthly premiums whether or not you are actually sick and need to use services. The increases in monthly premiums are staggered based on how much you earn at UCSF so they are less if you earn less, and they are also much more if you cover your spouse and/or children vs only yourself (the employee). I had also read that UCSF added $93 million to fund their insurance program for their employees for 2024, but even that wasn’t enough. Sigh.

        • Wolf Richter says:


          High-deductible plans can be a good deal if you’re not chronically ill and if you have a good amount of taxable income because you can set up a Health Savings Account (HSA).

          An HSA is like an IRA, where contributions are tax deductible and earnings are non-taxable. They’re better than IRAs in that when you take money out for medical expenses, it’s not taxed either (but some states, such as CA, don’t allow you to deduct the contributions from your state taxes).

          We’ve had those since 2006, ever since Bush came up with them, and now we have big balances in them that we use to cover future medical expenses as we get older, and they’re invested and earn income tax-free.

          The tax benefits every year paid for about 1/3 of our premiums (which were low because we had big deductibles with $4,500 max out of pockets per year. But after our second year, we had more than that in our HSAs, so if we had had a big-ticket repair, the HSA would have funded the max out of pocket.

          If you have chronic illnesses and don’t have enough taxable income, HSAs with high deductible plans may not be a great idea. This is a very personal decision, but do check them out.

        • Letro says:

          Chemo is $15,000 per week for months.

        • Wolf Richter says:


          With a high-deductible plan, you have a maximum out of pocket per year, after which 100% is covered. Our max-out-of-pocket was $4,500 the last year I was still on it. So the most medical expenses you’re going to have per year is your max-out-of-pocket. Once you hit that, you do 10 years’ worth of elective stuff because now everything is free. But then add up all the premiums you save in 12 months with a high-deductible plan, and then add up the tax benefits from the HSA, and you will get a feel for it.

        • sufferinsucatash says:

          Mine in NC actually went down a tiny $ amount. Self pay because my employers is such bad insurance.

          It’s still a lot but I was happy it stayed basically static.

      • truthseeking says:

        I would also like to mention the living amenities retired people can choose to make.
        For ex I’m on high income but I’ve chose to sell the McMansion home and settled down into a nice manufacturer home on a small lot-thus, cutting my fixed cost by 50%.

        • Who's the Boss? says:

          Well, my boss would not like that. I could totally swing it, but the boss would fire me. She needs coffee and books meetups and get togethers with her friends and family. I usually hide out in my study or go for a long walk.

          Yeah, there are many other ways to lose 50%, my friend.

        • JeffD says:

          Twenty years ago, my cousin bought a double wide mobile home. I had never been in one before and was stunned by how nice the interior was, both in floor plan and upgrades. The cabinetry was stunning throughout. The price was somewhere between a third and a half of stickbuilt, if I remember correctly.

      • Z33 says:

        I mentioned my Costco prices in a comment a few months back how the only big change I noticed was their boneless skinless chicken breasts (6 packed in pairs) went up from $2.99/lb to $3.49/lb earlier this year. First price increase I’ve seen in well over 5 years. Today, the same Costco now has it back down to $2.99/lb…0% inflation in 5+ years easily if not 10 (I’ve been buying them that long regularly). Also saw reg gasoline was $2.95/gal and 93 was $3.25/gal so figured I’d top off since no line that moment I came in (was packed when I left).

        And ditto the airfares. I mentioned a few months ago I got MCO (Orlando) to NRT (Tokyo) for $1051 and go back home recently. YUL (Montreal) connection was eerily empty and our gate was only one with a departure over a 4 hour span I wait for at least a dozen around. I was literally only person walking through the connections customs section of airport (thousand of square feet of empty lines with no one person visible til I got to sublevel stairs to scan my connecting ticket). No idea what that was about…flight was full at least.

        • sufferinsucatash says:

          Cool info.

          I love to see real prices. I think maybe everyone put all their trips and purchases onto credit cards that they are now having to pay off. So they will pull back awhile. Then go at it like starving woodchucks who Chuck a lot of wood.

        • Wolf Richter says:


          In terms of the airports, my experience was different. The two I saw — San Francisco and Frankfurt — were packed with huge lines. Frankfurt’s departure hall was total mayhem. Both flights were overbooked with people on standby, some of whom were called up and could get on. They know how to fill those planes: cut the prices for the crappiest seats.

      • Einhal says:

        Is the $25/month that Verizon wireless thing they’ve been advertising? I got a flyer in the mail the other day. If that is it, how do you like it? How reliable is it?

        • Wolf Richter says:

          No, it’s not Verizon. But the Verizon people actually “physically” knocked on my door selling 5G after they installed the antennas in my street, and we got tons of their fliers in the mail.

          We now have three competitors selling Gigabit broadband in my street: Sonic fiber, Comcast coax, and Verizon 5G.

          In addition, I have regular 4G on my cellphone, which runs at about 17 Mbts, which is more than enough for what I do; when my primary broadband fails, I set up a hotspot as backup (I have backups for everything since I live on the internet). That’s why I would not use 5G alone because I always need a backup. I could use 4G alone too, it’s good enough and reliable enough, but I need a backup.

          The thing for me is if there is a broader blackout, both fiber and coax go down. And then I switch to my cellphone hotspot because the wireless system runs on its own power supply, including batteries. So even in a blackout, you can still use your cellphone — and therefore the hotspot (until I run out of battery power at home).

        • Einhal says:

          Thank you for the detailed explanation, that makes sense. Our cable provider charges like $100/month now, so I was looking to try the $25 Verizon deal to see if it’s any good.

        • El Katz says:

          We have the Verizon 5G. Works seamlessly vs. the cable provider that was unreliable and nearly 5x’s as expensive. Yes, there’s the risk of an outage…. but I can stick the “brick” in the car and drive to another area and use it there. Can’t do that with hardwire. The only flaw in my grand plan is that both my mobile phone and broadband are on the same carrier.

          Nothing’s perfect.

        • John H. says:

          I’m looking at 5G jet box hotspot from Verizon. The reviews are pretty horrible. Might want to check them out.

      • mark says:

        you must have a very patient life partner. mine wouldn’t stand for all those changes (banking,services etc)

      • William Leake says:

        I’m in the East Bay (north). What decent broadband supplier is only $25 a month? Thanks in advance. I use Comcast at $50 month to get 300 Mbps.

        • Wolf Richter says:

          Yes, wait till you get the offer in the mail. Or google: cheapest broadband rates in city-name

          If there is no competition on your street, if Comcast is it, that’s what you’ll pay.

  22. themsicles says:

    Yes there’s too much capital out there. The supply side is limited, whether it’s new cars or houses or to some extent chips. AI is keeping demand of chips high and these are not cheap. Yes, some cars can be had for below MSRP, but it’s not a given. Consumer chip parts are rarely discounted as they used to be.

    In the good times, if you either cross shopped or waited for some shopping season: you could have the deal you wanted. People wouldn’t pay sticker for even a custom ordered car. Now from Porsche to Toyota, things are nuts across the spectrum of prices.

    My anecdotal go to has been seeing the trends on slickdeals dot net. There was a time when popular electronics were regularly go on sale. That’s not the case, though things have dramatically changes from last year. It is possible that the quality of slickdeals has gone down. But real life consumer experience matches the same.

    The bottom line is, people are maximally employed and the real assets they park most of their wealth in are still left untouched. Some meme stocks exploding here and there doesn’t change anything. And QT has slowed the rate of change, but we are not on course.

    • white, bob says:

      Why do people keep claiming that there’s a shortage of housing? Were a bunch of homes destroyed over the past 3 years? Has there been a huge population increase over the past 3 years?

      Census Bureau shows an increase of 2.7M from 2020 to 2023. From the data I see, an average of over 1 million new housing units have been completed each year since 2020. So that’s 2.7 million additional population and over 3 million new housing units during the same period. How is there a shortage?

      • white, bob says:

        It’s actually 1.41 million new housing units per year from 2018-2022. There was an increase in 2023.

        So over 3 years, the population increased by 2.7M while over 4 million new housing units were completed. There’s an excess of 1.3M housing units over the past 3 years. Explain again how there’s a shortage of housing instead of constantly parroting what the RE industry keeps telling you.

        • Jon says:

          There is absolutely no shortage of housing per se.

          The distortion we see in housing market is not because of supply and demand but because if FeD doings.

        • ru82 says:

          That is what is odd. Supposedly the census included all people which would include undocumented immigrants. There has been 7 million new migrants over the past 3 years. 2.7 appears to be way off.

          They require housing.

          Yes, there has been housing units added but many are multi family rentals. Plus many new homes are built for rentals. This leads to a shortage of single family affordable homes. If you’re looking for a $700k or more house, there is Plenty of inventory out there.

          Plus the myth that undocumented immigrants don’t buy houses is a myth. Maybe not right away but sometime in a couple of years. I have a rental house in a low income neighborhood. I see it all the time. They are the majority of the buyers in this neighborhood over the past 5 years.

          I now of a guy and his business model is selling homes to undocumented immigrants.

      • CCCB says:

        Because for 10 years starting in 2008, not enough homes were built to cover demand once the panic ended.

        At one point the new homes market was 4 million short. Its slowly coming back, but now the shortage is on the existing home side.

      • sufferinsucatash says:

        The millieniels and gen Z soon are all coming into their own. So yep each year there will be lots more buyers.

  23. Jonathan Searcy says:

    Wolf wrote:

    “Could it be… that so much central bank liquidity was created during and before the pandemic that financial conditions cannot meaningfully tighten, despite the Fed’s tightening, until this liquidity gets burned up?”

    My short answer is: I don’t think it works that way. The liquidity certainly lubricated financial conditions, but it was neither necessary nor sufficient to cause the asset bubble that we’re observing. The key to the inflation of the asset bubble (and the commensurate feeling of wealth that leads to consumption) is the underlying *belief* that investing in those assets is better than holding cash.

    As the Fed tightens, people at the margin between having some surplus funds to invest and having to draw down on their investments, switch from one to the other. This effectively drops these people out of the investment cycle. When their investments run down completely they become impoverished. However, those who are able to retain some liquidity continue to buy and sell assets at ever increasing prices. I have an agent-based computer model that demonstrates exactly this. As the money supply tightens, asset prices take a dip, but then as liquidity is transferred from those who have to divest to those who are still able to invest, asset prices take off again.

    The key to it all is the *belief* that holding the assets with inflating prices is better than holding cash. The vicious cycle will continue until that belief is given a reality check.

    • HowNow says:

      Jonathan, I agree with most of what you’re saying regarding beliefs. But the Fed has about 3 main ways to reduce money in circulation and this goes a long way towards getting people to “believe”.

      The Fed has weathered two main crises in the last 15 years, either one of which could have caused financial collapse. They may have overdone both, but that’s really only known after the fact – not during it. If you remember, once rates went effectively to zero, it did not stimulate the economy. QE was started, and it didn’t work, initially. It took 4 rounds before it made much of a difference. COVID showed up and f+++ed that effort up in short order.

      In the case of “belief”, I think the Fed was surprised that it took as long as it did for inflation to really kick in and it did so quickly. Once it did, they may have waited too long to try to reverse it. Volcker showed that they could ring it out quickly, but that may have been too drastic a measure this early in the inflationary cycle. They’re trying to wean the system without applying a tourniquet, which is totally reasonable.

      • Jonathan Searcy says:

        I agree with you that if the Fed tightens enough it may compromise the belief that investing in over-priced assets is better than holding cash, if for no other reason than that the immediate effect of Fed tightening is to reduce the price of the assets as less well off people are forced to sell.

        However, this is a short term effect. If the belief is not broken (and right at the moment it’s very deeply entrenched) asset prices dip for a while as a segment of the population is excluded from investing, and then continues to rise as the remaining population continues buying slightly more than it sells.

        If you Google my name and Price of Goo you’ll find the model.

        • ad says:

          Yes Jonathan, as there are enough people who are putting faith in Bitcoin as of the late.

          Enough think it is going to increase in value at a much greater rate than government-reported inflation.

        • Wolf Richter says:

          Bitcoin price plunged while inflation raged. That’s a shitty hedge against inflation. You lose twice, with the plunge in price, and then in purchasing power due to inflation. It’s just a gambling token.

        • Danilo says:

          Nah it’s just the mindless robot of 401k and people who are forced to buy into the dog$it funds that prop up indexes.
          And corporate buybacks prop up their own stock. Once those 2 fall, it’s game over. Has nothing to do with belief, just flows.

      • spencer says:

        Volcker created 2 unnecessary recessions.

    • JeffD says:

      “The key to the inflation of the asset bubble (and the commensurate feeling of wealth that leads to consumption) is the underlying *belief* that investing in those assets is better than holding cash.”

      Or, could the key to inflation be the underlying belief that the Fed/government will always step in to prevent an asset crisis (aka put a floor under asset prices)? I believe this is called “Keynesian economics” now, although Keynes is probably spinning in his grave.

      • Bobber says:

        Correct. As Bernanke admitted, the Fed pursued a misguided wealth effect to create a virtual cycle of growth, and the Fed keeps bolstering the wealth effect through bouts of QE and slow-walking QT until the next crisis.

        Truth be told, I don’t think Bernanke wasn’t level-headed enough to realize the consequences of it. I even heard him say you could do helicopter drops, as long as people didn’t think they would be recurring. Yeah right. In what world would that be allowed to happen? Not ours.

        • Augarbage says:

          Not to be a contrarian but after the two financial stresses. Some sort of stimulus has been injected either directly or indirectly. So yes I think the American public fully expects a fed backstop when things crater at some point for the third financial crisis.

        • HowNow says:

          Augarbage, yes, if it’s truly a financial crisis, they will probably come to the rescue of either/or banks or the general economy. Moral hazard, yes, but tough titties. I’m glad this tanker doesn’t hit the rocks, barnacles and all. At my age, starting over ain’t gonna happen.

          But they may try to talk down the crisis, if it’s feasible, or turn some screws to stop the leakage, even if some quarters of the economy sink into the deep blue. There’s really nothing permanent when it comes to economics. Moral hazard is with us but may not be permanent. Or the Fed may just howl into the wind, collapse and become just one more historical artifact, part of the never ending story.

          Trouble is… nothing is forever. Not even gold.

        • Einhal says:

          Yeah, easy to say tough titties when you admit you’re on the older side. Moral hazard is like a parasite that eventually destroys its host.

        • HowNow says:

          Yep, dogmatists just hate moral hazard. It makes their blood boil.

        • Einhal says:

          You’re right. I am a dogmatist. I wear that label with pride.

        • HowNow says:

          Pragmatics have beaten dogma since the early days of idol worship. It’s taken a lot of time, though, and there are still some holdouts lurking in the darkness.

        • 91B20 1stCav (AUS) says:

          How/Ein – wherever any of us are on the road of earthly existence, notice that the gawds are laughing hysterically at our universal desire that those we perceive to be at the root of our problems would simply go away…

          may we all find a better day (and not suddenly vanish…).

    • Ltlftc says:

      “As the Fed tightens, people at the margin between having some surplus funds to invest and having to draw down on their investments, switch from one to the other. This effectively drops these people out of the investment cycle. When their investments run down completely they become impoverished.”

      All things being equal, reducing quantity demanded will reduce price in an ellastic market.

      “However, those who are able to retain some liquidity continue to buy and sell assets at ever increasing prices.”

      The ever increasing prices part is nonsense. See above. Adjust your model.

    • Jon says:

      You need to look below the belief part.
      Why do people believe that holding assets is the way to go as they think asset prices can only go up.

      Who creates these belief that asset prices can only go up ??

      Just think hard and you’d have the answer.

      • Einhal says:

        Yes. The U.S. stock market has been an outlier. If you bought at the peak of the NIKEI in the late 80s, you still haven’t come out whole in nominal terms.

    • MM says:

      “The key to it all is the *belief* that holding the assets with inflating prices is better than holding cash.”

      But the comparison isn’t to cash, its to cash or cash-like assets. Ex: MMFs yielding 5+% that you can sell and settle in a day.

      I’m sure some beileve that stocks will do better than 5% in the near future, or that rates will fall and long bonds will rally (muh pivot), but how long can this exuberance be sustained?

  24. Tom says:

    Now THAT… is really really funny!

  25. The unfortunate consequence is that higher rates are a blunt tool punishing some industries disproportionately, like those that rely on research and development. For instance, there was too much money going into antiviral drug development, only for early stage cancer drugs to run out of funding a few years later. The fed needs to lean on QT more with fewer rate hikes, or figure out how to restrict some parts of the economy and not others.

    • Jonathan Searcy says:

      Umm… The Fed funds rate and QT have more-or-less the same effect, its just a question of timing. The Fed funds rate affects the short end of the yield curve whereas QT affects the long end.

      • kramartini says:

        I can see how selling long bonds would affect rates at the long end. It is not clear that the current run off policy affects the long end.

    • Glen in SoCal says:


    • JeffD says:

      The Fed could increase reserve requirements, which would lower leverage ratios and likely slow money supply growth. FINRA can increase margin requirements, having a similar effect on stock movements. Prior to 1982, stock buybacks were illegal but the SEC decided to let them slide, and even lets debt be issued to buy company stock, which seems like the definition of a ponzi scheme to me. The FHFA controls conforming loan limits. There are many levers out there to control specific aspects of money creation, but all these levers have been moving in the same direction for at least the last decade — looser money. There was a time (pre-1982) where the government used to move these levers up and down as opposed to always ratcheting looser. I remember margin requirements that actually used to change based on market conditions.

      • Wolf Richter says:

        “Fed could increase reserve requirements, which would lower leverage ratios and likely slow money supply growth”

        You mean “capital requirements,” which would do what you say.

        The Fed should also reinstate “reserve requirements,” at say 20% (from 0% today), which would raise liquidity at banks. SVB would not have collapsed under a 20% reserve requirement. But banks hate this stuff because it cuts down on their earnings ability.

  26. Mike R. says:

    The economy is slowing. Ongoing demand destruction taking place.

    Fed will not raise short term anymore even though Powell “jawboned” about that today. Long term rates will stay higher, primarily supported by Fed selling of bonds.

    We’ll be in recession within a quarter or two, IMO.

    • Julian says:

      I wish you were right!

      At first I was optimistic, but now I believe in the long flight to the USA and the soft landing in Europe.

      Obviously, nobody wants a recession.

      I’m hoping for another black swan that has nothing to do with inflation.

      Hope dies last.

      • HowNow says:

        The next black swan will be a pock a dotted turkey. That’ll surprise everyone, even Nassim.

      • kramartini says:

        “nobody wants a recession”

        Those who benefit from recessions want a recession…

        • Julian says:

          I meant that no government wants a recession.
          I personally want to see a deep all-out recession.

  27. gametv says:

    The Fed should be executing QT at twice the pace. The faster they go, the less chance of it getting entrenched and causing much bigger problems with the financial stability of the US government.

    • Yes, agreed! They need to actually start selling MBS to meet their cap, as a first measure. The longer the pain the worse it will be for everyone. Higher for shorter is better in my opinion if we are to stop the sailors in their tracks.

      • white, bob says:

        They never should have purchased MBS’s as that was never allowed by Congress. This housing bubble the Fed created is the reason why. When an entity like the Fed is allow to create trillions of dollars and dump it into an asset class, that creates a bubble that hurts every working class person that needs a place to live.

    • RH says:

      That ship may have sailed, albeit you are right: Read articles about a recent, dud, Treasury auction without enough buyers for 30 year treasuries, so dealers had to buy. Higher, federal interest rates to gift to the needy rich/allies mean our federal budget is becoming unsustainable due to increased federal total interest payments as we are now becoming hated all over the world. Defaulting on our federal debts will also not be a plus: can we then really monetize all US liabilities if interest rates that treasury buyers demand rise to much for the budget? Stagflation, here we come! More tax cuts for the rich planned, when the budget is already unsustainable, would be the cherry to top that cow pie.

  28. andy says:

    We have few Scrooge McDucks on this blog swimming in liquidity. Comrade Gary must be livid.

  29. SOL says:

    As time goes on I realize that the only way a lot of Americans will ever have a chance at a successful American lifestyle, is if the wealthy lose theirs. The divide is too great between those with assets and those without. My neighbors paid 50% less for their houses, with 1/3 the rate.

    • andy says:

      You mean when proletariat unite? What is rule of thumb for too wealthy?

      • OutsideTheBox says:


        To answer your question: NO billionaires. NONE at all. Not even one.

        Once that species is eradicated, we can further refine acceptable levels of wealth.

        • kramartini says:

          Without billionaires, who will provide the capital that workers need to be productive? Its not like the middle class saves…

        • andy says:

          So Musk as the first Trillionaire out of the question?

        • Bobber says:

          If every billionaire on Wall Street were replaced by 1,000 millionaires on Main Street, you’d have the same wealth and tons more investment in the productive economy, for things that matter. More people participating in the wealth means the economy would be better matched to needs of the people, not Elon Musk and Bezos.

          Wealth concentration is at all-time highs right now, to the point of causing societal strife and financial instability.

        • El Katz says:

          “If every billionaire on Wall Street were replaced by 1,000 millionaires on Main Street, you’d have the same wealth and tons more investment in the productive economy, for things that matter.”

          Go look at what happens when people of average intelligence and drive become wealthy through the lottery, sportsball, etc.. Most of them end up broke.

          As far as “things that matter”, how many people drive past their neighbor’s business on Main Street to save a nickel at a big box store?

        • white, bob says:

          Then the next target will be people who have $100 million, Then go after those who have $10 million. That’s how it always works. The lazy, greedy, and jealous slackers will always look for a scapegoat.

        • rojogrande says:

          White, Bob,

          “That’s how it always works.” When has it ever worked that way in the United States?

          I’m not a proponent of targeting private wealth, but that concern rings hollow to me.

        • Bobber says:


          Who could make better use of a billion? Elon Musk now, or Elon Musk 30 years ago?

          To say we should support today’s billionaire’s through tax cuts, lax anti-trust, other means is crazy. We should be supporting the pool of people who want to become billionaires – including you and me.

        • Damien says:

          Agreed 100%. Billionaires were created through tax loopholes, allowing them to arbitrage labor with 3rd world countries, buying politicians, laws and regulations. Enough is enough! People’s standard of living declines because so much wealth is hoarded instead of being productive. That capital can be used by entrepreneurs to improve our lives, not pay for a Billionaires 4th yacht.

        • NBay says:

          One has to remember Bob White’s chosen screen name is a character from a carton show who believes 45 is his ( and therefore everyone who is “good”) savior, and treat his utterances accordingly.
          Although 45 may truly be a savior……the major prophets throughout history were often perceived as very “strange” or oughtright evil. Many were killed on the spot… fact today we find many potentials are in mental hospitals, or among the homeless……which presents a real problem to the Docs. “How do you know I’m not Jesus?”, for instance. How DOES the Doc know? Would a priest even know?

    • Glen says:

      Not sure much has changed except this is now hitting a larger section of the population. Admittedly wealth inequality has increased but as the song Once In a Life time says ‘same as it ever was.’ There was a time when the struggles of a few groups of Americans were trying to build a larger brotherhood but didn’t stick.

    • BS ini says:

      Until the drunken sailors sober up and stop the party atmosphere or their credit hits their limits the bars will stay open.

    • elbowwilham says:

      So maybe you should have refused to buy at the price you did. It was your choice. Stop blaming your neighbor for your poor decisions.

    • ApartmentInvestor says:

      @SOL Your neighbor that paid $400K for their home with a 2.75% mortgage is not the problem is is the super rich (worth 1,000x more than your neighbors) that give money to politicians who pass mor laws to rig the game so they get “super richer”. We need a blanket law that if a politician takes even $1 from business that they need to recuse themselves from any votes related to that industry.

    • white, bob says:

      What your neighbors paid for their house and the rate they paid has nothing to do with you. You’re angry that they got a better deal? Do you want the government to control all prices and interest rates? The Fed tries to do that and this is where we’re at.

      • JeffD says:

        Depends on whether they bought their house, and 1000 other houses as rentals, to achieve a quasi-monopoly. It is, in fact, possible to corner the market of a finite resource, especially when the government encourages said cornering rather than regulating it. That’s where we are now. Only 5% down to own a five-plex, as of November 18, 2023. The DSCR bros are salivating. Pre November 18, it required 25% down.

  30. Gary says:

    The movie: “American Banker” of 1932 shows that if banks don’t loan money then there is no excess “liquidity.” The movie is a propaganda piece of the helpful banker who gushes concern about his local community. President Roosevelt promised the Federal Reserve that the government would make good on loans that Federal Reserve might make; Mr. Wolf would know best.

    The Federal Reserve had to know they were creating inflation as this nonsense is a century old in the USA and millenium in the World. Go read the US Constitution that says money is gold and silver, money probably of prehistory. Look at Wikipedia on Jerome Powell, a securities attorney with a political science undergrad. Apparently years of OJT (on the job training) and monetary experimentation on a planetary scale hasn’t given Powell working level economic knowledge; therefore, it is time to call for his resignation.

    • ChrisR says:

      Exactly. They cannot say he, Powell, has managed inflation adequately. One obvious error- “transitory.” So no political prizes for his time. Bernanke another failure. But these failures have a habit of seeming like the activities behind them were deliberate. No doubt from managing the those GFC losses, (cough, MBS, cough.)

  31. Max says:

    The reality is that the Fed said inflation was transitory and now they’ve been dragging their feet on correcting to save face. The fact of the matter is that they created moral hazard across the system when they stopped letting inefficient/bad investments fail. They again in March stepped in to bail out failing bank’s, and providing unlimited FDIC insurance, another moral hazard. Now in a presidential election cycle Powell has put himself between a rock and a hard place. I believe government is the most efficient device in society to manage ……society, LOL, along for the ride.

  32. Gattopardo says:

    “Could it Be the Fed’s Mega-QE Created so Much Liquidity that Tightening Doesn’t Work until this Excess Gets Burned Up?”

    Uh, affirmative.

    • BS ini says:

      Yep my sister received 200k of the stimulus small business gift/loans and just spent a week at Disney all expenses paid with grandkids and her business made less this year . 10k of that money (5 percent ) came from interest on her cash advances from Fed . Drunk sailors still stopping at the ports and cash in their pockets from 2020.

  33. KPL says:

    As long as government – the Pied Piper for the drunken sailors – keeps borrowing and spending the way it is doing (at some time again they have to go for longer duration bonds) the Fed has an assistant doing its job.

  34. DR_ECE_Prof_FinancialWizard says:

    The title hit the nail on the head exactly. In physics (engineering is nothing but applied physics), we have that golden rule, energy can neither be created or destroyed. Unfortunately in finance, originally our Demigod, FED only can create money and they don’t use any valid physics to do that.
    Using that free money, the super assistants to our DG like those who put out IPOs and SPACs have started creating more money (using so called new knowledge, process or product whose real future value becomes difficult to assess).
    Functionally, the money or dollar, is simply an intermediate media for goods and service exchange or for using new knowledge generated. I give an haircut to someone, I take that money to pay for some finance advisor and what not and the money keeps on circulating from one hand to another. So, the true measure is the productivity ( good produced, serviced provided; ideas generated) and we just need to have enough money – velocity of money — for that purpose (before we used gold for that process). but in the fiat currency system, that connection is completely lost.
    Think about your imploded stocks. The IPO value may be the nominal value of that new knowledge (but that is also a function how free the money has become because of DG). From that point, no extra real value is created or destroyed (beyond the real productive part of that new knowledge). Rest stays on as simple paper gain if the stock remains with the same set of investors or if sold, equal amount of money is gained (by one set of people) and lost by another set.
    The only solution seems to be that FED should increase QT and literally destroy that money they created. Then the value of assets, the perceived value of new inventions and so on also would go down. But FED has gone in the wrong path perhaps since 1987 (Greenspan put) and it is going to be difficult to reverse the clock.

  35. Andr says:

    The Federal Reserve Bank of New York reported in Q3 2023 that Household debt rose to $17.29 Trillion. This was led by Mortgage, Credit Card, and Student Loan balances.
    This now begs the question; are households happy to borrow more in the belief that all will return to normal soon or are they forced to do so because of the rising cost of living due to inflation that they have no choice. If the US government is happy to live beyond its means then why should the citizens not do so?

    • Wolf Richter says:

      LOL. Same nonsense over and over again. It doesn’t let up, does it? Don’t you people know that there is a growing population in the US, with a record number of working people that got the biggest pay increases in 40 years, earning a record amount of money? In terms of consumer debt, you can throw your questions and theories out the window. Here is the debt burden, total debt to disposable income:

      • Mike R. says:

        This one graph summarizes precisely what inflation does for debt levels (relative to income).

        What the graph doesn’t show is that while income may be up (perhaps even signficantly), so are expenses. So often, it turns out a wash with regards to income versus spending.

        Still, the relative reduction in debt load is significant and of course, desired by the Fed. When this ratio gets low enough, the economy will have “more room” for “more debt” and we’ll rinse and repeat all over again.

        • Wolf Richter says:

          The main takeaway here is that the debt problem is not with the consumer, but with government, with some parts of the corporate sector, and with the huge leverage in the nonbank financial sector (hedge funds, etc.)

        • ApartmentInvestor says:

          @Mike R. Graphs like the “Household Debt as a % of Disposable Income” that Wolf just posted help us step back and realize that while we may know some people that have been going into debt even faster than their income has been increasing the “overall” debt to income ratio had been pretty stable since banks stopped the “stated income loans” (aka “liar loans”). I don’t know if Wolf has a graph for “Household Expenses as a % of Disposable Income” but I’m betting it is similar since while most things are more expensive there are some things that have never been cheaper.

        • we owe says:

          The debt of the government is the citizen’s because government is just a representation of the citizens. What has the government done in response to high debt? It tried to deflate it by printing a bunch of money, making our dollar worth less and less. So we can see how the government debt is hurting us. And there’s still $100,000 per citizen or $260,000 per taxpayer left to pay. If we can’t pay it, and I see no way we can, then our living standards will eventually be reduced by that amount.

      • JeffD says:

        Not so fast, Wolf. That is a graph of Debt Service Ratio, not household debt. It’s an aggregate figure across the entire population. The reason the DSR is so low in the period this graph covers is because a huge number of people refinanced their mortgages during the pandemic, pulling down the overall number. I think the DSR is suffering from an “entrenched” statistical artifact born of extrordinary circumstances.

        • Wolf Richter says:

          No. This comes from my spreadsheet: total household debt ($17.3 trillion) divided by disposable income ($20.3 trillion). It expresses the burden of debt a ratio of disposable income. It has nothing to do with interest rates.

      • JeffD says:

        And… I’m wrong. In fact the DSR is only 10%. Almost nothing.

      • JeffD says:

        Here’s a similar looking graph for the “mortgage debt service payment as a percent of disposible personal income (DPI)”:

        I guess this number is so low (about 4% of DPI!) because there are very few new mortgages? I have to say that I am very puzzled, especially with the recent popularity of cash out refinancing.

        • Wolf Richter says:

          Yes, it’s too low. The Federal Reserve, which produces the DSR, points at some issues in how it arrives at the DSR, and it says that the absolute percentage is not what to look at because it may not be meaningful, but at the trend of this percentage.

          I reported on the DSR a few times but finally gave up because the caveat.

          In my last article on the DSR, this is how explained the Fed’s caveats about the DSR:

          First a caveat. We’ll get into ratios in a moment. These are estimates by the Federal Reserve based on all kinds of aggregate data. The absolute ratios are not important, and whether or not they’re “realistic” or whatever for a particular household is not important either.

          “What is important is how the ratios move over time, whether they rise or fall, and where the breaking points were at which households started to buckle under their debts – for example during the employment crisis and mortgage crisis that accompanied the Financial Crisis.

          Which is why I now figure my own ratio of debt to disposable income, and we know what goes into it.

      • JeffD says:

        Figured out the MDSP discrepancy. I’ll stay away from commenting until the new year. I need to go outside more.

        • Wolf Richter says:

          You did fine. Look at my comment about the DSR above. It’s not a good metric, according to the Fed itself, which produces it, which is why I no longer use it. I don’t expect you to know this stuff.

          But since you brought it up: Generally, going back over time, it does seem like to me that you’re trying to instigate a fight lots of times when you comment — that you briefly google around to see if you can pick up some stones to throw at me without knowing or understanding what you pick up, and you throw this thing at me, and it’s completely off the wall and you have no idea what you’re talking about because you just spent 30 seconds on it, while I spend my life on it, and so I broadside the nonsense you throw at me. And then you argue back with more nonsense. It’s really a waste of time for me to engage in this. And at some point, I just run out of time and block the comment.

  36. Drm says:

    Sure looks like the last rate pause was a mistake now does it not?

    • ru82 says:

      The Fed will have to chase the Treasury sales. If the bond vigilantes require the government to pay 6% or more on future bond auctions, the Fed will have to follow

  37. This is a brilliant observation that I have not considered until reading same. Many thanks Mr. Richter. As always, you are stellarly in-the-know with angles that the myopic metrics of the current norm don’t actually even know, yet understand how to measure. Tremendous piece of work.

  38. eg says:

    Or could it be that running record peacetime deficits swamps whatever effect of tightening monetary policy is supposed to achieve?

    Unless Mosler is right and the interest income channel means that the Fed has the effects of monetary policy entirely backwards.

    Or both.

    • Drm says:

      Warren Mosler and all that Modern Monetary Theory stuff? I don’t think so.

      • eg says:

        I’ll take Mosler’s investment record over yours, Drm, and that goes double for his insights where the macro environment is concerned, thanks.

        • Drm says:

          I tried reading some of Mosler’s 7 deadly innocent frauds. It reads like a sleazy car salesman or some other huckster. Worse than I imagined it might be. Whatever he’s selling, I don’t want any?

        • eg says:

          I read it years ago, Drm. Too bad you didn’t understand it.

    • Yes, the rate hikes add directly to gov deficit spending.
      More than half the deficit spending is now for interest,
      and hikes only make it worse.

      As in the article:

      “And the true Drunken Sailors, the folks in Congress, are throwing trillions of dollars a year in still easily borrowed money at the economy to fuel growth and inflation.”

    • Letro says:

      eg, When was there peace in the last 150 years ?

  39. Ed says:

    You are all correct. The question . How high can you build your house of cards. We all know it will fall. All of us still alive will be hurt. Not one card will be left standing. It is great fun though.

  40. Aman says:

    In a way financial conditions are also psychology. If in aggregate we worry less about the future then we are likely to take more risk, increase leverage and generate credit….in other words financial conditions loosen.

    Is it possible that so many years of monetary policy PUT and socialization of losses has numbed investors of all risks?
    The idea that QE and ZIRP will return at first instance of market trouble is widely held right now.

    • Yort says:

      Bill Dudley’s recent interview at FT stated that the Fed is doing QT, in his opinion, to have the power again to do QE again when necessary. A reset of the tool…and he has reasons for this assumption as stated in the interview.

      Bill was part of the Fed, and now outside the system with more verbal freedoms, and as such has a very unique perspective to talk without restraint concerning reserves, QE, QT, rates, etc.

      Bill strikes me as the “general relativity and quantum mechanics” versus classical physics. Easy to understand yet difficult to accept as his theories run deeper than what is relatively obvious to the common observers. Worth reviewing on FT if you get a chance…

      • Wolf Richter says:

        Dudley was a big proponent of QE and never accepted criticism of it. Now he is gone — relegated to interviews and Bloomberg opinion pieces.

        It’s like asking Bernanke about why the Fed was doing QT, he who said in ca. 2014 that the Fed would never do QT.

        • Yort says:

          I’d like to believe that Dudley is having his “Oppenheimer Moment”, as when Oppenheimer told Truman “There is blood on my hands.”

          That said, Dudley, like Oppenheimer, has never apologized or shown true regret after creating WMDs, be it financial or “other”.

          Personally I think QE is less destructive in an unlimited excess reserves regime that pays interest to quasi-regulate, than the Fed omnipotent act of determining the world’s time value of money via unadulterated meddling (manipulation) of global interest rates.

  41. LordSunbeamTheThird says:

    Totally agree, this is why QT is first before interest rates. Raising rates when you still have 3 trillion of additional base money out there doesn’t make sense, when that base money can be deposited at the central bank to -receive the base rate as yield-.

    QE should never have been done, its a banana republic style move at best and the extent that the US has presumed on international partners to maintain dollar hegemony is not worth the downside. The US dollar relies on a least ugly comparison and this is a terrible strategy because it will not be true for ever.

  42. C says:

    I agree with this macro idea. I think it’s going to take time. The pandemic savings are burned, and then some, issue is really the trillions in fake home equity that was churned and burned in 24 months. Rates and conditions are sufficiently restrictive on housing, which is just a massive monetary multiplier and explains why consumer spending has been so resilient. The goods inflation had a lot more to do with household balance sheets imo; which I realize shelter is classified as services. The brakes are on, mortgage spreads are very, very high. I don’t think rates need to move higher, it’s too risky. We just need to wait longer. The flashing red light to me is the broad disinflation while fiscal stimulus is still pumping. I’m more concerned about the deflationary risk of these growing interest payments and crowding out of investment than I am inflation. If we get genuine labor market problems, I fear the housing situation could turn very, very ugly fast.

    • the run up in prices was the ugliness says:

      The housing situation got ugly fast with skyrocketing prices and rents. Deflation in housing would be enormously good for the nation.

  43. Rico says:

    I remember when the Fed was saying they were hoping to get a little higher inflation over the 2%. They were saying 3 to 4 % would be ok with them for awhile.
    They may be happy with the numbers now ?

  44. sufferinsucatash says:

    Sounds like someone suffers from a tiny…

    We’re not talking about hands.

  45. T. Van Volkinburgh says:

    I just had an entire pool deck look at me because I laughed so hard at this comment.

  46. Putter says:

    Any prediction on CPI this month? Up or down?

  47. MountainTime says:

    Spoken like true Zero Hedgers, or Rex Heuermann.

    I wouldn’t pander to trolls, but I know at least a few people on this site have more class and aren’t so insecure to want a stupid misogynist comment be the first post of the day.

    That said, filtering blog comments all day is an exhausting, thankless job. It’s enough just to keep out or respond to the other garbage that spreads BS about the economy.

  48. breamrod says:

    Powell is a P—-! He takes away “liquidity” kinda like a wife takes away 2 beers out of a 12 pack to a roaring drunk husband!

    • Yort says:

      Powell has had a few “Hold my Beer” moments in regards to transitory inflation and delaying the reversal of QE and ZIRP nonsense. I’m betting the guy pounds a few $35 craft beers every now and then to deal with the fairy tell he has to sell the world on a daily basis…

      And how about his “Close the Fking Door” last week caught on tape, WOW, I already have a collection of meme’s from financial web sites.

      Powell isn’t as composed as many believe, not the typical reaction to scream “Close the Fking Door” when some harmless Tree Huggers interrupt the 50th weekly speech about how everything is financially great and under control. Next stop, “Hold my Fking Beer”…Inflation Contained..>LOL!

      Some people go straight to the funny pages to get a good laugh, I go straight to the financial pages instead…

  49. spencer says:

    The spike in inflation was textbook. See: “Quantity leads, and velocity follows” Cit. Dying of Money -By Jens O. Parson

    The composition of the money stock has changed, the percentage of transaction accounts to gated deposits has shifted increasing AD.

  50. Augusto says:

    I heard an interview yesterday with a Wallstreet guy who believes the economy is being held up by this excess liquidity still in the system. For the banks, he believes much of this is in the Fed’s Reverse Repo Facility where the banks park their surpluses to get a favourable rate. He notes this facility balance has been drawn down by the banks from around $2.5 Trillion during the last crisis to $1.1 Trillion today. His thesis is as banks exhaust this surplus, some already doing so, then the recession/crisis will begin. This account is not the only surplus around, but a major one that is being tapped hard. In his view this crisis will occur in the first quarter of 2024 as the surplus for many banks get “too low”, or thereabouts, unless of course the Fed reinflates, pads the banks surplus, prints more free money. Makes sense to me.

    • Z33 says:

      Yes I saw the o/n rrp got as low as $993bb the other day! I watch it regularly and am curious how the economy will do when/if it gets near zero. I read some of those funds have moved into tbills/bonds so no real change in economy imo. But if any is used to meet liquidity needs for people and businesses then it may show more cracks as it dries up. Interesting times.

    • Wolf Richter says:


      “For the banks, he believes much of this is in the Fed’s Reverse Repo Facility where the banks park their surpluses to get a favourable rate.”

      That “Wall Street guy” mouthed off a pile of BS about where banks put their excess cash. And everything else based on this BS was BS too.

      Banks put their extra cash on deposit at the Fed (“reserves”) where it earns more interest (5.4%) than the Fed pays on reverse repos or RRPs (5.3%). In addition, reserves are instantly liquid, and banks use them to pay for anything on the spot, while RRPs are not instantly liquid; they mature the next business day.

      Money-market funds put their extra cash in RRPs because they don’t have access to reserves.

      Everyone on Wall Street knows that, so I wonder what the guy really was. Some moron talking to a moron YouTuber?

      Reserves (where banks put their cash) have RISEN this year and are now at $3.33 trillion.

      RRPs (where money markets put their cash) have plunged by about 55% this year to $1 trillion.

      I have discussed this many times. Why do you listen to moron YouTubers and then drag this crap into here, when you can get the actual facts right here?

      Read this; it’s with September data, but it explains all of this plus a bunch more:

      • Yort says:

        Was it 2008 TARP that allowed FED interest payments, if memory serves? So many new tools got invented in prior financial crisis moments, that eventually took away the usefulness of other tools, such as QE, that “had” been very powerful previously via the Book of Fed. And the cycle continues ad finem, as the new Book of Fed pages never end as the Fed is a true Demi-God by aspect of Law, Consequence, and Societal Nature. Insured by those with great power and wealth would, who would be crazy to attempt to remove the keystone of their existence.

        Yet I would suggest to the top 0.01%, perhaps A.I. is the better solution to micro-manage the global economy, as having a single human lead such an attempt of ever increasing complexities with nearly infinitely evolving variables…that seems insanely illogical, at best.

        Thus I welcome our new A.I. overlords, remember this post, I’m a friendly…HA

      • Aman says:

        The Fed has painted itself into a corner.

        It created these reserves through years of bond buying and now is scared that this money goes into the real economy so it is paying interest to keep the funds parked.

        By the end of this the Fed balance sheet will have a big hole :)

        I guess that is what one should expect when high ranking intellectuals think they have a better prescription for society instead of letting people decide for themselves.

        My suspicion is that the central bankers have learnt their lessons and likely QE will never be mainstream. We will go back to the Bagehot rule of injecting liquidity only in times of panic and against good collateral (not to avert insolvency)

  51. anon says:


    Thank you so much for the wonderful charts and clear explanations that an old , long retired geezer like me can understand.

    And thank you too, to all the various commenters. The Doc says I gotta keep my mind exercised. (like a muscle he says… and , in my case it’s ALL muscle🤪) And reading the comments helps with that.

  52. John Powell says:

    JPow is attempting a soft landing. Just like Captain Sullenberger. We’ll all be safe but will have to swim in cold water for a while.

  53. AV8R says:

    The fed isnt empowered to fight profligate fiscal policy.

    Get ready for Volcker part 2.

  54. Could it be??? Yes, it could.

  55. Glenn says:

    If the government printed 4T during covid and have now taken back 1T, that’s still a long way from being tight. Also interest/mortgage rates of 4-8% are just back to the norm. So that’s not real tight either. So if the Fed takes back 1T yearly, we’ve still got about 3 years to go to return to normal. Like you say, Wall Street wants looser rates to jack up the S&P. But we’re really only at a normal level and only considered tight by comparison to zero interest rates which went on for years. No I don’t want or think Volker size increases in interest rates are called for, but maybe another single point by the Fed will bring us back to normalcy. However extreme actions like in covid almost always cause extreme reactions. So yes, I believe we’re due for some unknown plague. If I knew, I’d be preparing for it now. Stymied as usual.

  56. Louie says:

    It seems here the Fed has a job not unlike the poor lad at the circus whose job it is clean up after the elephant unexpectedly relieves himself. i say that because The Fed not only has to deal with economic cycles, but also has a mandate for employment. it also has to deal with irresponsible politicos who do crazy things like enormous tax cuts to benefit the few and other types of irresponsible actions. The FED has a hard job and there are issues they have no control over except to hope to be able to clean up.

    • HowNow says:

      Greenspan repeatedly asked Congress for tax reforms, even during relatively good times. Of course, they disregarded his suggestions.

    • Bobber says:

      The job is a lot harder when you screw it up and have to clean up your own messes. Do we really need to restate the huge blunders made by the Fed over the past 30 years?

      I’ll just name one massive and obvious and total blunder that was short-sighted from the start. 15 years of QE.

  57. Louie says:

    Can you do a piece on taxes. when I entered the workforce the high bracket for earned income was 50%. Unearned was 70%. Post war, the high bracket was over 90% because frankly we had bills to pay.
    We had as good, or as bad an economy then as we do today. the primary difference was we didn’t have much in the way of billionaires.

    • HowNow says:

      For clarity, read “Capital” by Thomas Piketty. He shows, graphically, how wealth accumulation took off and left the middle class behind, starting in the Reagan years when taxes on the rich were cut.
      What is specially interesting is that the wealthiest, the top 1%, were growing wealth at a consistent rate; it’s not as though their wealth was declining, for many years before those cuts.
      But once the rates were cut, the middle class wealth flatlined while the wealth of the wealthiest went up exponentially.

      • Glen says:

        In a battle of capital versus labor, capital always comes out on top, regardless of the few wins, such as has happened recently. Still remains to be seen over a longer period whether it is long lasting or will inflation overtake wage growth in the long term. I don’t blame drunken sailors as a rainy day fund runs out pretty quick so might as well enjoy it while you can.

      • kramartini says:

        Some people saved and invested while others consumed and went into debt. Rather than Pinkety, read “The Ant and the Grasshopper”.

    • kramartini says:

      Lots of tax breaks for the rich during the years you talk about, lowering the effective rates that were actually paid. There are very few juicy tax breaks left at todays rates thanks to the 1986 tax act.

      • Bobber says:

        Nah. People are accumulating huge wealth today without paying any tax. What most people consider wealth – appreciation in stocks, RE, etc. – can be gifted endlessly on a tax free basis. The tax code works great if the goal is creating billionaire family dynasties.

        • kramartini says:

          You know nothing. Taxes are paid mostly by the rich. Gift taxes are high and gifted assets retain a low basis and thus tax must be paid again when gifted assets are converted to cash. Learn a little about the tax code–it is all online, so your ignorance is inexcusable.

        • Bobber says:

          Are you making an argument, or did you you blow up in your chair? The lack of temperament is not impressive and contributes to the nonsense.

        • 91B20 1stCav (AUS) says:

          kra – would like to know your view on the ‘life taxes’ the nation has extracted in times of it’s international conflicts (would also place the recent world pandemic and ‘essential workers’ in this category, not just the military). At what point of national prosperity do you think would nix the willingness of the population to soldier to protect a highly-concentrated wealth disparity? (…somehow, a: “…thank you for your service…”, though usually polite and sincere, at times seems to me a trifle insulting, especially for the ones who put their actual skin in the game, and let alone those who can no longer hear it…).

          may we all find a better day.

        • rojogrande says:


          Not even including the annual exclusion, gift taxes are zero until the taxpayer has gifted their unified credit, which is $12,920,000 in 2023. A married couple can thus gift almost $26,000,000 before paying any gift taxes. For all but a fraction of 1% of taxpayers, gift taxes are essentially zero. I know you’re talking about the super-wealthy but I want to make this point because gift taxes simply don’t apply to most people reading these comments.

        • MM says:

          “appreciation in stocks, RE, etc. – can be gifted endlessly on a tax free basis”

          Sure, but that “wealth” doesn’t do anything *until* you sell and realize the gain. And then you pay cap gains tax.

          The top 1% paid >42% of all federal income tax in 2020.

        • JeffD says:

          There are thousands of ways to hide income in the tax code, all legal, and only one way to pay taxes. Says something about what legislators are really paid to do for a living.

  58. BH says:

    I’ve read a couple other articles recently that have suggested that maybe a 4% target rate is more realistic than 2% at this point. An over 5% raise in rates in this short period of time seems aggressive and it does seem to have chipped away at inflation a bit, but all data seems to point at it’s not going to be enough.

    I understand Powell’s wanting to treat this with kid gloves and not trigger a recession, but these things just happen over time regardless. I think he just doesn’t want it to be on his watch. I wonder if it’s going to take something as drastic as what Volker did to actually get things back to their target rate of 2%

    • kramartini says:

      The proper rate for inflation is 0%.

      • eg says:

        kramartini, the Fed will NEVER undertake an inflation target of zero — it’s too close to deflation, the effects of which you ought to hope you never live to see.

        • kramartini says:

          We have all lived through a period of sustained price declines in tech, and are enjoying the benefits. And on a broader scale over a longer term, “capitalism” has enriched all by reducing the real costs of goods and services. There is no reason why the government needs to debase the currency.

        • Bobber says:

          You are trying to tell me I won’t like lower prices? There’s a whole side of it you are missing.

        • eg says:

          Neither “price declines in tech” nor “lower prices” are the same thing as capital-D Deflation.

    • Wolf Richter says:

      “have suggested that maybe a 4% target rate is more realistic than 2% at this point.”

      If the Fed were to change the inflation target to 4%, the 10-year Treasury yield would jump to 6% and higher. Is the world ready for a 6% and higher 10-year Treasury yield? No, LOL

      The only thing that kept long-term yields low was the belief that inflation will be less than 2%. If that belief gets pushed to 4%, then all longer-term bonds will be repriced accordingly (prices plunge, yields soar). It would really be a hoot. I would love to see that. Dow down 2,000 points the day this is announced. Chaos in the Treasury market, corporate bond market freezes. Like I said, this would be a hoot, which is why the Fed has steadfastly repeated that it won’t raise the 2% inflation target.

      • kramartini says:

        Sounds like a Merry Christmas to me!

      • Gattopardo says:

        DJO down 2k? I would take the over on the that. More like 6k.

      • Julian says:

        Yes, the Fed won’t announce that the target is rising above 2 percent, but there’s nothing stopping it from maintaining 3-4 percent without aiming to get down to 2 percent.

        This could go on for a long time

  59. Glen says:

    Hard to see where any of this ends, whether it be the 8 trillion or do spent on recent wars or 4 trillion on pandemic relief and so on, there seems to be nothing that will address the structural problems of too much spending and not enough revenue. The political dimension is impossible to predict but a huge factor as the Fed isn’t completely independent and while inflation getting under control might be the words spoken, getting the housing market going seem to be in the same breathe. Sure, a recession or soft landing could ease some of that but still doesn’t address the structural issues. The massive investment needed for climate change doesn’t seem to be baked in anywhere. All I count on is that those we expect to make hard decisions, won’t. You can’t score if you always punt. It doesn’t mean there aren’t solutions but none palpable for our political system. Fortunately the tight labor market for now has ensured most people are doing okay and the massive deficit is some abstract concept to most anyway. Seems like just eliminating the debt ceiling altogether would make sense as just provides yearly drama of which nothing of value comes out of it.

  60. Citizen AllenM says:

    If we really want to kill inflation we need to raise taxes on the top 20%, and also raise ss taxes and medicare by a modest amount. Start with the 2017 tax cuts- all of them. Cap gains should be taxed just like earned income. No more advantage of carried interests or ridiculous tax engineering. A small tobin tax on shares.

    That would crash asset inflation and cure deficit spending.

    But voting for sanity after total stupid decades of insanity starting in 2001? Meh. Nobody really wants sane and stupidly quiet.

    Someday this war’s gonna end…

    • kramartini says:

      It sounds like you want to return tax policy to the 70s when inflation was truly out of control. If punitive taxation didn’t cure inflation then, why would it do so now?

      • HowNow says:

        Kramartini, you’ve conflated the ’70s recessions with taxation. Why not blame taxation for anything you choose? Example: A baby bird falls out of its nest. “Taxation”!

        • El Katz says:

          Example: A baby bird falls out of its nest. “Taxation”!

          Can’t be. It’s the Fed!! /s

  61. Brian Jarrard says:

    Powell may be right…the only thing to slow this train is unemployment increasing by a material amount

    • spencer says:

      Hardly. A reduction in IBDDs, interbank demand deposits, depresses asset prices period.

      Take for example, some people think Feb 27, 2007, started across the ocean:

      “On Feb. 28, Bernanke told the House Budget Committee he could see no single factor that caused the market’s pullback a day earlier”.

      In fact, it was home grown. Feb 27coincided with the sharpest decline in:

      (1) the absolute level of “free” legal reserves, &
      (2) & an historically large peak-to-trough reversal of roc’s for proxies on real GDP & the deflator.

      QT will depress asset prices.

  62. William Leake says:

    Inflation expectations were way up on Friday. The Fed’s greatest fear is that inflation becomes entrenched, which is happening now.

    The average Fed Funds Rate from 1971 to 2022 is 4.86%. Excluding ZIRP years, 1971 to 2008 it is 6.43%. There is a lot of variation, but the fact is the current Fed Funds Rate of 5.5% is not much different from historical averages. So of course it is having little impact on reducing inflation. It has to go much higher for longer, if it is going to have any impact. Volcker took it to 16% in 1981, but as we know, Powell is no Volcker.

    • Einhal says:

      Inflation already is entrenched. But the big difference between the Fed Funds Rate of 5.5% today versus the past is that there are many more zombie companies out there, and far more companies who rely on debt to to buy back their own stock. When the fixed rate facilities roll over, look out below.

  63. William Leake says:

    When I was a kid, some sixty years ago, I walked into my local bank and opened a passbook savings account for ten dollars. The interest rate was 5%. Many today just can’t grasp that 5% is a normal rate. Too many have gotten used to near 0%, which is the real aberration.

    • SoCalBeachDude says:


    • kramartini says:

      Same thing for me 35 years ago–I was able to get a checking account (technically a NOW account) that paid 5% with a $100 minimum and no fees. And 6 mo. to 1 yr. CD’s at the local S&L branch were paying 6%–brokered CD’s that I saw on the PBS Nightly Business Report were higher than that…

  64. Xavier Caveat says:

    Prescribed F.I.R.E.

  65. kiers says:

    You notice the Fed started this “tightening” frenzy with ~$2Trn of EXCESS reserves? Then they “STOPPED” reporting of the “EXCESS” reserve metric. And you’re saying financial conditions show no impact of tightening. When you have $2 TRILLION in “EXCESS”, who will borrow other than gov? This is the MAGIC of Bidenomics. Borrow to give money to corps via “inflation reduction act”.

    • Wolf Richter says:

      So let’s straighten out the technical aspects here. “Excess reserves” were those reserves beyond the “required reserves.” Every bank had to put some of its cash from its customers’ deposits on deposit at the Fed, which were the “required reserves.” Any cash that a bank would put on deposit at the Fed beyond the required amount were the “excess reserves.” But during the pandemic, the Fed ended the reserve requirements (stupid move which likely contributed to SVB blowing itself up), and so the labels “required reserves” and “excess reserves” were retired, and both of the amounts were combined and are reported as “reserves.” Which are now $3.3 trillion.

      • spencer says:

        Money banking textbooks written before 2008 are “now obsolete”, as the Fed now has the ability to pay interest on excess reserves, he said in response to an audience question. — DUDLEY

        • Wolf Richter says:

          Agree with his statement.

          But there are no more “excess reserves” and no more “required reserves”; only “reserves.” But yes, the Fed pays interest on them.

          The Fed announced on March 15, 2020, that it eliminated the reserve requirements: “This action eliminates reserve requirements for thousands of depository institutions…” That was the end of “required reserves.” And therefore of “excess reserves.” And the beginning of “reserves.”

          The St. Louis Fed discontinued its “excess reserves” series in August 2020

          The St. Louis Fed discontinued its “required reserves” series in April 2020:

          And it rolled excess reserve amounts and required reserve amounts into “reserves.”

          Could be that Dudley was misquoted in the text you cited because people are still used to saying “excess reserves,” rather than “reserves,” or that he misspoke since he’d called them “excess reserves” his entire tenure at the Fed. Anyway, excess reserves are dead, long live reserves.

  66. kramartini says:

    Companies flush with cash from low interest debt should consider buying back the debt at a discount and booking an immediate risk-free profit unless they are confident of being able to refinance the debt at a reasonable rate. The hurdle rate for investment in operations should be based on the expected future refinancing rate and not the free money rate of the recent past.

    • Einhal says:

      Agree, but nearly everyone, from government all the way down to individuals, are behaving as though today’s interest rates are a monetary “blip” in a permanent ZIRP world, not that ZIRP was a blip.

      We’ll see who is right.

      • SoCalBeachDude says:

        All interest rates that matter a hoot in the US economy are keyed off the yields (interest rates) on US Treasuries and those interest rates will all continue rising for the foreseeable future.

        • kramartini says:

          True. Also, the spreads between Treasuries and corporate bonds are too narrow and should rise. Which reinforces your point that the corporate cost of debt capital will continue to rise.

  67. Old Bond Trader says:

    As usual Wolf, another thought provoking article. I tend to agree with you that there is so much liquidity in the system around the world even though rates have risen.Just looking at charts of the monetary base for developed countries after the 2008 crisis and then another acceleration in 2020 helps explain the problem with a very small retracement. All the pundits are looking at short term charts of M2 retracing and screaming recession. I believe there is so much available money from these money accelerations in the system that they will find there way into asset prices and wages especially without much productivity gains.
    As I’ve been saying the long end of the treasury curve needs to be convinced that the fed and treasury has its back or else investors will demand risk premium. The hack Yellen barely addressed Fridays Moody’s warning shot. We have the potential for bond markets to revolt to get that attention.

  68. Jose says:

    Maybe, the issue is that interest rate hikes and QT aren’t the only things the federal reserve needs to do. What about raising reserve requirements. I know that during the pandemic the reserve requirement were near zero, does anyone know where they are now? They still at near zero?

    • SoCalBeachDude says:

      No, not now and not ever were the reserve requirements near zero, and the fact is that there are around $3 trillion in the bank EXCESS RESERVES account inside the Federal Reserve as has been the case for years.

      • Wolf Richter says:

        During the pandemic (in 2020), the Fed eliminated the reserve requirement (stupid decision, which likely contributed to SVB blowing itself up).

        Since there is no longer a reserve requirement, the labels “required reserves” and “excess reserves” were retired, and both amounts were combined and are now called “reserves,” which are $3.3 trillion.

        The problem with this arrangement is that some banks are reserves-poor and others are reserves-rich, and if a reserves-poor bank gets a run on the bank, it instantly runs out of liquidity to meet the withdrawals.

        • Northernlights says:

          I remember reading the release when they did that, and thought it was a funny that the Federal Reserve no longer required reserves!

          I like looking at problems at the limit (I’m a recovering engineer.) In practice, does that mean banks could have lent unlimited funds at really, really low rates? That seems like a big problem.

  69. Shelby Stone says:

    Could it also be:

    Americans continue to ransack their retirement savings, survey finds

    The number of participants taking hardship withdrawals from their 401(k) was up 13% in the third quarter versus the second quarter, according to a new survey from Bank of America, which tracks about 4 million clients’ employee benefit programs.

    That tallies up to more than 18,000 plan participants, the highest level in the past five quarters since Bank of America started tracking this data, and up 27% compared to the number of withdrawals during the first three months of the year.

    To be clear, while these numbers have ticked up, they are still a very low percentage of overall plan participants.

    Taking a loan from retirement savings is undeniably a quick cash move during uncertain times, but consequences exist.

    “In looking at our data across 401(k) plans, economic hardships continue to be a factor,” Lisa Margeson, managing director, Retirement Research and Insights Group at Bank of America, told Yahoo Finance.

    “While there could be several factors at play, the economic environment, following a year of high inflation and the rising cost of living, could be influencing this ongoing trend.”

    • Wolf Richter says:

      “Americans continue to ransack their retirement savings, survey finds”

      This is the kind of stupid manipulative BS line that drives me NUTS. You people are abusing my site to spread bullshit.

      You didn’t even read your own friggin quote! That’s one of the 7 mortal sins of commenting. Your own quote said (4th paragraph):

      “To be clear, while these numbers have ticked up, they are still a very low percentage of overall plan participants.

      Turns out, 401k and IRA balances continue to GROW,.

      From Fidelity — and the Bank of America quote agrees with it:

      “Average retirement account balances increased for the third straight quarter.

      “The average IRA balance was $113,800 in Q2 2023, a 5% increase from last quarter, 7% jump from 5 years ago and 41% increase from 10 years ago.

      “The average 401(k) balance increased to $112,400, up 4% from Q1 2023, an 8% increase from five years ago and 39% increase from 10 years ago.”

      So a relatively small number of people borrow against their 401ks, which they can in many plans, so maybe for the down payment for a house? And some people draw money out under the hardship withdrawal rules. So what? Americans continue to INCREASE the balances of their retirement accounts, which is what matters.

  70. Lucca says:

    The only thing that’s going to come of the Fed not doing enough to fight inflation is we’re going to end up with more “haves” and “have nots” and a much smaller middle class and where only the rich will be owning homes. The government will brag that we have “low unemployment “, but the number of homeless people will skyrocket.
    Raises will not keep up with inflation. I will be surprised if most companies can give even a 3% raise every year.

  71. longstreet says:

    Wolf ..
    You have likely answered this before, so forgive me…

    If a credit card holder meets the minimum payment, but is rolling a balance, how is that reflected in the data?

  72. , #24, hitting into that strong left field wind at Candlestick Park. says:

    I remember that too, as a kid, and a coin collector, 5%, yup, that was good, but not for a kid who was growing leaps and bounds in 6th grade. Yet it provided a way forward, if you were prudent and humble, get 5% for saving, now that’s a way forward. And if you didn’t do so? Who is to blame? You!

  73. spencer says:

    Just take a look at NSA retail MMMFs volumes. If these funds were transferred from bank-held savings accounts then the volume of loan funds increases, but the volume of the money stock remains the same. I.e., velocity has increased.

    Also, look at large CDs (which are not included in the money stock figures).

  74. grimp says:

    Perhaps the real rate of inflation is a little higher than the government’s numbers. Maybe real rates are still near zero or negative.

  75. farmernomore says:

    What would happen to excess liquidity if *I* were to pull money out of risk assets to park it in a long term bond that offered a great rate, say 6-8% or higher? Asking for real, and what would it take for a rate like that to happen?

  76. Asul says:

    Well the QT is not working the way the FED thought it would. The US has a problem. We can only conclude, that the expansion of monetary mass has far wider effects and lasts way longer than the removal of that mass, so basically no one exactly knows how much QT is really needed to get to normal and when this will happen.

    Or maybe, it is even worse: the measurement tools are not appropriate or non-existent, so it is currently not possible to measure the state of this QE that went on for 10 years.

    We are shooting at a black rabbit in the dark …

    • kramartini says:

      Your first sentence is correct in that there is less run off of the MBS than they had planned due to the lower rate of mortgage transactions due to rising rates. But that is no reason to doubt that it will eventually have the desired effect…

    • ru82 says:

      What did the FED think the QT would do? The cannot reverse things overnight. Who knows yet if QT is not working.

      What is normal?

      Inflation has not only stopped accelerating the rate has dropped from 9% to 3%.

      Commodity prices have crashed. Many are back to pre-covid levels. That has been successful. House prices have stopped going up and are going down. Oil has dropped from 120 to 76. Nat gas has dropped from 8 to 3. Lumber is down 50%, etc.

      It seems to me QT is working slowly as the FED has been slowly implementing QT.

      It took over 1 year for the Covid stimulus to cause inflation. The FED only stopped raising rates 3 or 4 months ago.

      We need to be patient.

  77. Anthony says:

    Will the $5 Trillion dollar roll over from Jan 2024 have any effect….

  78. Imposter says:

    Regarding your thoughts on excess liquidity possibly being larger than realized, and having a ways to go yet.

    Curious if you look “down the road” at the potential candidates for your “Imploded Stocks” list, which I find fascinating, has that list of potentials diminished yet or is the line still winding around the block?

    Maybe one has nothing to do with the other?

  79. Greg P says:

    Fed policy was so accommodative that it took over a YEAR of rate increases before rates moved into “restrictive” territory (somewhere around May, 2023). And QT has only unwound 15%ish of their money supply expansion. So when I look at the economy, I see a macro-economic theater that is perhaps neutral… or only slightly restrictive. And if you include the Federal government’s deficit spending, which is working against the actions of the Fed, you could argue that we are STILL in accommodative territory. It’s like people watching for a fire to go out when you say “well we cut the gasoline we were throwing on the fire by 80% – why isn’t it going out?”

  80. michael bond says:

    Good article and thread.

    Monetary “tightening” = rates > than inflation… so we are not really tight yet.

    QT is not there yet either as you surmise.

    Retirees who saved lost 50% of their net worth to negative real rates for over a decade, so that 5% is really 2.5% in effect.

    Need higher taxes on the filthy rich to tighten fiscally.

  81. Depth Charge says:

    The solution is plain as day, but the FED isn’t interested in it. They never should have paused, and should have raised 25 basis points every meeting. And, they should be aggressively selling off the MBS. But they are instead trying to “park asset prices at a permanently higher plateau,” attempting to levitate the largest speculative bubble in the history of mankind.”

    • spencer says:

      Yes, as Bair said, the FED should sell securities to mop up liquidity in spite of the losses it might take.

  82. Thomas Curtis says:

    Milton Friedman famously said: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

    I looked for this quote and was surprised to not see it anywhere. I think it is as true as anything you can say about the cause(s) of inflation.

    I guess QT must continue.

    • Bobber says:

      Based on the amount of illicit tinkering the Fed does with the money supply, they must think Friedman is a quack. The Fed believed money supply increases would only raise asset prices, creating a virtuous growth cycle based on a trickle-down effect. But as smart people knew, before and after suffering the recent Fed-forced 20% inflation step up, Friedman was right.

  83. Varughese says:

    Can FED go for a bigger interest rate hike to shock the market, like a 3%?

  84. Desert Dweller says:

    I first became licensed in 1982 and worked in the securities industry at various regionals until 2007, since back in 1982 I had a monitor on my desk and since switching over to CRE lending I’ve had a watch screen and day trading setup open for every trading day. I have never seen a market like the one over the past couple of years. A buddy of mine, a former floor broker on the PAC, also comments on the same thing – this market simply defies so many of the old rules. A CRE meltdown in progress and a pending govt shutdown and credit downgrade warning and there is hardly a ripple. I wonder what it is going to take to cause a panic???

    • ru82 says:

      unemployment rising.

      CRE is only effecting REITS and Banks so far and they have both been hammered. The Tech stocks are making lots of money still. The CRE is not spreading.

      I don’t think people realize how much money the Government is spending. Not only the new IRA but also there is still a lot of COVID money being spent by State governments.

      A local university is going to use their states covid money to do a $150 million dollar football stadium expansion. Why, because the state has money to spend.

  85. PT says:

    Like they always do, the Fed will find a way to mess this up. Go look at charts showing how frequently “soft landing” is searched in the 6-9 months prior to recession appearing. Things always look like they’re going to land smoothly before they don’t. It’s happened 2-3 times before and will happen again here.

    The inherent flaw in the Fed’s capabilities is that their two primary levers (QE/QT and rate manipulation) don’t work in a timely fashion, and even less so when trying to combat inflation caused by FISCAL policy ie: direct to consumer payments (MUCH different than monetary policy)

    The reality is this: higher for longer will happen, rates will stay high, the zombies will die off, and what we’ll likely experience is some stagflationary environment where rates stay high and inflation never returns to 2%, while the consumer gets progressively more tapped out.

    At that point, the Fed will be left to choose the lesser of two evils: cut rates / QE and watch inequality get even worse, or sit on the sideline while the house burns to the ground.

  86. BeeKeeper says:

    Quick notes:
    FED is the lender of last resort (injects liquidity only when things are blowing up).
    FHLB (Federal Home Loan Bank) is the lender of SECOND to last resort.

    There is not much info circling about activities of FHLB. Everyone is FED focus commenting.

    Earlier this year, during banking crisis, FHLB lent 10x the FED liquidity (around 1-Trillion) to the banks. Add up FISCAL stimulus and do quick recalculation. Now everyone here knows, why FED QT does not work YET! No mysteries, no secrets.

    • Wolf Richter says:

      “Now everyone here knows, why FED QT does not work YET! No mysteries, no secrets.”

      Dumb BS.

      The FHLB CANNOT create money, unlike the Fed. It borrows money from investors by issuing bonds and then it lends to proceeds from that bond sale to banks that have trouble borrowing. Same as any big company can. Borrowing at a lower rate to lend at a higher rate and make money off the spread.

      This doesn’t stimulate anything. It’s neither fiscal stimulus, nor monetary stimulus.

      Mixing this with the Fed’s QE/QT is dumb BS. I understand that there are some ignorant bloggers out there that have spread this BS. But that’s their problem.

      The reason to discuss the FHLB is that it’s another government-backed bank support that has now gone completely haywire. This is a legislative issue, for Congress to decide (and they’re talking about it). It’s not a monetary issue.

  87. Rog says:

    Tightening effect is deferred, not deleted. Irving Fisher‘ quantity theory of money at work. Excess liquidity has eclipsed a gradual slowdown in velocity – over the past 1.5yrs. That excess has been shrinking though, as bank reserves are not far from being deemed sufficient (down from excessive). However velocity is expected to fall further.. which is hardly good news looking forward.

  88. Yenwoda says:

    “it might take a lot more and a lot longer to tighten financial conditions enough to where they have even a chance of removing the fuel from inflation”

    The thesis from a few months ago that “the disinflation honeymoon is over” and “the second half of the year will be rough for CPI”. How would you say that is holding up?

  89. Keith says:

    Why does the Fed show it is borrowing a total of 223 trillion dollars? Or am I misreading this? Certainly would explain alot of the stealth inflation.

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