Oh Deary, Where Did my Rate Cuts Go? Fed’s Wait-and-See Now Entrenched? And Suddenly Lots of Talk about “Rate Hikes”

What Powell Said about rate hikes, no rate cuts, rate cuts, and the QT slowdown while getting rid of MBS entirely.

By Wolf Richter for WOLF STREET.

“Hike” and “rate hike” were mentioned 8 times by reporters and by Powell during the FOMC’s post-meeting press conference today. Those terms weren’t mentioned at all in the press conferences during Rate-Cut Mania, which were all about “rate cuts,” how many and when.

Powell was obviously unenthusiastic about rate hikes, and thought it “unlikely that the next policy rate move will be a hike” – “our policy focus is really how long to keep policy restrictive,” he said. But rate hikes weren’t even on the table before, so that alone was a big shift, from a bunch of rate cuts to having to deal with the possibility of a rate hike. One step at a time.

What would it take for the Fed to hike rates?

“We need to see persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation down to 2%,” he said. “We look at the totality of the data to answer that question. That would include inflation.  Inflation expectations and all the other data, too.”

The Fed could hike rates “if we were to come to that conclusion that policy wasn’t tight enough to achieve that, so it would be the totality of all the things we’re looking at; it could be [inflation] expectations, it could be a combination of things. If we reach that conclusion – and we don’t see evidence supporting that conclusion – that’s what it would take for us to take that step,” he said.

“So, if we were to conclude that policy is not sufficiently restrictive to bring inflation sustainably to under 2%, then that would be what it would take for us to want to increase rates,” he said.

Is there a timeframe of persistent inflation that would trigger a rate hike? “These are going to be judgment calls. Clearly restrictive monetary policy needs more time to do its job. That’s pretty clear based on what we’re seeing. How long that will take and how patient we should be depends on the totality of the data and how the outlook evolves,” he said.

Was there a discussion at the meeting about a rate hike? “The policy focus has been on what to do about holding the current level of restriction. That’s where the policy discussion was in the meeting,” he said.

Oh deary, where did my rate cuts go?

“So, let me address cuts,” Powell said. “Obviously, our decisions we make on our policy rate will depend on the incoming data, how the outlook is evolving, and the balance of risks, as always. We’ll look at the totality of the data. We think that policy is well positioned to address different paths that the economy might take.”

“We don’t think it would be appropriate to dial back our restrictive policy stance until we’ve gained greater confidence that inflation is moving down sustainably to 2%,” he said.

“If we had a path where inflation proves more persistent than expected, and where the labor market remains strong, but inflation is moving sideways, we’re not gaining greater confidence. That would be a case in which it could be appropriate to hold off on rate cuts.”

“There are other paths that the economy could take which would cause us to want to consider rate cuts.” One path “would be that we do gain greater confidence if inflation is moving sustainably down to 2%,” he said. “Another path could be an unexpected weakening in the labor market, for example.”

“For us to begin to reduce policy restriction, we want to be confident that inflation is moving sustainably down to 2%. For sure, one of the things we would be looking at is the performance of inflation. We would be looking at inflation expectations. We would be looking at the whole story. Clearly, incoming inflation data would be at the very heart of that decision.”

Wait-and-see is now entrenched?

“My colleagues and I today have said that we didn’t see progress [on inflation] in the first quarter. And I’ve said that it appears then that it’s going to take longer for us to reach that point of confidence. I don’t know how long it will take. I can just say that when we get that confidence, then rate cuts will be in scope. And I don’t know exactly when that will be,” he said.

“What do we now see in the first quarter? Strong economic activity. We see a strong labor market. We see inflation. We see three [bad] inflation readings. I think you’re at a point there where you should take some signal. We don’t like to react to one or two months of data. But this is a full quarter.  We are taking signal. And the signal we’re taking is it’s likely to take longer for us to gain confidence that we’re on a sustainable path to 2% inflation. That’s the signal we’re taking,” he said.

“My expectation is that we will, over the course of this year, see inflation move back down. That’s my forecast. But my confidence in that is lower than it was because of the data we’ve seen,” he said.

“We actually have the luxury of having strong growth and a strong labor market, very low unemployment, high job creation, and all of that. And we can be patient. We will be careful and cautious, as we approach the decision to cut rates,” he said.

What’s the chance of no rate cuts?

“I don’t have a probability estimate for you. But all I can say is that we didn’t think it would be appropriate to cut until we were more confident that inflation was moving sustainably at 2%. Our confidence in that didn’t increase in the first quarter.  And, in fact, what really happened was we came to the view that it will take longer to get that confidence.”

“But there are paths to not cutting. And there are paths to cutting. It’s really going to depend on the data.

QT slowdown to avoid accidents that could stop it prematurely.

“The decision to slow the pace of runoff does not mean that our balance sheet will ultimately shrink by less than it would otherwise, but rather allows us to approach its ultimate level more gradually,” Powell said.

“In particular, slowing the pace of runoff will help ensure a smooth transition, reducing the possibility that money markets experience stress, and thereby facilitating the ongoing decline in our securities holdings that are consistent with reaching the appropriate level of ample reserves,” he said. The Fed has already shed over $1.5 trillion in assets since it started QT in July 2022.

Why even slow QT? “It’s really to ensure that the process of shrinking the balance sheet down to where we want to get it is a smooth one and doesn’t wind up with financial market turmoil, the way it did the last time we did this,” Powell said in reference to the repo market blowout in the second half of 2019, which caused the Fed to step back in with large-scale repo operations that quickly undid a big part of QT-1. And that’s to be avoided this time.

The FOMC’s statement and Implementation Notes today already outlined the basics of the QT slowdown:

  • Starts in June
  • Cap for Treasury runoff reduced to $25 billion from $60 billion
  • Cap for MBS runoff stayed at $35 billion
  • If MBS run off faster than $35 billion a month, then the excess will be replaced with Treasury securities, and not MBS.

Getting rid of MBS entirely. What Powell added in the press conference was the Fed’s intention “to hold primarily Treasury securities in the longer run,” meaning they want to get rid of MBS entirely. Powell cited this intention as the reason for not reducing the runoff rate of MBS, and for not replacing any excess MBS runoff over the $35 billion cap with MBS, but with Treasury securities.

This unchanged cap also means that QT will speed up when the housing market unfreezes and sales volume goes back to more normal levels, which would trigger a much faster rate of mortgage payoffs, which would trigger a much faster pace of passthrough principal payments to holders of MBS, such as the Fed. And passthrough principal payments being the primary way in which MBS come off the balance sheet, it would speed up QT, and could push QT to a maximum pace of $60 billion a month.

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  166 comments for “Oh Deary, Where Did my Rate Cuts Go? Fed’s Wait-and-See Now Entrenched? And Suddenly Lots of Talk about “Rate Hikes”

  1. Sporkfed says:

    The Fed is will have to play a game of chicken with Congress to get them to
    slow spending. Hard to see Congress
    blinking in an election year. Hard to see
    Powell stand up to political pressure.

    • SpencerG says:

      Oh this is definitely getting political. Getting Congress to be fiscally prudent is a long term project… getting past this November’s elections is a short-term focus of the Fed. I fear that they “fingers-crossed” strategy for 2024 is about to blow up on all of us. But it is not abnormal… even the Volcker Fed had to let inflation run hot from April to November of 1980.

      • SeekingCassandra says:

        And pending the inflation prints and economic readings in the coming months, and once the election is done and over with, I wonder if the current Fed will truly have the stomach to go “full Volcker” and administer a really strong dose of higher FFR and QT medicine.

        • SpencerG says:

          Not until the election is over (if then) I am afraid. The Fed historically bends over backwards to stay out of politics… come what may with the economy. They even delayed hiking the Fed Funds rate above 1% until Powell’s confirmation approval in the Senate (May 2022).

    • Brian says:

      He stood up to political pressure just fine during the last administration, doing what he believed was right even with constant public criticism from the then-president. Good thing, too, or we’d have been way behind in the response to inflation.

      • Home toad says:

        I agree, the man is majestic and solid. Powell and the gang will lead our economy to the fertile monetary fields with yields of prosperity.

        I was thinking of selling my house, but my best investment could be to let it gain another 100k over the coming few years. Some here think it could loose 100k?…. Don’t think so.
        A wonderful time, to live and die.

        • Depth Charge says:

          It’s all paper gains until you sell it. Better do so before that phantom equity vanishes…….or the termites get to it…..

        • MM says:

          “It’s all paper gains until you sell”

          Paper gains and a roof over one’s head.

          Not like you can live inside a pile of cash.

      • JCN says:

        Cutting rates to 0% in 2020 helped fight inflation? What Ivy League university did you attend?

        • Whatsmynameagain says:

          University of Sarcasm if I am reading it correctly.

        • Brian says:

          It helped prevented the collapse of the economy from the pandemic. There was no inflation at the time. Funny how people forget what almost happened. You probably also forget the QE started because of the GFC and limited the damage to months what could have been years. The problems of QE are bad but the problems we would have faced without Fed actions would have been worse.

    • GuessWhat says:

      I agree 100%. The Fed has totally underestimated the effect that $1.7T and at least that amount this FY in deficit spending is doing to prop up the labor market.

      EVERYONE KNOWS the solution is a recession, but will the Fed do HIGHER FOR AS LONG AS IT TAKES?

      They’re already capitulating on QT, IMHO. I agree at some point they need to start to taper, but I think it’s too soon. Tapering is going to put downward pressure on yields, which is not what we need for the next 4-6 months.

      Basically, they’re resigned to doing the one thing that won’t leave them with a political hot potato of directly mucking with interest rates before an election.

      The hilarious thing is what do they do if inflation continues to slowly accelerate? I would love to see them forced into raising rates by late summer.

      • Mac Money says:

        Tapering puts UPWARD pressure on yields. Less demand from the Fed means price drops and yield increases. The capitulation is slowing QT by reducing the runoff. If the Fed wanted to be more aggressive in reducing inflation they would want to accelerate QT.

        • GuessWhat says:

          Everything I’ve read says the tapering of the runoff is going to lower yields. It’s going to slow down the draining off liquidity from the system.

    • dang says:

      I suggest that a paragraph cited by Wolf;

      “We need to see persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation down to 2%,” he said. “We look at the totality of the data to answer that question. That would include inflation. Inflation expectations and all the other data, too.”

      What do I think is that the secret of capitalism as the most likely system is that is scalable and normally distributed.

    • n0b0dy says:

      why would congress ever slow spending?

      they simply wont be held to account for any of it, reckless as it is..

      powell is not going to face any political pressure from congress. perhaps from trump he might, since there is precedent for it already. if trump even gets elected, which isnt certain.

      and lets not forget.. congress CREATED the fed. in any ‘dust-up’ between the two (which is unlikely in the extreme), the fed caves anyway.

      congress is going to let the fed continue to do what its been doing. just like they do with every other agency for the most part. this is the ‘4th branch’ of gov’t mindset. congresspeople get their marching orders from their major donors, and routinely vote for bills they dont even read. they couldnt be bothered in the least to ‘regulate’ much of anything else, unless they are TOLD to pass this or that law. and even then, it is not really regulation.. thats what the agencies are for.

  2. Frumpled says:

    I’ll admit I’m biased. I don’t think we’re going to see inflation improve. Seems to be normalizing here and getting entrenched. But… how long is it reasonable to wait to make a move?

    This feels like “the beginning of considering to discuss potential, transitory rate hikes in the future”. The fed has set an unfortunate precedent where any slight change in policy is broadcasted far, far ahead of time and they’ll do anything they can to avoid rocking the boat. It “feels” like they want to avoid conceding literally anything regarding current economic conditions and are just praying inflation will see itself out. Cannot have the cake and eat it, too.

    • Richard says:

      This inflation is creating greater inequity within the United States, with the coastal states raising minimum wage, I don’t think until Congress raise minimum wage and cause a recession will inflation be controled

      • Glen says:

        Very few, about 1.3% make at or below Federal minimum wage. It would take it to be raised significantly to have an effect. The demand for labor sets the price with the low end really there to avoid extreme exploitation, of which in many states doesn’t even do that anymore.

    • GuessWhat says:

      We’re in an inflation super cycle. Outside of a recession, core inflation isn’t going back to 2%. There’s still too much deficit spending stimulus in the system as well as aggregate demand. Now, I don’t see inflation shooting higher, outside of a moderate oil shock, but slowly moving upwards. Core inflation of 4.1% or so within the next 5 months leading up to the election is not out of the question. Basically, if core PCE inflation makes it to 4%, then alarm bells at the Fed need to start going off. At that level, we’re looking at deeply entrenched inflation that could last somewhat indefinitely.

      • will says:

        I agree with you inflation is entrenched, remember vote Biden he signed the Inflation Reduction Act, a few more of those and we will be running negative inflation then we can see rate cuts. But in seriousness 2% steady is their goal not market price stability supply and demand.

    • dang says:

      I project that Powell represents the Fed which the other day Wolf labeled on his graph as the beginning of the oppression of savers to pay for what we have now.

      Tellingly, what Powell didnt say was that the Fed policy has a much greater, documented history of being wrong than right.

      I think his dovish demeanor about that the inflation nuisance is over blown was what I expected, ala Dimon’s vision of the future for the financial economy the we live in.

  3. Mainly on the Plain says:

    Good that the Fed can pivot when the data sink in; just too bad it took three months to see what Wolf saw in zero, just from looking the service and housing inflation trend.

    • dang says:

      I have been shopping for a central air system and the sales men are all hucksters, pushing a 500 pct margin on the elderly. The over payment for an old person, unaware of the dishonesty that lurks in the paellio history of lessons learned in the mud.

      It is not only disgraceful but more importantly, immoral

  4. Russell says:

    At least oil is coming down…for now.

  5. OutWest says:

    From my perspective as the average guy, it looks like the Fed has become more comfortable with inflation, and the impact it has on this country.

    I’m not a fan.

    • Wolf Richter says:

      Higher rates for longer. That’s what higher inflation means. Wait-and-see forever?

      • Depth Charge says:

        “Wait-and-see forever” = inflation entrenchment. That’s not combating inflation, that’s encouraging it.

        • JeffD says:

          Inflation is already entrenched. That said, there is evidence that large swaths of the population, mosly renters with spring rent increases (?), are beginning to hit hard spending limits that are *forcing* them to change behaviors. I don’t know if that should be seen as a good thing or a bad thing.

        • Kenny Logouts says:

          It’ll self resolve quickly.

          Even if everyone gets pay rises, and it’s all sustainable, all that negative yielding debt will become increasingly worthless as people realise the rates aren’t coming down again.

          And no one will want to buy debt at 5% if they know inflation is being left at 4-5%.

          As debt costs start to rise it breaks everything.

          It’s not sustainable as it is, but as always FRB are playing a game of brinkmanship with chaos under the guise of responsible controllers.

          The plates are spinning somewhat steadily so they’ll keep pretending running an economy with spinning plates is acceptable policy.

        • Cas127 says:

          “The plates are spinning somewhat steadily so they’ll keep pretending running an economy with spinning plates is acceptable policy.”


          It is amazing how quickly the US devolved into a society run by…sociopaths.

          (The 50 years worth of sociopaths would all argue they *had* to be sociopaths…because of the prior sociopaths…)

          The fatal poison was likely an oligopolistic mass media (1950-90) that allowed transparent madness to go unchallenged and become entrenched institutionally (the end phase we’re in now).

        • MM says:


          “renters with spring rent increases”

          Not sure how it is by you; but in Boston, a solid % of leases renew or turn over on the 1st of Sept.

          Its an unofficial holiday here – Alston Christmas – because you can drive around, and scoop up all the stuff that the rich college kids leave curbside.

        • dang says:

          I agree that Powell was ridiculously contrite in his defense that monetary policy is restrictive in spite of the obvious fully inflated bubbles on the asset prices.

          According to my theorem that asset price inflation is the precursor of general inflation.

          The Fed is less than trustworthy for anyone paying attention.

      • CCCB says:

        Wolf, I reecently read that pay should increase to a neutral level, which was defined as the inflation rate plus gdp. The current number came out to around 4 or 5% annually.

        It makes sense from the workers standpoint, but doesnt this imply permanently higher inflation due to labor input costs on everything?

        • Wolf Richter says:

          There are two factors that drive up wages, one of them is productivity gains, and the other is wage inflation.

          No one argues about productivity gains increasing wages (paying more for higher output by the same number of people), that’s how it’s supposed to be, it producers higher standards of living, and it’s not inflationary.

          But when you get wage inflation on top of it (paying more for the same output by the same number of people), the question becomes: is wage inflation lower or higher than consumer price inflation? So that’s where the arguing starts. If wage inflation gets hot, obviously, it is good for workers, and they have more money to spend, but can add fuel to consumer price inflation through increased demand while at the same time forcing producers to hike their prices to cover the rising labor costs (the infamous wage-price spiral).

        • dang says:

          Well the truth is that the working people could get an annual productivity raise of 6 pct forever and never earn their historically, proportionate share. The idea that inflation only manifests itself when the rights of the workers are the cause of losses rather than the traditional cause of profits. Seems to be shortsighted.

    • SpencerG says:

      Good point… it took them the last three or four months to get people to understand that they didn’t intend for the possibility of rate cuts to be taken too seriously. One wonders when they start getting people to accept that the same is true about their 2% inflation “target.”

    • John H. says:

      Fed playbook: Lower rates quickly in an attempt to quell the emergency, them raise rates slowly attempting to avoid a new, potentially bigger emergency. Repeat ad infinitum….

      And so it goes in the business of managed money.

      • Mainly on the Plain says:

        Good summary

      • dang says:

        Since you gave thrown down the gauntlet of surmising what the Fed is likely to do in several years all the while they allow a failed monetarist model employed since 2008 as being beneficial for the median American hero

        An unproven model at best applied as a palliative to the open wound of corruption that obviously defines the existential question between right and wrong

  6. Phoenix_Ikki says:

    Wolf, I can see you’re having a lot of fun poking at these delusional rate cuts fookers, just like shooting down those QT forever folks…lol

    The collective delusional from these FOMO rate cutters believers are a sight to behold though, at least we know it’s worth a couple of trillions in matter of months…

  7. SeattleTechie says:

    Wolf please correct me if I am wrong here. And I did read the entire article. Will this policy ultimately serve to increase spread between the 10y yield and mortgage rates? If and when housing unfreezes for whatever reasons – the faster MBS roll off, the faster the spread increases? How does this not cause a full blown housing recession?

    • MM says:

      “How does this not cause a full blown housing recession?”

      Aren’t we already in one?

      • CCCB says:

        MM, were obviously not in a hpising recession. Substantially lower sales volume hasnt translated into substantially lower home prices.

        Are we due for a “normal” price correction of maybe 10-15%? Sure, but dont expect 2008 all over again. All the doomsayers continue to be wrong with this prediction.

        • Julian says:

          “All the doomsayers continue to be wrong with this prediction.”

          It seems that you are the most credible prophet!

        • spencer says:

          Housing prices didn’t decline until after the money stock was held constant for a little over 2 years in the GFC.

        • Depth Charge says:

          CCCB will disappear like a fart in the wind once house prices crash. His ilk were a dime a dozen last bubble, too. They generally show back up under a different moniker to tell everybody how they predicted the crash.

        • MM says:

          I’m not talking about prices. Sales volume is in a recession.

          Why else are all the realors I know getting part time jobs?

      • Clykke says:

        The average price increase YoY is 7%… so no.

    • dang says:

      It is hard to predict the future interest rate, especially if one assumes it is a random variable rather than the more likely, a manipulated variable, still under the control of the Fed’s obese balance sheet

  8. Dick says:

    wait and see wolf, is wait and delay. It’s from the old playbook. A year ago I said 2% is out the window. I’m too old to care what anyone says. I look at what they do.

    • Depth Charge says:

      Exactly. These guys show up in a minute with massive QE to blow the most insane everything bubble in the history of mankind so they and their buddies can get obscenely wealthy in a moment’s time, but when inflation starts tearing the entire country apart they take a tentative “wait and see” approach. Smart people see what they’re doing.

      • WB says:

        Higher for much, much longer. CONgress is fully owned, and the average hard working American has no representation. This is the root of the problem. 5% interest rates isn’t high, and the second wave of inflation is coming. In fact, some well-respected folks are arguing that inflation isn’t being measured correctly. I tend to agree.

        Hedge accordingly

      • CCCB says:

        DC, have you already forgotten that massive inflation was initiated by the pandemic, work stoppages and supply chain meltdowns, as well as the entire world economy coming to a screeching halt?

        Yes the fed was slow to react, but they didnt cause the inflation. If anyone did, it was our presidents, senates and congress spending and handing out cash like drunken sailers in a strip club on payday! The fed is still trying to fix those screwups and greedflation without blowing things up again.

        • Sporkfed says:

          You don’t think lowering rates doesn’t
          cause inflation ? What do you think was
          behind the asset inflation ?

        • WB says:

          That’s quite the revisionist history lesson. ZIRP started with the “great financial fraud” and obama. Buying MBS and holding rates too low for far too long happened LONG before the “pandemic”. Things were about to blow up again in the banking sector AGAIN when suddenly there was a pandemic…

          Interesting times.

        • Wolf Richter says:


          “That’s quite the revisionist history lesson. ZIRP started with the “great financial fraud” and obama.”

          LOL, doing a little “revisionist history” yourself?

          ZIRP and QE started with Bush in late 2008. Under Bush, in 2006, the financial system started to teeter, and in early 2008, under Bush, Bear Stearns collapsed, and in Sep 2008, under Bush, AIG and Lehman collapsed, and the whole financial system began to collapse, and the Fed began bailing it out. During Bush’s 8 years in office, the financial system cascaded into the Financial Crisis, and then in January 2009, Bush handed the entire mess to Obama and said, “here you go.” The only thing the Fed did after Obama inherited the mess was add MBS to its QE operations in order to bail out the banks that started collapsing under Bush.

        • VIII says:

          The Fed created $2T in new money, straight out of thin air. As Milton Friedman said…..

          I don’t doubt that the Fed is trying to fix the situation, and I actually think they’re doing a decent job (I.e it could be worse/this is the least-bad path), whilst trying not to blow-up something.

        • Escierto says:

          Regarding WB and Obama. In the minds of these guys, Obama was president from 2000 to 2020 when he was replaced by the current occupant. Everything bad that ever happened is Obama’s fault.

        • Depth Charge says:

          “Everything bad that ever happened is Obama’s fault.”

          Sounds like projection, because DJT is blamed for almost everything bad under the sun. Who are you kidding?

        • JimL says:

          WB accuses others of revising history while he completely revises it himself.

          Maybe he should get better sources of information. Ones that do not take advantage of him.

        • dang says:

          “massive inflation was initiated by the pandemic” is a foolish assertion given that asset prices have been increasing since 2008, driven by the relentless increase in money supply engineered by the Fed.

        • Happy1 says:

          The Fed reacted promptly and massively to the pandemic. This may or may not have been necessary. The other government interventions seem more than adequate to me anyway.

          What is unconscionable is what the Fed continued to do well after the pandemic was no longer an economic threat and when inflation accelerated starting in early 2021 and continuing long into 2023, with the economy massively overheating and inflation raging. Everything now costs 30% more and inflation is still twice their illegal self determined target of 2% (actual target is supposed to be price stability and full employment).

          They are not doing their damn job. It’s time for a change.

    • andy says:

      I’ve read somewhere on interwebs that 1% inflation was the “ceiling”. Then it became 2% “target”.

      • Paul S says:

        Yeah, why 2%? Why not aim for 0 and 2% is a worst case scenario.

        I was in our nearby town a few weeks ago and hardly recognise it. Homeless pushing carts on the once vibrant and positive streets. And new business? Tattoo parlours and fricking nail salons. There is obviously too much money sloshing around looking at the new vehicles everywhere. Opportunities are limited for regular people, but money for tats and nails?

        Raise the rates, already.

      • Depth Charge says:

        Right. The entity whose mandate is stable prices sneakily introduced a 2% inflation “target,” gleaned from some crackpot in New Zealand. And yet, nobody ever even questioned it. The FED is a cancer.

    • Mark says:

      Dick –

      Exactly right

  9. DownFed says:

    “Why even slow QT?”
    Maybe it’s because of the Japanese selling dollar to prop up the Yen. There has been quite the gyrations in the yen-dollar market in the last week that is suspected to be due to dollar selling to buy yen.

    Japan may fill the gap created by the tapering QT.

    • dang says:

      Japan’s saving grace is that the yen is a component of the currency basket that is supported, unconditionally, no matter what they do.

  10. SRK says:

    Whats rush to slow-down QT?

    After March meeting, in comments I had mentioned, Powell hinting us QT slowdown will start “Pretty Soon” its means June. Unfortunately that’s true now.
    If last meeting consensus was on half the limits, why go to 25B and not 30B. In short term MBS limits are bogus. We all know they are not hitting those limits for last 15 months. So it wont change in next 6-12 months too.

    I understand and agree FED should slow down in order to reduce balance sheet without blowing up. But NOT SO SOON is the point. Whats rush?

    1) ON RRP has more than 400B as of April end. Historically it used be 0. Powell had said we will go near lower amount
    2) Banks still has more than 3.3T Reserves. Way more than Ample Reserve.
    3) FED already opened up the SRF.

    FED can definitely wait another 4-6 months. At least wait till ON RRP go below 100B.

    Rushing to slow down QT doesn’t make any sense. It will loosen Financial Conditions. It will negate FED’s own efforts to bring down inflation via Higher Rates.
    This does look like appeasing Treasury in order to put lid on longer dated yields.

    • SpencerG says:

      Exactly. For a FED that has used “Patience” as its watchword… what on Earth is causing them to rush THIS decision??? They could easily have slow-walked and jawboned this QT decision for a couple more months until they had their Balance Sheet under $7 trillion in August. I wish one of those financial reporters in the press conference had even a glimmer of Wolf’s understanding about this. Because the question that needed to be put to Powell is exactly the one you state here…

      “Just last month you were talking about cutting QT by half sometime in the future… now you cut it by MORE than half… RIGHT NOW!!! What is it that you all see in the data that is causing this rush to cut QT?”

      Maybe there is a good answer… like they have spoken with the banks that still hold BTFP and they expect to take that to zero far faster than previously imagined. But with no one asking the question we don’t even get the pretense of Straight Talk.

      As it stands now this is the “Fed of Mixed Signals”… on the one hand the economy (and inflation) are so strong that they are abandoning any more rate cuts for this year… but on the other hand the economy is so stressed that the Fed needs to back off its successful QT program of the past twenty-four months… and on the THIRD hand the one thing they want to rule out is rate HIKES going forward.

      I mean seriously… what the hell?

    • Happy1 says:

      To me this is even worse than not increasing the short term rates. Their balance of holdings is far far above what is needed. They should be selling MBS outright and not waiting for them to mature and roll off. This will further delay the return to pre 2008 and monetizes our current massive deficit spending problem.

  11. Aman says:

    Can anyone knowledgeable enough help in the following clarification

    The Fed has 3.3T of reserves currently. It is paying banks 5%+ on these. That means it creates roughly 165B of additional reserves per year by paying out interest. And at $25B per month of QT it removes $300B in reserves.

    Doesn’t this mean that the effective QT is really just $135B per year? So the money supply in reality is just shrinking at a much smaller rate via treasury run off than claimed.

    Of course I am assuming the interest the Fed earns on the Treasury holding is zero (it isn’t but these were purchased in ZIRP era so likely not 5% either)

    Side note: Powell did his very best to telegraph that rate hikes were quite unlikely. That was the only thing he seemed to be more relatively certain of. Almost everything else is data dependent. Interesting that at least in one aspect the Fed has confidence and clarity.

    • Wolf Richter says:

      Your calculation and theory is not correct because it excludes the fact that what is in reserve accounts is cash from bank-customer deposits, and banks have to pay those depositors increasing amounts of interest on their deposits, or those deposits leave, and there won’t be any reserves from that bank, and the bank will collapse. So much of that 5.4% the Fed pays on reserves goes via the banks to their depositors. That’s why consumers are getting 5%-plus on their CDs, and 4%-plus on savings accounts. And many consumers spend this money and plow it back into the economy, which is where part of the consumer spending comes from, and it circulates from there.

      • Aman says:

        Dear Wolf,
        my point was that interest paid by Fed on reserves increases reserves. Of course some of this ends up belonging to people in the form of interest on their deposits.

        But the fact is that interest on reserves is also an increase in reserves. Even when it is going through the economy it never really leaves the bank account of someone and therefore is present on the Fed’s balance sheet as a liability as well.

        So there are three things happening.
        1. Elimination of reserves through QT
        2. Creation of reserves via interest payments on reserves
        3. Fed earning reserves (which are then destroyed) via interest Fed earns on Treasury holdings

        So net increase in reserves is 2 less (1+3). From my calculation 2 less 1 is just $135B per year at current rates and 3 is likely not that big either.

        What did I miss?

        • JS says:

          Asked and answered counselor. 😆

        • JimL says:

          You missed the fact that interest on the reserves is NOT an increase in the reserves. No different than a retiree investing in debt. The interest they earn goes to pay the bills, not increasing their nest egg.

          If anything it is worse for banks because most (not all) of the interest they earn goes right out the door to depositors.

  12. Jonno says:

    Wolf wrote:

    “This unchanged cap also means that QT will speed up when the housing market unfreezes and sales volume goes back to more normal levels, which would trigger a much faster rate of mortgage payoffs, which would trigger a much faster pace of passthrough principal payments to holders of MBS, such as the Fed. And passthrough principal payments being the primary way in which MBS come off the balance sheet, it would speed up QT, and could push QT to a maximum pace of $60 billion a month.”

    I don’t agree with that. Fed receipts from redemptions of MBS in excess of $35G per month will be used to buy Treasury securities, which should have no net effect on QT. All that will be happening in excess of $35G per month will be that MBS will be exchanged for Treasury securities. Although I guess that tells you at least a little about what the FOMC members think about the relative value of MB versus Treasury securities.

    • SpencerG says:

      Isn’t $35 billion in MBS roll-offs PLUS $25 billion in Treasury roll-offs a total of $60 billion in QT?

      Any ADDITIONAL roll-off of MBSs (above $35 billion) will be counterbalanced with purchases of Treasury securities. Last month Wolf’s report on the Balance Sheet said that MBS had only declined by $15 billion in the previous month… so we are a LONG way from this mattering.

      • Ol' B says:

        As I commented on a previous article – maybe the Fed sees the MBS monthly rolloff accelerating to and far beyond $35B very soon. People with 3% mortgages but no jobs sell their houses fast just like people with 7% mortgages and no jobs. The housing market has been ice cold and expensive for over a year – that may be about to change. The Fed could be at $25 + $35B by mid summer. That’s only ~$15B less net QT than the average month now.

        I do hope they stick with this “softer QT” for a long time but I don’t think they will. Maybe a year at these values then zero Treasury rolloff and less MBS.

    • Wolf Richter says:


      You disagree with something I didn’t say. You disagree with something that’s only in your own imagination. Re-read the quote you quoted. Especially the last part:

      “…could push QT to a maximum pace of $60 billion a month.” = $25 billion Treasury rolloff plus $35 billion max MBS roll-off = max $60 billion QT.

  13. Anthony says:

    Interest rates, are often determined by the risk people are willing to accept lending money to the USA. If people think the USA is risky, then rates go up, no matter what the Fed thinks.

    • Wolf Richter says:

      Hogwash. Credit risk of Treasury securities is near nil by definition (fiat currency controlled by the issuer), and everyone knows that. Long-term yields are determined by the inflation outlook of bond buyers. If bond buyers think long-term inflation will be around 5%, then 10-year yields will be 6-8%.

      • Charles Clarke says:

        I think you two may be saying the same thing but disagree on the words. Inflation risk is the risk involved in converting my gold (or other store of value) to dollars, waiting a period of time and then converting back. How much gold will I end up with. Just like the risk in loaning my gold to someone who says they’ll pay me interest, but may also default on part of the debt. How much gold will I end up with. In both cases the interest rate depends on how much gold I expect to have at the end of the loan.

    • MM says:

      Not to just repeat what Wolf said, but

      US Treasuries are GLOBALLY recognized as the most PRISTINE collateral to lend against.

      There is zero, zip, zilch credit risk with USTs. Only duration/rate risk.

  14. WB says:

    Higher for much, much longer. CONgress is fully owned, and the average hard working American has no representation. This is the root of the problem. 5% interest rates isn’t high, and the second wave of inflation is coming. In fact, some well-respected folks are arguing that inflation isn’t being measured correctly. I tend to agree.

    Hedge accordingly

    • JS says:

      Oh geez. Here come the ShadowStats guys again.

      I remember during the GFC how they twisted and turned to say “real unemployment” was 20-25% starting in 2009 all the way through to 2019. You could maybe make that argument during the worst of the GFC, but nearly everyone who wanted a job in 2019 had one, and they were still saying 1 in 5 Americans were unemployed.

      That was when they lost all credibility from all but the most fringe perma bears.

    • Wolf Richter says:


      “…some well-respected folks are arguing that inflation isn’t being measured correctly. I tend to agree.”

      If you’re referring to Larry Summers, READ THIS:

      The paper Summers co-authored said: if mortgage interest rates were added back into the CPI basket, as they has been before 1982, then CPI would be much higher.

      Here is the paper:

      This is a stupid idea, and the only reason why THE HEADLINE of the paper went viral (no one read the actual paper) was because it fit into people’s narrative.

      If you add mortgage rates into CPI, then you would have had mega DEFLATION from 2008-2018 and then again from 2020-2022.

      If mortgage rates are included, then:

      Every time the Fed starts a hiking-cycle, mortgage rates go up and CPI goes up even further due to the Fed-induced increase in mortgage rates, which falsifies the signal CPI is sending.

      And every time the Fed cuts rates, the mortgage rates go down, and as a result, CPI goes does, which causes the Fed to cut rates even more, even though actual inflation may have taken off again.

      INCLUDING MORTGAGE RATES IN CPI IS STUPID. And it was a good move in 1983 to remove them and replace them in the CPI basket.

      And thank God they removed them because we would have had DEFLATION during the ZIRP years, which would have caused the Fed to go to negative interest rates and even bigger QE, which would have inflated home prices even more.

      These economists are idiots sometimes.

      Also life has changed. Lots of products and services that we have today that are in the CPI basket didn’t even exist back then. So CPI has to be adjusted to modern times. People who claim that the old method was better don’t have a brain. They need to look at how people today spend their money and how that differs from what they bought 40 years ago.

      Summers is responsible for a lot of stupid shit, including helping repeal Glass-Stegall.

      Here is a fun-to-read piece on Summers from 2013 when he was trying out for the Fed chairman job.


      This is how the article starts, to give you a flair:

      “Tell me it’s a sick joke: Former US Treasury Secretary Lawrence Summers, the guy who tops the list of those responsible for sabotaging the world’s economy, is lobbying to be the next chairman of the Federal Reserve. But no, it makes perfect sense, since Summers has long succeeded spectacularly by failing.

      “Why should his miserable record in the Clinton and Obama administrations hold him back from future disastrous adventures at our expense? With Ben Bernanke set to step down in January, and Obama still in deep denial over the pain and damage his former top economic adviser Summers brought to tens of millions of Americans, this darling of Wall Street has yet another shot to savage the economy.”

  15. John says:

    Well rate cuts have died off with higher for longer being the new normal. No interest on money for years! There is interest now. That’s the way I see it.

  16. Oldpaperboy says:

    IMHO,the Fed should not have bought MBS in 2020-21…

    With mortgage rates at 3% and lower,what were they thinking!!!

    • Wolf Richter says:

      The Fed should have NEVER bought MBS. And it should have never done QE. It should have stuck to repos to deal with crises, as it did until 2008. It would have worked OK, without causing all these crazy dislocation.

      • Marcus says:

        Fair point. But the central banks have done QE, and now they are trapped, have no chance for an exit, and must monetize governments debt.

        • Wolf Richter says:

          The central banks not trapped, they are exiting QE just fine. Here are three of them:

        • John H. says:


          “…now they are trapped.”

          I see it that way, too. Almost more important than being trapped by the current situation (damned if they exit; damned if they don’t) is the prospect of opening the door, in future emergencies, to similarly sized monetary experiments.

          Each perceived emergency demands even stronger palliatives, accompanied, of course, by commensurately more disruptive unintended consequences.

          How do we get off of the “managed money” treadmill?

        • Happy1 says:


          Looks like the Canada is truly winding down QE and Europe is making an effort.

          Regarding the Fed, I see an escalating ladder with QE accelerating with every downturn and QT half heartedly edging forward far after. This trend will continue the next downturn, which is probably happening within a couple of years, well before QT is complete.

        • Wolf Richter says:


          “I see an escalating ladder with QE accelerating with every downturn..”

          You’re fantasizing and you’re abusing my site to spread a BS agenda. I have explained a million times why your comment is BS, and why it’s an agenda that’s being promoted in the social media.

      • Pea Sea says:

        I couldn’t agree with you more. But I’m puzzled by something I keep seeing you say. You say that the slowing down of QT, the Fed’s caution in hiking or holding rates high, etc. are justified because if the Fed overdoes it and something breaks, they will “have to” bring back ZIRP and QE.

        But if in your (and my) opinion they didn’t actually “have to,” but instead foolishly chose to, do QE during the GFC and a global pandemic, why on earth would they “have to” do QE again if e.g. there were another repo blowout like in 2019? Surely the GFC and Covid were much greater emergencies?

        Leaving ZIRP out of it for the moment, why would the Fed have to, or be forced to (by whom? how?), bring back QE in the case of a repo blowout or a recession caused by overtightening?

        • Wolf Richter says:

          They don’t HAVE to do QE and they might not do QE, and the didn’t do QE in March 2023, and the didn’t do QE during the repo crisis in 2019.

          QE = bond purchases that stick on the balance sheet for years or decades.

          In fact, they’re now set up like they were before 2008, with a Standing Repo Facility that can handle crises. Bernanke scuttled the SRF. So now the Fed has it back.

          I watched them deal with the repo crisis in 2019, after I watched them do QT-1. Repos are a $5 trillion market, pretty big, and it was beginning to lock up. The Fed didn’t do QE (bond purchases), it did repos, which vanish after they mature in a day (overnight repos) or over some longer term, such as a week or a month. So this wasn’t QE but it was a huge amount of liquidity very quickly that undid much of what QT-1 had done, in terms of removing liquidity. So I really don’t want to see that again. Slow is good. There’s no rush.

  17. Gen Z says:

    Up here in Canada, many financial bloggers are repeating the rate cut myth, probably because some people want to sell protected recreational property in the middle of Ontario for Manhattan prices. Recreational property is very restricted in use that one cannot even camp overnight on it.

    Yet during the low interest rates of late 2021, hu$Tyler’s were listing those properties for hundreds of thousands of dollars when the net present value in 2019 was a whopping $5,000 because nobody is legally allowed to live on the protected land.

    • WB says:

      The funny thing about “laws” that cannot be enforced, is that they really aren’t laws at all.

      Central bankers around the globe have destroyed the most important mechanism of price discovery, so it’s no surprise to me valuations are all f&$%ed up.

    • Paul S says:

      But I just read yesterday that changes to capital gains is freaking the cottage owners out and expected to change this.

      • Gen Z says:

        Wasaga Beach and Kawartha Lakes wasn’t supposed to be the Malibu of Canada with multi-million dollar cottages and C$10,000 a month cottage rentals.

        Back in 2017, those same cottages went for C$150,000.

  18. cb says:

    Powell said: “In particular, slowing the pace of runoff will help ensure a smooth transition, reducing the possibility that money markets experience stress,”


    What are the mechanics for the current pace of runoff to induce money market stress?

    • Wolf Richter says:

      Withdrawing liquidity from the money markets. That’s what QT does. And that can get dicey because liquidity doesn’t always flow evenly and quickly to where it’s needed. And when liquidity doesn’t make it to where it’s needed, but had been relied upon to be there (repo market, for example, see 2019), then something can get messy. This is the basic plumbing of the financial markets.

  19. fred flintstone says:

    IMO the talk about rate increases is as real as the talk about rate cuts……..the fed is not going to put the banks in further jeopardy or risk a melt down in real estate. Someone has to pay for the party put on by congress and the rich have chosen the poor and middle class…….what a surprise. (sarcasm)
    Just another day in the swamp. Interesting that unless Kennedy catches fire the next president will be in his last term……..so a recession could be possible…….he will not be running again……no matter which party wins.

    • MB says:

      They might raise rates at some point. If you’ve noticed the fed likes to ease the market into ideas. They never just pivot. They give very advance notice of decisions to avoid panic. So this was I don’t forever it happening. Next meeting will be probably not, but maybe. Meeting after that will be a neutral maybe. Meeting after that will be there’s a chance it’s coming if the data doesn’t improve. Meeting after that will be data is not improving it’s like coming. Then finally it will happen. This is given data shows accelerating inflation for a significant period of time. If the data just shows no improvement I expect an even slower progression towards hikes. All this is given no recession and still low unemployment. In a recession or rising unemployment scenario + accelerating inflation hard to say how they’ll react.

  20. Redundant says:

    The Fed is doing a great job of painting themselves into an increasingly smaller corner.

    The economic conditions currently in place, are generating inflation, therefore, by essentially doing nothing, inflation will continue at a similar rate going forward.

    It’s reasonable to be cautious, but the inflation genie has been out of the bottle for more than two years, going on three.

    IMHO, the solution would have been to not have raised rates, two years ago, but to let inflation run hot. Nobody would have liked that, but all the excess cash in the economy would have burned up and inflation would have died.

    Instead, the Fed rate hikes have stimulated inflation growth, and now we’ll dance around in denial about doing nothing as a solution.

    Currently, the only solution to defeat inflation is to have a recession, but that’s in limbo too.

    Einstein allegedly said, “We can’t solve problems by using the same kind of thinking we used when we created them.”

    • Wolf Richter says:

      “IMHO, the solution would have been to not have raised rates, two years ago, but to let inflation run hot.”

      They did do that for all of 2021, and inflation ran hot and was spiraling toward 10% by early 2022 and would have spiral higher, as for example in Turkey, had the Fed not cracked down with its 5.5% rates and QT. Once you get 20% or 30% inflation, it’s very difficult to get it back down. You’re just totally destroying the currency and you’re seriously messing up the economy. And you’re creating impoverishment across a big part of the population.

    • Aman says:

      This is very dangerous thinking. Humans are not blocks that you can keep rearranging. Events change them.

      With the kind of inflation you are recommending, society would have been changed forever. You can’t have 10%+ inflation and everything else remaining same.

      Also policy makers don’t have a dial to determine how much inflation they want. Which is why the Fed keeps under and overshooting on its target.

      That is the kind of linear thinking at Fed that has got us into this mess in the first place.

      • John H. says:


        Regarding the management of volatile beings:
        “Conveniently, we follow the French practice of using a special designation: dirigism, a category different from both the free and the authoritarian type, meaning that governmental (or delegated) agencies take over a major section of economic activities and direct the rest, more or less. Characteristic of directed economies is the fact that their policies are implemented largely by three techniques: bureaucratic controls, re-distributive taxes, and subsidies. The intensity and extent of dirigist ventures may vary from outright authoritarian rules, incisive regulations and restrictions, to indirect influences, mild pressures, and active encouragement. But incomplete, piecemeal, and un-co-ordinated as it may be, dirigism implies full-fledged public control over a major sector of the economy with deep incursions into the remaining private sector. In one respect it operates under the same assumption as a centrally planned system, that management by a small number of presumably disinterested and competent administrators is preferable to letting a multitude of consumers and producers make up their own “selfish” minds.
        — Melchior Palyi, Managed Money at the Crossroads, Chapter 6: Built-in Inflation and Perverted Controls, University of Norte Dame Press, 1959 [another author to add to your list!]

        Dirigism is a largely forgotten term, but it was known and debated in the 1960’s.

        • John H. says:


          not “volatile beings,” should be “volitive” (as in volition).

          Damnable spellcheck.

        • 91B20 1stCav (AUS) says:

          John H. – would enjoy hearing Palyi in a contemporary debate with many of the general public here vis. retail gasoline/grocery pricing and the perceived value of price stability…best.

          may we all find a better day.

        • John H. says:

          That would indeed be a treat. Palyi might reproduce a line from a few pages after the quote above (e.g. “Price ceilings and rationing are twins, but rarely born together.”) Among other wisdom, especially in the book’s concluding chapter.

          Palyi’s background at Duetsche Bank in the 1920’s and 1930’s is interesting and makes him pertinent to this site. He also had a radio show on economics in Chicago and did a weekly column for the Chicago Tribune (sort of an earlier Wolf Richter!?). The general population was actually interested in economics back then!

    • Home toad says:

      How’s the economy there in bedrock fred?. Is Mr slates business down in the quarry still going strong, maybe your retired by now. Hope Wilmas health is good,
      I always wondered if she was a true redhead

      I hear rock stoners in rehab…?
      All the best Fred and excellent comment as always.

  21. SpencerG says:

    Chuckle… I just saw this headline on CNBC…

    Stocks making the biggest premarket moves: Peloton, Carvana, Cigna, Qualcomm…

    Without even looking I am going to guess that Peloton (one of Wolf’s “imploded stocks”) is not going to have good news to relay to the markets.

  22. JG says:

    Powell loves to “talk hawk”, but he walks dove. Rates are not at all restrictive for most of the economy, especially with existing home comp prices. WOLF, your own artice/charts just showed how home comp prices have been going back UP and in many areas surpassing the 2022 supposed peak! The middle class income earners need deflation (NOT DISINFLATION – huge difference) in all goods and services, including home comp prices of existing homes. Just because some apartment rents are coming down, it means nothing for existing SFH comp prices. Powell will absolutely NOT raise rates. He does have an election to help with in NOV. I know I know, the FED is not political. Oy vey. Home prices and infaltion “higher for longer”

  23. JG says:

    M2 Money Supply been increasing huge since OCT 2023…QT?…LOL! Where is this $ coming from?

    • Wolf Richter says:

      1. M2 has NOT “been increasing huge since OCT 2023”– see chart

      2. What is included/excluded in M2, designed decades ago, is no longer appropriate today. For example, M2 includes CDs of $100k and less, but EXCLUDES CDs of over $100k. There are other issues with M2, including ON RRPs (which took all of the QT so far). These iniquities cause the M2 measure to be meaningless, which is why I don’t cover it. The Fed’s balance sheet gives you a much more valid indication of money supply direction.

      • fullbellyemptymind says:

        When you speak of the Fed Balance Sheet are you referring to the Fred series labeled:

        “Assets: Total Assets: Total Assets (Less Eliminations from Consolidation): Wednesday Level (WALCL)”

        You know my interest here, and if I dump M2 I’m gonna have to get a money supply measure in there. (Taking the opportunity to ask these questions when legitimately on topic)

        • Wolf Richter says:

          Looks like you’re referring to the FRED database which collects the data from various other agencies, including from the Fed. But I don’t get it from there, I get it from the Federal Reserve Board site. And this chart is what it is. I will post my new updated chart in my QT article later today after the Fed releases its new numbers:

        • fullbellyemptymind says:

          Wie immer – vielen dank

  24. BrianM says:

    Wolf, I was a bit surprised that there weren’t any changes to how the excess treasuries are reinvested. Given your earlier writing on the Fed’s desire to shift to holding a larger portion of T-bills (vs running them off now in below cap months), I would have thought this might have been the time to announce a change. Do you think that is still in the works?

    • Wolf Richter says:

      They said at the time that the decision on T-bills replacing notes and bonds will come after the decision on the pace of QT. One step at a time. They’re not going to throw too many issues all at once at the markets.

  25. Xaver says:

    It will be interesting to watch. Rates may be increased or not, they will be cut when there’s a calamity I think.

    • WB says:

      Unfortunately, I think debts and deficits matter now. The Fed must hold the line and force CONgress to be more fiscally responsible. It’s that or we go “full Argentina”, and I don’t think anyone wants that. However, the behavior of some very privileged youth on campuses around the country may indicate otherwise.

      Interesting times.

      • JimL says:

        We are no where near going full Argentina. It is absurd to even start to think about the comparison.

        As for youth on campuses, you just yell at them to get off your lawn. Maybe yell at the clouds too.

        Please get better sources of information that don’t take advantage of your fear. Democracy relies on a well informed populace.

  26. Brendan says:

    Q: What do the Eclipse and J-Pow’s soft shoe shuffle have in common?
    A: Totality man.

  27. Alba says:

    Down here in Mexico, at least we’re getting a decent real return on government bonds. The yield on CETES is ~ 11% annualized on inflation of 4.6%. The election will almost certainly go Morena’s way, so it’s doubtful that the peso will be impacted much. Never thought I’d view investing in MXN bonds as the safer bet.

    • David in Texas says:

      Looking at the currency charts, the Peso has been the strongest currency vs the USD for the past year, so you’re getting the best of both worlds: a high interest rate on an appreciating currency.

  28. Debt-Free-Bubba says:

    Howdy Folks. Hopefully they will say ” ZIRP is dead, Normal for Forever, “.
    We never should have ZIRPed. Sorry I know they will never admit that mistake…….. Too many got too rich……..
    Sober Sailor till death. I worked for it and will party on.

    • spencer says:

      The mistake was paying interest on interbank demand deposits. This sterilized reserves and artificially suppressed interest rates.

  29. Bear Hunter says:

    Perhaps they want to dump MBS before they become worthless?

  30. Desert Dweller says:

    A close buddy of mine is going for his PhD in economics, and from time to time we discuss the economy and the stock and bond markets. We were talking about current economy and whether or not the Fed should cut. I offered that rates weren’t high enough yet, and by historical standards they really aren’t all that high. My buddy looked at me like I was crazy and then added that if the Fed doesn’t cut soon, the country may go into recession. I then asked if it was the Fed’s job to prevent recessions, and he responded in a long roundabout way that Fed’s MMT policies were about ensuring the country will l never have to suffer another recession. The discussion went on for a while longer, here’s the takeaway: according to the current crop of economists, the Fed has a solution for every monetary crisis and every phase of the economic and business cycle – print more money.

    • MB says:

      That’s interesting. Back when I was in school they were teaching that a recession is a normal part of business cycles to cool down the economy when it overheats and prevent excess speculation. No one wants a 2008 but mild recessions are a normal part of the business cycle and arguably do less damage then inflation and allowing giant bubbles to accumulate. I’m curious what University this person is at?

  31. spencer says:

    During the GFC, Bernanke actually drained reserves tightening monetary policy for 29 contiguous months. That’s what caused the recession.

    Powell on the other hand is draining excess reserve capacity which has had no effect on the money stock, properly defined. I.e., draining O/N RRPs increases both the money stock and reserves. And deposits have just been shifted into large CDs (which the banks create).

  32. spencer says:

    The difference is that Bernanke had a money multiplier of 206, while when Powell drains excess reserves there has been no money multiplier.

    That is it must be that the FED is draining reserves from banks and not nonbanks.

  33. Nick Kelly says:

    And today a relief rally? Does just floating the idea of a rate increase make no change is good news?

  34. PaulM says:

    The doves at the fed are clearly going for inflation big time. The man on the street knows it and the stock markets definitely know it.

    Rates need increasing. Urgently.

  35. Redundant says:

    Does anyone have thoughts on how demographics are impacting the Fed tool kit?

    Fred has a beautiful chart called:

    Population ages 65 and above for the United States (SPPOP65UPTOZSUSA)

    What seems amazing is the amount of people near retirement age today, versus the magical eras around the Volker Fed.

    Inflation seems to be acting differently today, but that’s subjective.

    Additionally, perhaps obviously, there’s a tsunami of Boomers that probably have homes paid for, cars paid for, decent retirement portfolios, etc. the wealth effect.

    My assumption is, a huge amount of this cohort wasn’t impacted by Fed rate hikes, and that they probably benefited from higher money market funds. Obviously a screaming stock market and housing market adds to their overall enthusiasm.

    Additionally, going into the pandemic, with Zirp, a tsunami of corporations took advantage of generational low rates.

    Back to the chart, the change in population makeup along with corporations insulting themselves from inflation, IMHO, made the Fed somewhat irrelevant in this inflation cycle.

    It just seems they are using the same playbook from fifty years ago and basically not making progress today.

    If anything, the wealth effect is directly fueling inflation. Boomer stability is probably a huge reason we keep hearing about resilience and strong consumption.

    I’m not complaining but see this as a contributing factor to the bifurcated economy, that seems so puzzling.

    BTW, I love higher rates!

    • Goldendome says:

      Yes-great observation Redundant on all counts.

    • 91B20 1stCav (AUS) says:

      Red – surely a typo or auto-whatever, but am guessing that corps. ‘insulated’ rather than ‘insulted’ themselves (…bonus entertainment wrought via spelling/language-wrangling in EVERY exciting WS comments episode, these days…).

      may we all find a better day.

  36. RedRaider says:

    Someone mentioned the middle finger the other day.

    Call up a 1 min chart of the Dow for three days.

    In plain view of little children…. this has to stop :-)

  37. MDM says:

    If the FED intended to get rid of MBS entirely, I would expect them to say:

    “to hold Treasury securities in the longer run,”

    and not:

    “to hold primarily Treasury securities in the longer run”

    It would also be useful to know what a “longer run” is.

    • Wolf Richter says:

      “Primarily” because they also hold some other stuff, such as loans and gold.

      • MDM says:

        Where is the exclusion of MBS from “other stuff?”

        • Wolf Richter says:

          You can look up all the “other stuff” on the balance sheet:


          Scroll down to #5 Consolidated Statement of Condition of All Federal Reserve Banks. The first line-time is “Gold certificate account” followed by “Special drawing rights certificate account,” followed by “Coin,” followed by the various categories of securities, etc.

          This “other stuff” is just small stuff, usually without movement, so I don’t discuss it.

  38. Glen says:

    I work in software in an area where many projects fail at high expense. The post mortems often blame timelines or the software purchased or the system integrator but often completely bypass the real causes which is a lack of strategy, planning and detailed requirements.
    That in my mind is a good analogy to our current issues and system. Sure, right now this or that might be able to be tweaked but how long be before the next major issues because of systemic issues that are for all practical purposes are impossible to solve. I challenge the premise that the boat has to naturally be rocky and that it is failures in the system that we have come to accept as the norm. After all, a rocky boat doesn’t impact all passengers equally.

  39. Steria75 says:

    Wolf, I guess there are many teenagers on this blog that were born in 2009.
    That would make them 15 going on 16.
    It’s a shame these people never studied history.
    Even recent history to them is out of their league.
    Message to many of you here:
    You guys are super ignorant.
    2008 they started the financial bailout with GWB at the helm. Henry Paulson a former Goldman Sachs executive and Republican was paramount in the bailout. Did anyone read his book? Probably not.
    No wonder Wolf gets annoyed with you people.
    I forgive the ones who are not living in the US for their ignorance but the rest of you who spew out idiocy ought to be deeply ashamed of your performances on here.

    • Glen says:

      Wow, just wow. My guess is there are few teenagers on this site but even if so they are full time students who have a full course load and not sure a book about the financial crisis would be required reading. I do get where my teenage son and his generation use the word boomer now. Perhaps better to look at the generations who allowed that, climate change and other problems we face now to be left to younger generations.

    • JS says:

      I highly doubt teenagers are reading this blog. Maybe r/stocks or some other YOLO site promoting leverage/gambling. My guess is the average age here is 50+.

  40. randy oldman says:

    Sometimes all this palaver makes me think of dung beetles frantically trying to figure out what the elephants are up to.

  41. LouisDeLaSmart says:

    I love how the statement “wait and see” is placed there as if the FED has a choice, or at least does not want to seem completely powerless when facing such inflation numbers. There is only one option…Continue QT and adjust % based on inflation numbers. That is all. Consistency.

  42. themsicles says:

    thank you Wolf for all your insights.

  43. n0b0dy says:

    Is there a timeframe of persistent inflation that would trigger a rate hike?

    “These are going to be judgment calls. Clearly restrictive monetary policy needs more time to do its job. That’s pretty clear based on what we’re seeing.”

    i think whats ‘pretty clear’ is, that: the ‘policy’ is NOT restrictive enough.
    NOT that it needs ‘more time’.

    this is the same excuse as the whole ‘inflation is transitory’ assumption they had PRIOR TO inflation being anything BUT.

    the ‘more time’ that elapses, the more the market/people/entities get USED TO the so-called ‘restrictive’ policy, and it becomes NORMALIZED.. thus negating the very point of it in the first place.

    if the fed was indeed trying to blunt inflation, as it PURPORTS to do.. then it would not be telegraphing everything well in advance, executing the ‘script’ to a “T”, and giving no surprises.

    it comes down to the basic concepts of ‘fear’ and ‘greed’. absent ‘fear’, ‘greed’ will prevail. and that means more spending.. better now than down the road, since it will cost more later..

    the market has no fear of the fed at all.
    as WR has correctly pointed out in the past.. there is a whole lot of money out there now making 5+% return, which is getting spent/re-invested to enable both inflation and continued gargantuan deficit spending to continue…

    • SpencerG says:

      The Fed is trying to get past the election. That is the source of their wait-and see schtick. Simple as that. As an institution it has a long-term interest in not being seen as political… so if they can ride this policy out for just five more months without an explosion in inflation (or a recession) then they will have been successful.

  44. Bear Hunter says:

    Wait and see is right up there will hold my beer. How could anything go wrong?

  45. Imposter says:

    I’ve had to cut spending because my income doesn’t go far anymore. Yet Congress and Administration spend like there is no tomorrow.

    This is feeling like the Fed is beating my dog because the Congress’s dog bit someone across town, AND expect me to pay for their dog’s damages.

  46. Merida says:

    Excellent summary. Oil prices are down which is a huge plus. Let’s see how inflation goes pushing forward. Thanks Wolf for your insights!

  47. Josh Kjoelen says:

    Would love to hear the Fed explicitly say they will not purchase MBS in future QE cycles. An apology for exacerbating existing inflationary pressure on housing not required.

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