Watching today's rate decision was fun

[Freedom56]

Keep an eye on rates. The ten year dropped below support of 2.81 and closed at 2.75 and the 30 year fell below 3%. The 10 year is getting closer to inversion with the 2 year. Here is the dilemma for equities, if rates go higher, the market will tank fast. If rates stay the same there will be a gradual decline to normal valuations and bank stocks will continue to tank as the interest rate spreads are too narrow. Many companies will start to deleverage if they have the cash flow to do so or from asset sales. Brick and mortar retailers on the other hand are facing some serious headwinds with high debt and declining sales and their landlords (the Mall REITS) are facing the same issues. 2019 maybe a year for sectors like utilities.

 

[joeea]

Personally I think the current Fed is doing a pretty decent job. I think their mandate is for full employment and a symmetric inflation target of 2%. Today the unemployment rate is very low (3.7% or so IIRC) and inflation is just under 2%.

I agree with both their goals and that approach to attaining those goals.

We should all thank the Fed for their monetary policy over the past 10 years. They helped right the economy and keep it on the correct path.

 

[Spock]

I agree with both their goals and that approach to attaining those goals.

We should all thank the Fed for their monetary policy over the past 10 years. They helped right the economy and keep it on the correct path.

Alternatively: They kicked the can down the road to create a much bigger kaboom later when you are too old to go back to work to deal with the fallout.


Just keep whistling past the grave yard (and walk a little faster...)

 

[Free bird]

Historic normal is around 5%. Probably won't be a straight line to normal. Might take 5-10 years.

 

[imoldernu]

From here:
https://www.axios.com/newsletters/axios-markets-a7dccfd8-2b08-4f7b-afe9-f4f5fdb8df7e.html

If your stocks, bonds, and real estate holdings were worth the same today, relative to GDP, that they were worth in 1995, they would have to crash in value by 33%, or $43 trillion. That's more than enough to trigger another financial crisis. (The stock market right now has lost about $4.1 trillion, compared to its all-time high in September.)

 

[JDARNELL]

In his press conference Powell stated that the Fed planned on, and continues to plan on, the balance sheet moderation activity being on autopilot and using rate policy to adjust and respond to the activities in achieving their mandated goals.

I believe they are selling $50B per month currently. I also think that there is some long term balance sheet target ($2T-$2.5T maybe?), so if they get to that point they would presumably shut down or slow down the sales.

I believe someone asked Chairman Powell about the tightening effect of the balance sheet sales and in his answer he seemed to me to state that he did not believe it to have much of an impact. Reading between the lines, I think he seems to think that rate policy and rate changes have a larger impact.

@Free bird, I did watch the entire press conference with Chairman Powell. He stuck very closely in his answers to the Federal Reserves mandate from Congress. He stated clearly that the FOMC is not political and is determined to stay that way (when asked whether the President's recent comments affected the Fed's decision today). He also indicated that they don't really take the stock market behavior itself into consideration - they look more at underlying economic data.

@JDARNELL, Chairman Powell did state clearly several times that the FOMC is predicting a moderation in growth in 2019, but they still expect growth. In other words, the economy is going from 3.x% growth this year to ~2.5% growth next year. But still growth, not a contraction. Not sure if that's what you were meaning in your post #15.

And a general comment: Personally I think the current Fed is doing a pretty decent job. I think their mandate is for full employment and a symmetric inflation target of 2%. Today the unemployment rate is very low (3.7% or so IIRC) and inflation is just under 2%.

Yep growth is growth but you know how it will be. Growth was x% now it’s less than x%. The sky is falling. It’s the others sides fault blah blah blah.

 

[joeea]

Historic normal is around 5%. Probably won't be a straight line to normal. Might take 5-10 years.

Historic normal what?

 

[joeea]

Alternatively: They kicked the can down the road to create a much bigger kaboom later when you are too old to go back to work to deal with the fallout.

No idea which can you imagine they kicked.

 

[Free bird]

Fed funds historic normal is 4-5%. But can't find where I read that. From 1950 to 2018 the bank lending rate average is 6.63%. Rates are still historically low.

 

[RAE]

Alternatively: They kicked the can down the road to create a much bigger kaboom later when you are too old to go back to work to deal with the fallout.


Just keep whistling past the grave yard (and walk a little faster...)

+1. The whole Quantitative Easing thing was (and is) an experiment, and we still don't know how it is going to end. The hard truth is that nobody (including Powell) knows how to extricate the world safely from this experiment. Yes, it may have been necessary to try something like this to avoid a major financial crisis. And yes, it apparently worked for a while, but it also has to be unwound at some point, and that is where the trouble starts. I have read that Bernanke felt that reversing QE was too dangerous, and recommended that the economy simply be allowed to "grow into" the Fed's 4.5 trillion dollar balance sheet over time. But Yellen started the unwind, and Powell has continued it, so now we enter uncharted waters, which I'm afraid could get pretty ugly. Time will tell, I guess.

 

[explanade]

Maybe the fed is participating in mission overreach. The wheels did come off the banking system. Maybe they don't feel confident all the lug nuts are on & tight.

That's what people have mentioned, that they want a reduced balanced sheet and rates high enough in case there's something as bad as the 2008-09 recession again, in which case they'd have the ability to cut rates and do QE again if necessary.

 

[explanade]

+1. The whole Quantitative Easing thing was (and is) an experiment, and we still don't know how it is going to end. The hard truth is that nobody (including Powell) knows how to extricate the world safely from this experiment. Yes, it may have been necessary to try something like this to avoid a major financial crisis. And yes, it apparently worked for a while, but it also has to be unwound at some point, and that is where the trouble starts. I have read that Bernanke felt that reversing QE was too dangerous, and recommended that the economy simply be allowed to "grow into" the Fed's 4.5 trillion dollar balance sheet over time. But Yellen started the unwind, and Powell has continued it, so now we enter uncharted waters, which I'm afraid could get pretty ugly. Time will tell, I guess.

In the 2008-2010 period a big threat was deflation.

That is why they went to QE, while the Austrian School followers said let it crash down hard, i.e. don't do anything -- no TARP, no fiscal stimulus, no monetary easing.

Then it would have bounced up much faster or so they claimed.

Nobody in power wanted to take that gamble. People were already suffering so they had to put out fires.

This has been the longest period of growth, even if it's "low growth" since post-war. Maybe ever.

Obviously the path they took has been good for many people, including many here.

Will there be some reckoning as they "normalize" rates and the balance sheet?

We will see.

 

[Spock]

No idea which can you imagine they kicked.

Name one problem that led to the 2008 crisis that has been fixed in the last 10 years.


Too Big to Fail banks? Nope... the Geithner/Paulson solution was to make them even bigger. The top 5 US banks now hold 40% of all deposits.


Re-enact Glass-Steagall to separate investment banks from commercial banking? Nope. Geithner/Paulson explicitly paired up BoA with Merrill Lynch, JP Morgan Chase with Bear Sterns, etc.


Ratings companies giving investment grade ratings to tranches of sub-prime loans? CEO so the ratings companies testified to congress that their ratings are merely opinions and therefore protected as free speech under the first amendment. As opinions, their ratings can not be held responsible for their accuracy



Even the "liar loans" are making a comeback.


Go read Dodd-Frank, the legislative response to the crisis (and since gutted as being too restrictive). It gives us untested concepts of "living wills" for banks, FDIC authority to take over practically anything, and the spectre of depositor bail-ins to recap banks.


If you don't like the image of kicking the can down the road, try "they loaded even more crap on to the manure spreader, set it to go even faster, and didn't fix what caused the wheels to almost come off in 2008".

 

[explanade]

People were losing jobs and homes at a very high rate.

Was that nothing?

 

[RAE]

People were losing jobs and homes at a very high rate.

Was that nothing?

QE addressed a crisis situation, and did keep things from getting far worse, at least in the short-term. The basic problem, though, is that we should not expect central bankers to solve fundamental structural problems with the economy - those should be addressed by policy makers. But of course, they weren't, so the Fed had to put a (4.5 trillion dollar) band-aid on the situation with QE. And QE, though it may have helped avert a crisis, and helped some people for a while, it also did a lot of damage to a lot of people, which you don't hear much about anymore. Here is an article from 2015 (Financial Times) that talks about all this:

https://www.ft.com/content/031b49ec-c415-11e4-9019-00144feab7de

Also, as I mentioned earlier, nobody knows how to unwind a 4.5 trillion dollar QE without causing severe economic repercussions. It's a huge experiment, and we are all the guinea pigs.

 

[capjak]

Well, that's only a guess on his part, because this type of thing has never been done before - so we are in uncharted territory.

+1

Powel: " I throughly investigated all my moves and have determined I have made Zero mistakes.... Next Question"

Translation.....We're...F'ed

 

[Free bird]

Pay me now or pay me later. Americans like later

 

[explanade]

Yeah they call it QT, quantitative tightening.

 

[JDARNELL]

So what would happen if they never unwound their balance sheet? My theory is at the end of the day does it really matter? You could make the case that people will lose faith in the US govt but where else are they gonna go? We are one of the best of the worst as it stands now. The govt controls the printing of money, the circulation of money, and the rates associated with it indirectly. Money changes hands and there are winners and losers but its still relative. It all seems smoke and mirrors to me.

 

[explanade]

I guess they want to reduce the balance sheet in case they have to increase it again at some point in the future, if they have to.

 

[almost there]

Mind boggling how slow CD's react to rate hikes...............Looking at the 5000 year interest rate chart. We are still well below normal..............As someone mentioned, QE was an experiment. I have no idea how it will effect the near future 10-20-30 years...

 

[explanade]

Someone pointed out on CNBC that they've been winding the balance sheet for most of this year and the market was riding up most of this year.

Also heard that the Fed's current course of hiking rates or interest rate normalization has been much slower than the last time the Fed raised rates in 2004-05.

 

[joeea]

If you don't like the image of kicking the can down the road, try "they loaded even more crap on to the manure spreader, set it to go even faster, and didn't fix what caused the wheels to almost come off in 2008".

For most, kicking the can down the road is putting off for later a decision/task that must be accomplished.

So apparently for you, making choices that you don't like is the same as kicking the can down the road. Okay.