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Old 12-19-2018, 02:50 PM   #21
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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%.
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Old 12-19-2018, 02:53 PM   #22
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There are many whose investments depend on interest rates returning to normal.
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Old 12-19-2018, 02:53 PM   #23
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We have plenty of non-political entities in the government such as the FBI, IRS, DOJ, EPA etc....
Each of those is most definitely "political" when the appointee running them decides what will or will not be prosecuted/defended/401c3'd, etc.
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Old 12-19-2018, 02:57 PM   #24
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...
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.
....

The Fed isn't selling anything.
As MBS and Treasuries mature, the Fed is not using the payoff to buy new securities to replace them.
https://www.stlouisfed.org/open-vaul...-balance-sheet


Which kinda raises the question "how is this 'tightening'?" and causing all the EM grief when all they are doing is stop adding more to their balance sheet? I see it drains liquidity in that funds go to the Fed and don't recirc back out, but they just invented those funds with a keystroke in a spreadsheet to begin with...
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Old 12-19-2018, 03:15 PM   #25
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The Fed isn't selling anything.
As MBS and Treasuries mature, the Fed is not using the payoff to buy new securities to replace them.
https://www.stlouisfed.org/open-vaul...-balance-sheet


Which kinda raises the question "how is this 'tightening'?" and causing all the EM grief when all they are doing is stop adding more to their balance sheet? I see it drains liquidity in that funds go to the Fed and don't recirc back out, but they just invented those funds with a keystroke in a spreadsheet to begin with...
Thanks for the article; I found it quite accessible. I think you're right; I should have used "reducing the balance sheet by $50B monthly" instead.

I don't know the answer to your question. I'm an amateur at Fed stuff. Most of the financial folks I listen to talk about it as tightening liquidity; I just assume they're right. I was a little surprised at Chairman Powell's implication that the balance sheet reductions were not as impactful on the economy as the financial pundits seem to imply.
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Old 12-19-2018, 03:15 PM   #26
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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.
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Old 12-19-2018, 03:23 PM   #27
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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.
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Old 12-19-2018, 03:26 PM   #28
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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...)
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Old 12-19-2018, 03:44 PM   #29
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Historic normal is around 5%. Probably won't be a straight line to normal. Might take 5-10 years.
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Old 12-19-2018, 03:45 PM   #30
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From here:
https://www.axios.com/newsletters/ax...5fdb8df7e.html

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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.)
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Old 12-19-2018, 04:27 PM   #31
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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.
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Old 12-19-2018, 05:08 PM   #32
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Historic normal is around 5%. Probably won't be a straight line to normal. Might take 5-10 years.
Historic normal what?
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Old 12-19-2018, 05:09 PM   #33
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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.
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Old 12-19-2018, 05:34 PM   #34
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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.
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Old 12-19-2018, 05:59 PM   #35
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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.
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Old 12-19-2018, 07:37 PM   #36
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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.
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Old 12-19-2018, 07:57 PM   #37
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+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.
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Old 12-20-2018, 08:15 AM   #38
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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".
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Old 12-20-2018, 11:13 AM   #39
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People were losing jobs and homes at a very high rate.

Was that nothing?
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Old 12-20-2018, 12:45 PM   #40
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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-...9-00144feab7de

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.
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