Fed holds rates, sets date to unwind $4.5 trillion balance sheet

[kgtest]

10 billion a month ramping up to 50 billion a month has got to be deflationary and will contract the money supply. QE was like rocket fuel for the markets, this is QE in reverse. Uncharted territory ahead.

Do you think the PRK has a present waiting when the rates rise? That would be a double x factor...and MAYBE the only thing to force enough fear for a temporary correction, or bear. Either way the drip is getting cut off, and the fiends are gonna have to find cheap money somewhere else. Lots of cash heavy corps yet.

 

[Totoro]

I'm inclined to believe the tipping point might be 10 year treasuries exceeding to 3%. At least that's what bond guru Gundlach opined about a year ago.

I'm with you on this one. Stocks can be thought of as an unsecured junior loan with perpetual duration. The interest rate of that loan is the earnings yield (inverse of P/E) is about 3.2%.

Now, when bonds hit 3% they are roughly on par with stocks, only bonds are senior and are shorter duration. So, that wouldn't make sense.

While the story and correlation isn't perfect, you'll rarely find situations where stock yields are below bond yields for long.

Another danger zone is when inflation goes above earnings yield. That never ends well.

 

[YVRRocketSurgery]

I don't agree that QE flooded the entire economy with money. Otherwise, there would have been major inflation across the board. Instead, we've seen certain areas benefit and increase in value.

Similarly, I'm not sure stopping QE and unwinding the balance sheet will mirror in the opposite result. Don't think it's that simple. Agree however, it's uncharted territory and it should be interesting.

 

[GrayHare]

CPI inflation correlates more with the velocity of money than with the money supply. Just having more money around (supply) does not in itself cause inflation, but rapid and frequent spending of it (velocity) does.

 

[audreyh1]

CPI inflation is also caused by wage inflation. We haven't had serious wage inflation in this country for s very long time. Unemployment was very high after 2008, and even though it has recovered and is now quite low, wage gains have been very weak. So there has been no wage pressure on inflation.

But the money did go somewhere - it went into financial assets. A lot of the bidding up of financial assets since 2012 can be happened during the various quantitative easing programs, so you would expect some reversal as the easing programs are wound down.

 

[Totoro]

I don't agree that QE flooded the entire economy with money. Otherwise, there would have been major inflation across the board.

In 1929 there was double digit deflation (-30% overall I think). The belief is not that QE caused inflation, but stopped similar deflation from happening. There indeed hardly was any.

Since it was a one-off we won't know for sure, but I do believe that QE actually did give a big push across the board to prices. In some areas the push was felt harder by the method chosen, but it was across the board.