7 ms·

Fed flags rate hike 'soon,' plans for 'significantly reducing' balance sheet

29 points by ckastner 5y ago

soperj 5y ago
boredumb 5y ago
two more weeks to flatten the balance sheet
ipnon 5y ago
The fed balance sheet is absolutely massive.[0] One item that usually surprises folks not familiar with the money market is that the Fed owns 2.5 trillion dollars worth of mortgage-backed securities. That's 2,500 times a billion dollars worth of Americans' mortgages. If you are a homeowner in the United States, it's a good bet that the Federal Reserve has played some part in the financing of your very own home. This project of buying regular Americans' mortgages began during the Great Recession, when the government was willing to do whatever it takes to keep the economy from imploding more than eventually did anyway. You can buy a lot of homes with 2.5 trillion dollars! This is a great example of a temporary program that inevitably became permanent. How would you even sell 2.5 trillion dollars worth of anything? Who could buy it? [0] https://www.federalreserve.gov/monetarypolicy/November-2021-Federal-Reserve-Balance-Sheet-Developments.htm https://www.federalreserve.gov/monetarypolicy/November-2021-...
- jdsully 5y ago
  The average mortgage is held for 8 years so theoretically they’d just age out if the fed stopped buying more.
  - kbelder 5y ago
    Yeah, but the fed stopping buying would cause a huge shift in demand. You can't really depend on any other variables in the market holding steady when such a large distortion is removed.
    - jdsully 5y ago
      They stopped in 2014 and we didn’t die (although there was the taper tantrum a year prior).
- eutropia 5y ago
  This might be a dumb series of questions but here it goes: Didn't we get into a huge mess because of mortgage-backed securities just 15 years ago? And you're telling me now instead of (i)banks owning them, the federal reserve owns them? Does anyone know what the general "rating" of those securities is? Isn't this dangerous? I know we trust our governments to handle things like nuclear weapons but this seems a bit more dangerous and opaque with far less oversight. Should we be concerned?
  - VirusNewbie 5y ago
    Banks are the federal reserve.
    - gruez 5y ago
      Only in the sense that banks hold shares in the federal reserve, but since the federal reserve is controlled by the federal government it's not really comparable to holding shares in JP Morgan Chase. It essentially functions as a government agency.
      - VirusNewbie 5y ago
        Do you think there is a separate bank that literally holds the money? Do you think the US government owns the assets owned by the federal reserve?
        gruez 5y ago
        >Do you think there is a separate bank that literally holds the money? holds what money? all the money in the US? all the money on the fed's balance sheets? >Do you think the US government owns the assets owned by the federal reserve? What do you think ownership means? The federal government might not "own" the assets in the sense that they can raid the federal reserve's holdings, but they (or their appointees) can very well direct the federal reserve to sell/buy holdings at will. They can also direct the federal reserve to buy government debt, which is essentially giving the government money.
- naveen99 5y ago
  The us separates government debt from fed assets. If you net it out, the debt is even more massive, especially compared to some countries which just have sovereign wealth funds, a budget surplus, and no debt. best to just look at the global economy, and find your place in it.
disambiguation 5y ago
There's a lot about economics I don't understand. Could someone explain (or point me to a resource on) how raising rates helps to control / reduce inflation?
- voisin 5y ago
  Raising rates means projects that would inevitably be paid for in part by debt would be more expensive than when rates were lower. So projects at the margin suddenly aren’t profitable and are cancelled. Less demand at the margins means less pricing pressure upwards, so less inflation.
- AtlasBarfed 5y ago
  Demand is currently greater than supply in so many ways (see: computer chips). A lot of inflation is because the suppliers can "gouge" customers. It's why the car makers are really profitable but selling way less: they only sell the expensive versions of what they can make, and then there is gouging on top of that by the dealers for example. But if you raise rates, then consumers and business buyers can't access as much money on cheap credit, so they buy less / delay / make do with what they have. Demand for goods drops, so the difference between demand and supply evens out. But slowing the exchange of goods and services means GDP slows ... is another way of saying "recession". Western economies have been floating on zero/negative credit for so long to keep their economies "stable" aka propped up. We'll see what happens... If you don't understand why the FED changing interest rates has such cascading changes, it's because all the banks that you would get a loan from peg their interest rates to the FED's (plus a markup), because the FED supplies money to banks when they need at by loaning it to them ... at the federal rate.
- scottiebarnes 5y ago
  - Interest rate is the cost of borrowing money; if the cost is high, people/businesses generally borrow less - Borrowing money involves the creation of new money (fractional reserve banking); when you get a loan from a bank, they only have to have a certain portion of that backed by actual cash, the rest is created out of thin air. So you get your loan and spend it immediately. When enough people are borrowing, there is more money flying around; an economy can only produce so many "things" at once, so we have to compete over our purchases. This demand, fueled by borrowing, pushes prices up.
sschueller 5y ago
Likely and soon isn't actually doing it. It seems they are kicking this turd down the road hoping that just the threat would make things turn around.
- nine_zeros 5y ago
  Sounds like a good plan. Let the speculators take losses on their carry earnings while labor continues with their paltry salaries anyway.
- throwoutway 5y ago
  They started doing it; then Covid happened and reversed everything for two years. Worst possible timing all around

29 points by ckastner 5y ago

soperj 5y ago

boredumb 5y ago

two more weeks to flatten the balance sheet

ipnon 5y ago

The fed balance sheet is absolutely massive.[0] One item that usually surprises folks not familiar with the money market is that the Fed owns 2.5 trillion dollars worth of mortgage-backed securities. That's 2,500 times a billion dollars worth of Americans' mortgages. If you are a homeowner in the United States, it's a good bet that the Federal Reserve has played some part in the financing of your very own home. This project of buying regular Americans' mortgages began during the Great Recession, when the government was willing to do whatever it takes to keep the economy from imploding more than eventually did anyway. You can buy a lot of homes with 2.5 trillion dollars! This is a great example of a temporary program that inevitably became permanent. How would you even sell 2.5 trillion dollars worth of anything? Who could buy it? [0] https://www.federalreserve.gov/monetarypolicy/November-2021-Federal-Reserve-Balance-Sheet-Developments.htm https://www.federalreserve.gov/monetarypolicy/November-2021-...

jdsully 5y ago
The average mortgage is held for 8 years so theoretically they’d just age out if the fed stopped buying more.
- kbelder 5y ago
  Yeah, but the fed stopping buying would cause a huge shift in demand. You can't really depend on any other variables in the market holding steady when such a large distortion is removed.
  - jdsully 5y ago
    They stopped in 2014 and we didn’t die (although there was the taper tantrum a year prior).
eutropia 5y ago
This might be a dumb series of questions but here it goes: Didn't we get into a huge mess because of mortgage-backed securities just 15 years ago? And you're telling me now instead of (i)banks owning them, the federal reserve owns them? Does anyone know what the general "rating" of those securities is? Isn't this dangerous? I know we trust our governments to handle things like nuclear weapons but this seems a bit more dangerous and opaque with far less oversight. Should we be concerned?
- VirusNewbie 5y ago
  Banks are the federal reserve.
  - gruez 5y ago
    Only in the sense that banks hold shares in the federal reserve, but since the federal reserve is controlled by the federal government it's not really comparable to holding shares in JP Morgan Chase. It essentially functions as a government agency.
    - VirusNewbie 5y ago
      Do you think there is a separate bank that literally holds the money? Do you think the US government owns the assets owned by the federal reserve?
      - gruez 5y ago
        >Do you think there is a separate bank that literally holds the money? holds what money? all the money in the US? all the money on the fed's balance sheets? >Do you think the US government owns the assets owned by the federal reserve? What do you think ownership means? The federal government might not "own" the assets in the sense that they can raid the federal reserve's holdings, but they (or their appointees) can very well direct the federal reserve to sell/buy holdings at will. They can also direct the federal reserve to buy government debt, which is essentially giving the government money.
naveen99 5y ago
The us separates government debt from fed assets. If you net it out, the debt is even more massive, especially compared to some countries which just have sovereign wealth funds, a budget surplus, and no debt. best to just look at the global economy, and find your place in it.

disambiguation 5y ago

There's a lot about economics I don't understand. Could someone explain (or point me to a resource on) how raising rates helps to control / reduce inflation?

voisin 5y ago
Raising rates means projects that would inevitably be paid for in part by debt would be more expensive than when rates were lower. So projects at the margin suddenly aren’t profitable and are cancelled. Less demand at the margins means less pricing pressure upwards, so less inflation.
AtlasBarfed 5y ago
Demand is currently greater than supply in so many ways (see: computer chips). A lot of inflation is because the suppliers can "gouge" customers. It's why the car makers are really profitable but selling way less: they only sell the expensive versions of what they can make, and then there is gouging on top of that by the dealers for example. But if you raise rates, then consumers and business buyers can't access as much money on cheap credit, so they buy less / delay / make do with what they have. Demand for goods drops, so the difference between demand and supply evens out. But slowing the exchange of goods and services means GDP slows ... is another way of saying "recession". Western economies have been floating on zero/negative credit for so long to keep their economies "stable" aka propped up. We'll see what happens... If you don't understand why the FED changing interest rates has such cascading changes, it's because all the banks that you would get a loan from peg their interest rates to the FED's (plus a markup), because the FED supplies money to banks when they need at by loaning it to them ... at the federal rate.
scottiebarnes 5y ago
- Interest rate is the cost of borrowing money; if the cost is high, people/businesses generally borrow less - Borrowing money involves the creation of new money (fractional reserve banking); when you get a loan from a bank, they only have to have a certain portion of that backed by actual cash, the rest is created out of thin air. So you get your loan and spend it immediately. When enough people are borrowing, there is more money flying around; an economy can only produce so many "things" at once, so we have to compete over our purchases. This demand, fueled by borrowing, pushes prices up.

sschueller 5y ago

Likely and soon isn't actually doing it. It seems they are kicking this turd down the road hoping that just the threat would make things turn around.

nine_zeros 5y ago
Sounds like a good plan. Let the speculators take losses on their carry earnings while labor continues with their paltry salaries anyway.
throwoutway 5y ago
They started doing it; then Covid happened and reversed everything for two years. Worst possible timing all around