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Since mid-April, the Fed has withdrawn ~$140B of liquidity from financial system
- jdkee 4y agoLong way to go to get to pre-pandemic levels.
- djbusby 4y agoHow do they actually withdraw the money (is it money, or is "liquidity" something different than M1).
- kuczmama 4y agoThey sell bonds. When they sell bonds, USD is converted into bonds. This has the effect of removing cash from a bank account and replacing it with an IOU from the government. The actual account balance stays the same, but where before you had cash, now you have government backed bonds. This is what they call "quantitative tightening".
- cs702 4y ago> They sell bonds. Yes. Or they let the bonds mature and don't buy replacement treasury and agency-sponsored bonds. Meanwhile, the US treasury has to issue new bonds to be able to repay the bonds that mature every month. Others (meaning the private sector) will have to buy all those bonds.
- whatever1 4y agoCorrect. The higher the interest rate the bonds offer the more likely someone will buy them.
- eximius 4y agobut those get turned back into cash at maturity?
- deleted 4y ago[deleted]
- kuczmama 4y agoYeah they do. Actually they get turned into cash after each coupon payment and at maturity. But it takes time (as long as 30 years for some bonds) to turn the bonds back into cash. So this has the effect of taking liquidity out of the economy, while not making anyone any poorer. When you take out liquidity, people's money are now locked in bonds and they can't buy anything else with that money unless they sell the bond. So this has the effect of reducing demand for other financial assets like stocks, real estates, cryptocurrency, etc in the short term. The hope is that in the long run, the economy will grow enough to be able to support the eventual increase in the money as the bonds mature.
- splistud 4y ago
- gfd 4y agoI've never bought a bond in my life (I didn't even know what they were) until someone told me they are currently offering 9.62% risk free returns! There's a very low limit on how much you can buy per year but this seems like a no brainer to me. https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm https://www.treasurydirect.gov/indiv/research/indepth/ibonds...
- Invictus0 4y agoMight not shock you to learn that the treasury has less than stellar customer service. I signed up to buy some I bonds and was told they couldn't verify my information (??? -- I gave them my SSN) and I would have to mail them a letter to proceed with signup.
- giobox 4y agoFor sure, but I wouldn't recommend someone ignore things like Treasury I Bonds on account of the shitty website/customer service - especially at current rate above 9 percent. I had similar issues, they do resolve them if you get in touch, albeit it took a few weeks to authorize my account.
- SketchySeaBeast 4y agoThat rate is only for 6 months: "That rate is applied to the 6 months after the purchase is made. For example, if you buy an I bond on July 1, 2022, the 9.62% would be applied through December 31, 2022." And here[1]: "What's the interest rate on an I bond you sell today? For the first six months you own it, the Series I bond we sell from May 2022 through October 2022 earns interest at an annual rate of 9.62 percent. A new rate will be set every six months based on this bond's fixed rate (0.00 percent) and on inflation." I'm not sure what the next return is - either way given the current mark that's excellent, just important to know that there is a definite time limit on that interest rate. [1] https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm https://www.treasurydirect.gov/indiv/research/indepth/ibonds...
- HellzStormer 4y ago
- RC_ITR 4y ago> They sell bonds. To be clear, they are not selling bonds. They are simply not buying new bonds to replenish those that reach maturity.
- wbsss4412 4y agoTo add, they sell mortgage backed securities too.
- wbsss4412 4y ago“Liquidity” literally means the ease with which assets can be converted into cash. In the context above it’s saying they have removed cash from the system, in specific reference to the M1 money supply. It’s one of those words that gets used in a bunch of different contexts without a consistent meaning, unfortunately.
- avg_dev 4y agoAnyone care to explain the significance of this? Ideally by stating your biases upfront :)
- headbee 4y agoAfter the Federal Reserve adds money to the economy, they usually want to take some of it back out. They take money out either by selling bonds or through taxes. The goal of removing money from the economy is sometimes to control inflation, but it's debated whether "printing money" actually affects inflation.
- usrnm 4y ago> it's debated whether "printing money" actually affects inflation The fed "printed" a shitton of money during Covid, dismissed all inflation concerns, and now, two years later, we're facing record inflation. I'd say there is a good chance that it does in fact affect inflation
- lesuorac 4y agoEven a broken clock can get the time correct. Happy to see an article or w/e from you in 2020 correctly predicting the actual inflation and when it was going to occur. Saying everytime the fed does something that it'll cause inflation and then waiting years to say "Ha told you so!" is not impressive and not even p-hacking since you don't even have a p variable.
- nomel 4y agoI know nothing of the economy, but I was pretty convinced by this: https://www.longtermtrends.net/m2-money-supply-vs-inflation/ https://www.longtermtrends.net/m2-money-supply-vs-inflation/ For most significant spikes, there's a two year delay to a spike in inflation. 2009 and 2012 being a clear violation of that observation.
- lesuorac 4y ago
- rdsubhas 4y agoJust doing rough back of the envelope math. Around 6T has been injected since the pandemic. It's taken 5 months to withdraw 140B. If they keep going at this rate, constantly down without flattening or going up, it will take 214 months or 18 years to go back to 2020 levels. Ignoring that the 2020 levels themselves were hyper injected from 1T to 4T by the 2009 crisis.
- JumpCrisscross 4y ago> they keep going at this rate The run-down rate more than doubled in August [1]. Current estimates to optimal balance sheet are about 4 to 5 years [2]. [1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... [2] https://advisors.vanguard.com/insights/article/thefedsplantoshrinkitsbalancesheetquickly https://advisors.vanguard.com/insights/article/thefedsplanto...
- divbzero 4y agoThe balance sheet shrunk from $8,874,620 million on August 3 to $8,822,401 million on September 7, a rate of about $50 billion per month or $600 billion per year. If continued, this rate of decrease would bring the balance sheet from $8.5 trillion down to $5.5 trillion by 2027, within range of the “optimal balance sheet” described in the Vanguard report.
- Retric 4y agoIt’s not a linear drop, the removed 20B from mid April to mid June. Then another 120B in under 3 months.
- viscanti 4y agoWasn't the 120B during a time when the FED was in a battle against inflation and making aggressive moves to raise rates? Are we to expect that it's the new normal for many years?
- onlyrealcuzzo 4y ago
- umarniz 4y agoI had to search what this graph actually meant and this post gave some context: https://www.americanactionforum.org/insight/tracker-the-federal-reserves-balance-sheet/ https://www.americanactionforum.org/insight/tracker-the-fede...
- purpleblue 4y agoThat's not very much.
- meltyness 4y ago"Mechanically, the Fed will reduce its securities holdings by not reinvesting the funds it receives from maturing securities[...], which will reduce [...] the size of its balance sheet." https://www.stlouisfed.org/open-vault/2022/may/how-will-fed-reduce-balance-sheet https://www.stlouisfed.org/open-vault/2022/may/how-will-fed-...
- RC_ITR 4y agoI wish more people would actually read this kind of stuff before commenting what they think is happening. Thank you.
- mandeepj 4y agoTo tackle inflation, will it be fair of US government to ask money back in small chunks from people who got it during Covid lock-downs?
- Invictus0 4y agoLol, as if the government has any idea of who it gave money to
- datalopers 4y agoThey've already lost most of it on cryptocurrencies, online gambling, and meme stocks
- ThunderSizzle 4y agoNot that fair, considering the US government closed down businesses during lockdowns. If the government did close anything in particular, I'd say the answer would be yes otherwise.
- ajmurmann 4y agoLike having kept the business loans they gave out as actual loans rather than forgiving them?
- goldenchrome 4y agoThey’ve been doing that every year already
- JumpCrisscross 4y ago> will it be fair of US government to ask money back in small chunks from people who got it during Covid lock-downs? This is taxation. Raising taxes reduces inflation in the same way fiscal spending prods it.
- chordalkeyboard 4y agowell it only reduces inflation in aggregate if the money collected from taxation is destroyed and not spent.
- boringg 4y agoThis in combination with rate hikes are why equity markets are going to be hurting for a good amount of time.
- paulpauper 4y agohard to say. the market did well in 2019 despite liquidity being puled out.
- bredren 4y agoThis makes it sound like equity markets were healthy in advance of this.
- endisneigh 4y agoI’ve wondered - wouldn’t it be simpler to raise taxes vs raising interest rates?
- ceejayoz 4y agoSure, if the Dems had like an 80% supermajority in both parts of Congress. Republicans tend to be universally opposed, and swing Dems typically won't touch the idea either.
- exabrial 4y agoNo. We stop financing the elite 1%'s lifestyles with tax money is the only sensible out.
- endisneigh 4y agoYou could tax the lifestyles and elite in question no?
- exabrial 4y agoOmg. When someone has a spending problem, literally nobody says "OH, go make more money!", we tell them to cull their bad habits. Raising taxes has _never_ balanced the budget.
- kmeisthax 4y agoNo, but taxing is a good way to pull dollars out of circulation and destroy demand. In fact, it's probably a better lever to pull than the Fed funds rate. The spending problem in question is deliberately supported by voters, who oppose lowering spending or raising taxes. Running the government on a deficit lets you simulate the benefits of economic growth without all that pesky growing.
- adra 4y agoNope, the "elite" will just pick up their money in trusts and corporations, then constantly take out loans against their equity and take out enough from their shelters to pay the interest.. because the interest is less than the taxes they dodge, they come out ahead. Maybe if you significantly increased consumption taxes you'd have a chance, but the "elites" will just buy their goods in another country. Net result, you're boned.
- RC_ITR 4y agoSo here's what's happening for anyone who wants more context. The US Treasury issues debt (called Treasuries) to fund US government operations. The US Treasury is a 'traditional' part of the US government and its debt is considered as close to 'risk-free' as you can get today (some combination of the US government's ability to indefinitely tax the largest/most advanced economy in the world + the US military are the two things cited as to why this is true). The US Fed is a less traditional part of the US Government. It is technically a bank that the government owns, but voters have no direct means of influencing policy. Previously, The Fed would 'manage' the behavior of private banks by either controlling the money supply (an increasingly abstract concept in the age of digital money) or adjusting the super short-term interest rate at which it loans money to banks who need it in a pinch (increasingly less relevant for a variety of factors). They actually transacted very little with the Treasury in this period. In 2008, The Fed found that neither of their tried and true tools was good enough to get private banks to lend more money than they were doing at the time (you'll hear a lot of hand-wringing about the 0 lower bound of interest rates, despite some interesting outcomes from negative interest rates in other countries). In order to do something, the Fed decided to just straight up buy US Treasuries (something Japan had pioneered before; they also buy Mortgage-backed Securities, but don't worry about that right now). This decision (known as Quantitative Easing because economists love to pretend like they're scientists) has the net effect of making the Treasuries more expensive, and their interest rates lower. This is because Treasuries are sold with a fixed coupon rate (i.e. I'll give the owner of this Treasury $5/month) and a floating face value (i.e. I'll pay a variable amount of money depending on current risk conditions to own the Treasury that pays me $5/month risk-fee). When the risk-free interest rate is low, people tend to look to riskier places to generate yield, and therefore lend money more liberally. This change is important because it went from the Fed influencing a relatively esoteric, bank-only interest rate to the Fed controlling the most important interest rate in the world (it's one of the most common baselines used for determining other interest rates). Long story short, The Fed wants that interest rate to go back up, so what are they doing? They are no longer buying new Treasuries to replace their existing Treasuries that reach maturity, to the tune of $90bn per month Is that removing liquidity? Not really, it's just decreasing the active injection of liquidity that the Fed has been doing for the past 15 years. Does the nominal amount of money on the Fed's balance sheet matter/should we strive to bring it to $0? Unclear - what does it even mean for the US government to own its own debt? As long as markets don't care (they seem to not care right now out of convenience) then it's all fine, I guess? Will the Fed ever actively sell its Treasury holdings? Probably not, because they are happy with the tense equilibrium I mentioned above and they don't want to risk breaking that. What's the best KPI to watch? As long as new Treasuries sell (at auction) at around the Fed's desired interest rate, this is a non-problem and we can sort of ignore it. As soon as the Treasury market breaks (A lot of varying opinions here), then this is the world's biggest problem ever and we will look back at how foolish we were (just unclear if that will ever happen).
- sheeshkebab 4y agoAnother $4.8t to go… all this cash went into pumping real estate, big tech and crypto. I guess real estate is next after stock market completely rolls over, together with crypto crap.
- it_citizen 4y agoHow much of the inflation is due to money injection? How much is due to the war, the energy crisis and post covid supply chain problems?
- splistud 4y ago
- alberth 4y agoIt's amazing that the USD is the strongest it's been in ~20 years; yet it's fighting inflation and has the largest national debt out of any country in the world ... is this simply a circumstance that the US is "less bad off" than the rest of the world? Note: I'm no economist, so if I'm inaccurate in my statements - please forgive.
- wbsss4412 4y ago> yet it's fighting inflation and has the largest national debt out of any country in the world ... is this simply a circumstance that the US is "less bad off" than the rest of the world? Debt is usually benchmarked against GDP for a reason, by that metric the US doesn’t have the highest debt level, it also doesn’t have the highest level of inflation. The USD is also the currency of basically all international trade and settlements, it’s value is determined by external factors to a significant degree, not only on the US economy itself.
- SilverBirch 4y agoWell, let's compare it to other countries right. (and this is just my feeling). Europe can't heat their homes this winter because of Russia's war on eastern Europe. Russia is fucked also, becasue they need to sell their oil at a discount to whoever will take it to fund their war. This has also caused a massive spike in food costs in emerging markets. Turns out Ukrainian crops were important. Meanwhile, China is struggling with its first real recession because of overleverage with Evergrande and the same supply chain issues that face the US. So yes, things are going badly in the US. But there are bigger problems elsewhere and in situations where things go crazy people flee to safety. Which at the moment seems to be the USD.
- danielmarkbruce 4y agoTotal US household assets are around $150 trillion. If one rich uncle starts selling all his bonds it's not that big of a deal. It's not nothing, but it isn't some train wreck waiting to happen like some folks make out.