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> “My main message has not changed since Jackson Hole,” Powell said in his post-meeting news conference, referring to his policy speech at the Fed’s annual symp

by yuan43 4y ago

> “My main message has not changed since Jackson Hole,” Powell said in his post-meeting news conference, referring to his policy speech at the Fed’s annual symposium in August. “The FOMC is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done.” That earlier speech was far more direct and succinct than usual. Market participants should have gotten the same message then as they are now. The Fed intents to break inflation, with all the likely consequences that brings. Whether the Fed actually has the technical tools to do this is another question. Most of what it does is mass psychology - trying to convince the markets of its resolve one way or another. Bank reserves haven't mattered for years as money, but that's pretty much the only lever the Fed holds. It holds another - margin stock trading requirements, but that path has all but been forsaken. Treasuries are the fuel for the financial system. But to the US Treasury, they're just a mechanism to fund the deficit. The contrast has led to some things that are hard to explain otherwise, and more things like this will no doubt arise in the future.

thebradbain 4y ago
> It holds another - margin stock trading requirements, but that path has all but been forsaken I didn’t know this, could you explain when it’s last been used, if ever? Could they theoretically drastically raise margin requirements for some stocks and lower it for others to encourage sectors to be rebalanced?
- yuan43 4y ago
  From this 2000 article: >The recent rise in margin credit has focused attention on the Federal Reserve’s margin requirements for purchasing equities with borrowed funds, which has been at 50% since 1974. In November and December of 1999, margin credit grew very rapidly, outpacing the sizable appreciation in the overall stock market. And in January 2000, it grew further while the stock market’s valuation dropped, leaving the ratio of margin credit to market capitalization at its highest level in the past 29 years. This Economic Letter discusses the recent trend in margin credit and the merits of using margin requirements as a policy tool. > ... > The Securities Exchange Act of 1934 mandated federal regulation of purchasing securities on margin. The margin requirement was motivated by the concern that credit-financed securities speculation helped fuel the run-up in stock prices prior to the stock market crash of 1929. The act viewed the Federal Reserve as responsible for managing the availability of credit in the economy, so the Fed was charged with setting margin requirements for securities purchases. The Securities Exchange Commission was directed to enforce those regulations. https://www.frbsf.org/economic-research/publications/economic-letter/2000/march/margin-requirements-as-a-policy-tool/ https://www.frbsf.org/economic-research/publications/economi... According to Wikipedia, the rate hasn't been changed since the 1970s: > Regulation T governs the extension of credit by securities brokers and dealers in the United States.[1] Its best-known function is the control of margin requirements for stocks bought on margin. The initial margin requirement for such margin stock purchases has been 50%[2] since 1974,[3] but Regulation T gives the Federal Reserve the authority to change this percentage. Raising the margin requirement ostensibly reduces risk in the financial system by reducing the potential leverage and total buying power of investors. Conversely, lowering the margin requirement increases systemic risk by expanding the buying power and leverage available to investors. Since 1974, the Federal Reserve has not deemed it necessary to adjust the margin requirement despite periodic extremes of price volatility in the equities markets.[4] https://en.wikipedia.org/wiki/Regulation_T https://en.wikipedia.org/wiki/Regulation_T Given the absolute neglect of the mandate it was given on this, I suspect the Fed views even mere talk of increasing margin rates as the nuclear option. But if the usual roll call of psyops fail to deliver, this thing is there in its back pocket. I imagine the mere threat would cut 20% off the S&P overnight.
- deleted 4y ago
  [deleted]
marcosdumay 4y ago
> Bank reserves haven't mattered for years as money, but that's pretty much the only lever the Fed holds. The FED can make they matter again with a pen strike. It doesn't matter because they don't want it to matter.
- User23 4y ago
  Not really. A consequence of doing so would be breaking the inter-bank payment system, which is to say crashing the economy with no survivors. The Fed simply must provide adequate reserves to support the payment system. The so-called "dual mandate" of controlling employment and inflation rates is necessarily secondary to that. I mean theoretically sure they could do whatever, but the end result would be the dissolution or restructuring of the Fed by Congress, or worse.
scotuswroteus 4y ago
>Bank reserves haven't mattered for years as money, but that's pretty much the only lever the Fed holds. And this is why they aren't raising it more. If they do, and that doesn't work, people will act like the train conductor broke off the handle.
state_less 4y ago
> Whether the Fed actually has the technical tools to do this is another question. Most of what it does is mass psychology - trying to convince the markets of its resolve one way or another. Who else can buy up trillions of t-bills and mortgages at a moments notice? When they do this, it drops rates. The Fed offered up historically cheap money to borrowers to keep the economy rolling during the pandemic and housing crisis. > But to the US Treasury, they're just a mechanism to fund the deficit. The deficit doesn't get funded as well when the Fed is not buying. It's not merely a technicality. Someone else will have to fill the hole left behind by the Fed leaving the market, and that usually means higher rates to draw in money from elsewhere to feed the t-bill and mortgage market.
nimbius 4y ago
>Whether the Fed actually has the technical tools to do this is another question. its unlikely the fed is reactive enough in the short term to have any real effect on inflation presuming its tooling is effective. the interest rate hike took six months to implement, and began with a quarter of one percent increase. this was before earnings reports for the prior christmas holiday but november itself was a sobering enough red flag that Powell should have immediately pushed for 1% or more. its taken us nearly a year to arrive at the 3% we're at now, but in my opinion this inflation wont stop for another year, and it wont stop even at clinton-era interest rates of almost 6%. Quantitative easing --and the feds decade long addiction to it-- make this thoroughly uncharted territory. the interest rate push will likely be the straw that breaks corporate real estate, no matter how hard Bloomberg pounds his fists and demands a return to cubicles in his newspaper. this will likely tumble back into another residential housing or auto lending crisis. The student loan forgiveness push and reforms on wage garnishment also send a clear signal that our nations 1.73 trillion dollar nickelodeon of perpetual youth debt is becoming a serious threat as well.
- subsubzero 4y ago
  I agree on this thesis, the crux of the problem and I have told many people about this, was the handouts given during covid. It was totally scattershot and should have been more targeted. In addition states like California and others extended payouts way longer than they should have(and had way over-generous unemployment) which led to entire industries being completely short staffed. This led to extreme raises in wages and started a spiral of inflation that started at the bottom of the economic tiers and has worked its way up. Couple that with China doing zero tolerance covid lockdowns our supply chain is completely strangled which is also adding fuel to the fire, and making prices shoot up even further. Real estate sales have completely frozen as prices for all houses are priced in at a 3% interest rate and buyers will not entertain 25-30% cuts in price. Against this backdrop California plans on distributing $9.5B to any family who makes under a certain amount of money($1k each), I expect this huge infusion of cash to make inflation even worse and I do not know where this will go except that it will not be pretty.
  - PaulRobinson 4y ago
WalterBright 4y ago
> Most of what it does is mass psychology - trying to convince the markets of its resolve one way or another. Inflation isn't the result of mass psychology. It's the result of too much money sloshing around in the economy, thanks to trillions in deficit spending.
- biomcgary 4y ago
  Regardless of the starting point, inflation can persist due to mass psychology. See the mass psychology experiment in the mid-1990s that worked!() to constrain inflation in Brazil. They did have to introduce a new currency that was pegged against the dollar (essentially). See: https://www.bcb.gov.br/en/monetarypolicy/realplan https://www.bcb.gov.br/en/monetarypolicy/realplan
- Sparkle-san 4y ago
  Inflation has many causes and psychology is one of them. If you think prices are going to keep rising, you will be more likely to spend your money to "lock in" the price right now. If enough people do this, it adds demand to the system which keeps prices high and prolongs inflation. If too much money in the economy alone caused inflation it would been apparent between 2008-2020.
  - WalterBright 4y ago
    Why is there no deflation from mass psychology? BTW, you cannot imagine yourself into having more money.
    - robocat 4y ago
      > Why is there no deflation from mass psychology? There is: that is the ECON101 feedback model of deflation causing money under the mattress reducing money supply causing deflation. That doesn’t occur because modern money systems don’t have a fixed supply of printed money; also governments actively prevent deflation so it isn’t seen. “Opposite effects occur when the supply of money falls or when its rate of growth declines. Economic activity declines and either disinflation (reduced inflation) or deflation (falling prices) results”. Rate of growth can decline due to consumer sentiment (psychology). > BTW, you cannot imagine yourself into having more money. Strawman. Consumer sentiment (psychology) can become more positive, people borrow more (increase mortgages or buy a “better” house) and spend more (increasing the money supply).
lamontcg 4y ago
> Whether the Fed actually has the technical tools to do this is another question. Short term interest rates being higher means that loans which roll over and refi on a scheduled basis (ARMs being one example) will have their interest payments move much higher. That will create delinquencies and stress in the financial markets eventually, but it will take some time for those loans to wind up getting refinanced at higher rates and for the loans to go delinquent. Watch for CMBS delinquencies to start climbing. When the Fed says that they need to hold rates through 2023 and not cut people should also believe them. That's how they force the weak hands to capitulate and be liquidated. Everyone will naturally try to kick their cans down the road as long as they can, so it won't happen overnight.
- uup 4y ago
  ARMs make up a tiny percentage of mortgages. They are also usually fixed rate for the first 7 or 10 years. How many other types of revolving loans are there?
  - labcomputer 4y ago
    Auto loans are not normally thought of as revolving lines of credit, but many consumers treat them as such. As soon as one car is paid off (or even before), they trade it in for a new one with a new loan (sometimes rolling over negative equity). The used auto market has been hot the last couple years, so it’s hard to predict what happens. But since most consumers buy based on the monthly payment, higher rates mean smaller, less luxurious car, which has implications for the profitability of auto manufacturers. Also, some consumers have been using their homes as piggy banks, refinancing each time the value increases. When happens to consumer spending when they can’t do that?

by yuan43 4y ago

thebradbain 4y ago

> It holds another - margin stock trading requirements, but that path has all but been forsaken I didn’t know this, could you explain when it’s last been used, if ever? Could they theoretically drastically raise margin requirements for some stocks and lower it for others to encourage sectors to be rebalanced?

yuan43 4y ago
From this 2000 article: >The recent rise in margin credit has focused attention on the Federal Reserve’s margin requirements for purchasing equities with borrowed funds, which has been at 50% since 1974. In November and December of 1999, margin credit grew very rapidly, outpacing the sizable appreciation in the overall stock market. And in January 2000, it grew further while the stock market’s valuation dropped, leaving the ratio of margin credit to market capitalization at its highest level in the past 29 years. This Economic Letter discusses the recent trend in margin credit and the merits of using margin requirements as a policy tool. > ... > The Securities Exchange Act of 1934 mandated federal regulation of purchasing securities on margin. The margin requirement was motivated by the concern that credit-financed securities speculation helped fuel the run-up in stock prices prior to the stock market crash of 1929. The act viewed the Federal Reserve as responsible for managing the availability of credit in the economy, so the Fed was charged with setting margin requirements for securities purchases. The Securities Exchange Commission was directed to enforce those regulations. https://www.frbsf.org/economic-research/publications/economic-letter/2000/march/margin-requirements-as-a-policy-tool/ https://www.frbsf.org/economic-research/publications/economi... According to Wikipedia, the rate hasn't been changed since the 1970s: > Regulation T governs the extension of credit by securities brokers and dealers in the United States.[1] Its best-known function is the control of margin requirements for stocks bought on margin. The initial margin requirement for such margin stock purchases has been 50%[2] since 1974,[3] but Regulation T gives the Federal Reserve the authority to change this percentage. Raising the margin requirement ostensibly reduces risk in the financial system by reducing the potential leverage and total buying power of investors. Conversely, lowering the margin requirement increases systemic risk by expanding the buying power and leverage available to investors. Since 1974, the Federal Reserve has not deemed it necessary to adjust the margin requirement despite periodic extremes of price volatility in the equities markets.[4] https://en.wikipedia.org/wiki/Regulation_T https://en.wikipedia.org/wiki/Regulation_T Given the absolute neglect of the mandate it was given on this, I suspect the Fed views even mere talk of increasing margin rates as the nuclear option. But if the usual roll call of psyops fail to deliver, this thing is there in its back pocket. I imagine the mere threat would cut 20% off the S&P overnight.
deleted 4y ago
[deleted]

marcosdumay 4y ago

> Bank reserves haven't mattered for years as money, but that's pretty much the only lever the Fed holds. The FED can make they matter again with a pen strike. It doesn't matter because they don't want it to matter.

User23 4y ago
Not really. A consequence of doing so would be breaking the inter-bank payment system, which is to say crashing the economy with no survivors. The Fed simply must provide adequate reserves to support the payment system. The so-called "dual mandate" of controlling employment and inflation rates is necessarily secondary to that. I mean theoretically sure they could do whatever, but the end result would be the dissolution or restructuring of the Fed by Congress, or worse.

scotuswroteus 4y ago

>Bank reserves haven't mattered for years as money, but that's pretty much the only lever the Fed holds. And this is why they aren't raising it more. If they do, and that doesn't work, people will act like the train conductor broke off the handle.

state_less 4y ago

> Whether the Fed actually has the technical tools to do this is another question. Most of what it does is mass psychology - trying to convince the markets of its resolve one way or another. Who else can buy up trillions of t-bills and mortgages at a moments notice? When they do this, it drops rates. The Fed offered up historically cheap money to borrowers to keep the economy rolling during the pandemic and housing crisis. > But to the US Treasury, they're just a mechanism to fund the deficit. The deficit doesn't get funded as well when the Fed is not buying. It's not merely a technicality. Someone else will have to fill the hole left behind by the Fed leaving the market, and that usually means higher rates to draw in money from elsewhere to feed the t-bill and mortgage market.

nimbius 4y ago

>Whether the Fed actually has the technical tools to do this is another question. its unlikely the fed is reactive enough in the short term to have any real effect on inflation presuming its tooling is effective. the interest rate hike took six months to implement, and began with a quarter of one percent increase. this was before earnings reports for the prior christmas holiday but november itself was a sobering enough red flag that Powell should have immediately pushed for 1% or more. its taken us nearly a year to arrive at the 3% we're at now, but in my opinion this inflation wont stop for another year, and it wont stop even at clinton-era interest rates of almost 6%. Quantitative easing --and the feds decade long addiction to it-- make this thoroughly uncharted territory. the interest rate push will likely be the straw that breaks corporate real estate, no matter how hard Bloomberg pounds his fists and demands a return to cubicles in his newspaper. this will likely tumble back into another residential housing or auto lending crisis. The student loan forgiveness push and reforms on wage garnishment also send a clear signal that our nations 1.73 trillion dollar nickelodeon of perpetual youth debt is becoming a serious threat as well.

subsubzero 4y ago
I agree on this thesis, the crux of the problem and I have told many people about this, was the handouts given during covid. It was totally scattershot and should have been more targeted. In addition states like California and others extended payouts way longer than they should have(and had way over-generous unemployment) which led to entire industries being completely short staffed. This led to extreme raises in wages and started a spiral of inflation that started at the bottom of the economic tiers and has worked its way up. Couple that with China doing zero tolerance covid lockdowns our supply chain is completely strangled which is also adding fuel to the fire, and making prices shoot up even further. Real estate sales have completely frozen as prices for all houses are priced in at a 3% interest rate and buyers will not entertain 25-30% cuts in price. Against this backdrop California plans on distributing $9.5B to any family who makes under a certain amount of money($1k each), I expect this huge infusion of cash to make inflation even worse and I do not know where this will go except that it will not be pretty.
- PaulRobinson 4y ago

WalterBright 4y ago

> Most of what it does is mass psychology - trying to convince the markets of its resolve one way or another. Inflation isn't the result of mass psychology. It's the result of too much money sloshing around in the economy, thanks to trillions in deficit spending.

biomcgary 4y ago
Regardless of the starting point, inflation can persist due to mass psychology. See the mass psychology experiment in the mid-1990s that worked!() to constrain inflation in Brazil. They did have to introduce a new currency that was pegged against the dollar (essentially). See: https://www.bcb.gov.br/en/monetarypolicy/realplan https://www.bcb.gov.br/en/monetarypolicy/realplan
Sparkle-san 4y ago
Inflation has many causes and psychology is one of them. If you think prices are going to keep rising, you will be more likely to spend your money to "lock in" the price right now. If enough people do this, it adds demand to the system which keeps prices high and prolongs inflation. If too much money in the economy alone caused inflation it would been apparent between 2008-2020.
- WalterBright 4y ago
  Why is there no deflation from mass psychology? BTW, you cannot imagine yourself into having more money.
  - robocat 4y ago
    > Why is there no deflation from mass psychology? There is: that is the ECON101 feedback model of deflation causing money under the mattress reducing money supply causing deflation. That doesn’t occur because modern money systems don’t have a fixed supply of printed money; also governments actively prevent deflation so it isn’t seen. “Opposite effects occur when the supply of money falls or when its rate of growth declines. Economic activity declines and either disinflation (reduced inflation) or deflation (falling prices) results”. Rate of growth can decline due to consumer sentiment (psychology). > BTW, you cannot imagine yourself into having more money. Strawman. Consumer sentiment (psychology) can become more positive, people borrow more (increase mortgages or buy a “better” house) and spend more (increasing the money supply).

lamontcg 4y ago

> Whether the Fed actually has the technical tools to do this is another question. Short term interest rates being higher means that loans which roll over and refi on a scheduled basis (ARMs being one example) will have their interest payments move much higher. That will create delinquencies and stress in the financial markets eventually, but it will take some time for those loans to wind up getting refinanced at higher rates and for the loans to go delinquent. Watch for CMBS delinquencies to start climbing. When the Fed says that they need to hold rates through 2023 and not cut people should also believe them. That's how they force the weak hands to capitulate and be liquidated. Everyone will naturally try to kick their cans down the road as long as they can, so it won't happen overnight.

uup 4y ago
ARMs make up a tiny percentage of mortgages. They are also usually fixed rate for the first 7 or 10 years. How many other types of revolving loans are there?
- labcomputer 4y ago
  Auto loans are not normally thought of as revolving lines of credit, but many consumers treat them as such. As soon as one car is paid off (or even before), they trade it in for a new one with a new loan (sometimes rolling over negative equity). The used auto market has been hot the last couple years, so it’s hard to predict what happens. But since most consumers buy based on the monthly payment, higher rates mean smaller, less luxurious car, which has implications for the profitability of auto manufacturers. Also, some consumers have been using their homes as piggy banks, refinancing each time the value increases. When happens to consumer spending when they can’t do that?