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> 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. This is a p

> 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. This is a pretty ideologically based statement. The fed is quite literally removing liquidity from the system. They aren’t “actively” adding any liquidity and haven’t been for months. For context, yes it’s helpful to keep in mind the build up of the balance sheet, but the spin here is overly politicized.

RC_ITR 4y ago
>They aren’t “actively” adding any liquidity and haven’t been for months. Just so you know, in order to keep the balance constant, the Fed actively participates in the market to buy new Treasuries to replace those that have matured. I see no ideology in saying that buying bonds (even if it's to replace old ones) is active support. In fact, the Fed is still a huge player in Treasuries markets even during QT.
- wbsss4412 4y ago
  I’m aware that is the case. If they weren’t doing that, though, it would result in a massive uncontrolled level of tightening. I don’t see how it’s somehow a bad thing that they are being intentional about the draw down. If I were to buy a bond ETF, that fund would be doing the same thing on my behalf. I wouldn’t be “buying” bonds just because the underlying product is maintaining a fixed asset level/ratio.
  - RC_ITR 4y ago
    >I’m aware that is the case. If they weren’t doing that, though, it would result in a massive uncontrolled level of tightening. Yes, so they aren't 'removing liquidity' because they are still 'injecting liquidity' at literally every treasury auction (as they have been for 15 years). They are simply injecting less liquidity than they have been, which is my entire point. >I don’t see how it’s somehow a bad thing that they are being intentional about the draw down. It's not a bad thing and I never said it was. If you want ideology, I think the Fed shouldn't even be doing QT and probably never should (I think inflation is largely unrelated to this liquidity). >If I were to buy a bond ETF, that fund would be doing the same thing on my behalf. I wouldn’t be “buying” bonds just because the underlying product is maintaining a fixed asset level/ratio. In literal terms, the government holds an auction for Treasury debt at various maturities. ~20 primary dealers bid on those Treasuries. Those ~20 primary dealers know exactly how much The Fed needs to buy from them. That influences their bids. If The Fed weren't buying from those dealers, they would bid for higher rates. In no way do those dealers consider the amount of debt that has reached maturity that month, they only care about new issuances. Isn't this pretty basic supply/demand stuff here? Are you also implying that demand for bond ETFs has no effect on the price of underlying bonds?
    - wbsss4412 4y ago
      > Yes, so they aren't 'removing liquidity' because they are still 'injecting liquidity' at literally every treasury auction (as they have been for 15 years). They are simply injecting less liquidity than they have been, which is my entire point. Your point is myopically focused on the bond market (and realistically the mortgage backed securities market as well). The net amount of liquidity is going down. They are removing liquidity. If I’m in a sinking ship and frantically pulling out buckets of water, the ship is still sinking even though I’m removing water. The fact that the fed has to continue to make bond purchases is a technicality that is irrelevant to anyone outside of the trading industry, and has little net effect of the Marco economy. Like, when headlines come out saying “alphabet stock sell off on earning miss” do you tell everyone around you that technically there was a buyer on the other side of every one of those transactions?
      - RC_ITR 4y ago
        >The net amount of liquidity is going down. They are removing liquidity. Yes, they are actively injecting less liquidity than they were before which is my original point? Wouldn't removing liquidity be actually selling holdings? EDIT: Maybe this helps - you're taking for granted that the US Treasury auctions an increasingly large amount of Treasuries to cover an increasingly large amount of debt, but The Fed doesn't create that debt, that's a separate phenomenon. If the government balanced its budget for a year, does that create liquidity?
        wbsss4412 4y ago
        The fed removes liquidity every time it receives a coupon payment or a bond matures (ie, it gets paid cash by the government). It could stop all open market operations and it would continue to remove liquidity from the system by virtue of that process. So, no, it doesn’t need to sell any assets in order to remove liquidity from the system, it simply needs to have lower net outflows of cash than its inflows of cash. As the headline states, since mid April it’s net outflows of cash have been $140 billion less than its inflows.

RC_ITR 4y ago

>They aren’t “actively” adding any liquidity and haven’t been for months. Just so you know, in order to keep the balance constant, the Fed actively participates in the market to buy new Treasuries to replace those that have matured. I see no ideology in saying that buying bonds (even if it's to replace old ones) is active support. In fact, the Fed is still a huge player in Treasuries markets even during QT.

wbsss4412 4y ago
I’m aware that is the case. If they weren’t doing that, though, it would result in a massive uncontrolled level of tightening. I don’t see how it’s somehow a bad thing that they are being intentional about the draw down. If I were to buy a bond ETF, that fund would be doing the same thing on my behalf. I wouldn’t be “buying” bonds just because the underlying product is maintaining a fixed asset level/ratio.
- RC_ITR 4y ago
  >I’m aware that is the case. If they weren’t doing that, though, it would result in a massive uncontrolled level of tightening. Yes, so they aren't 'removing liquidity' because they are still 'injecting liquidity' at literally every treasury auction (as they have been for 15 years). They are simply injecting less liquidity than they have been, which is my entire point. >I don’t see how it’s somehow a bad thing that they are being intentional about the draw down. It's not a bad thing and I never said it was. If you want ideology, I think the Fed shouldn't even be doing QT and probably never should (I think inflation is largely unrelated to this liquidity). >If I were to buy a bond ETF, that fund would be doing the same thing on my behalf. I wouldn’t be “buying” bonds just because the underlying product is maintaining a fixed asset level/ratio. In literal terms, the government holds an auction for Treasury debt at various maturities. ~20 primary dealers bid on those Treasuries. Those ~20 primary dealers know exactly how much The Fed needs to buy from them. That influences their bids. If The Fed weren't buying from those dealers, they would bid for higher rates. In no way do those dealers consider the amount of debt that has reached maturity that month, they only care about new issuances. Isn't this pretty basic supply/demand stuff here? Are you also implying that demand for bond ETFs has no effect on the price of underlying bonds?
  - wbsss4412 4y ago
    > Yes, so they aren't 'removing liquidity' because they are still 'injecting liquidity' at literally every treasury auction (as they have been for 15 years). They are simply injecting less liquidity than they have been, which is my entire point. Your point is myopically focused on the bond market (and realistically the mortgage backed securities market as well). The net amount of liquidity is going down. They are removing liquidity. If I’m in a sinking ship and frantically pulling out buckets of water, the ship is still sinking even though I’m removing water. The fact that the fed has to continue to make bond purchases is a technicality that is irrelevant to anyone outside of the trading industry, and has little net effect of the Marco economy. Like, when headlines come out saying “alphabet stock sell off on earning miss” do you tell everyone around you that technically there was a buyer on the other side of every one of those transactions?
    - RC_ITR 4y ago
      >The net amount of liquidity is going down. They are removing liquidity. Yes, they are actively injecting less liquidity than they were before which is my original point? Wouldn't removing liquidity be actually selling holdings? EDIT: Maybe this helps - you're taking for granted that the US Treasury auctions an increasingly large amount of Treasuries to cover an increasingly large amount of debt, but The Fed doesn't create that debt, that's a separate phenomenon. If the government balanced its budget for a year, does that create liquidity?
      - wbsss4412 4y ago
        The fed removes liquidity every time it receives a coupon payment or a bond matures (ie, it gets paid cash by the government). It could stop all open market operations and it would continue to remove liquidity from the system by virtue of that process. So, no, it doesn’t need to sell any assets in order to remove liquidity from the system, it simply needs to have lower net outflows of cash than its inflows of cash. As the headline states, since mid April it’s net outflows of cash have been $140 billion less than its inflows.