4 ms·

Keeping in mind increasing rates isn't the only way the fed can tighten the screw. I am always surprised how little attention is given in non financial newspape

by cm2187 4y ago

Keeping in mind increasing rates isn't the only way the fed can tighten the screw. I am always surprised how little attention is given in non financial newspapers to the movements in the fed balance sheet [1]. Even if rates remain stable, if the Fed keeps draining QE, it will apply a strong downward pressure on markets. [1] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

chollida1 4y ago
Fully agree, and to be honest I didn't have that on my quick checklist for FED reporting. Appreciate the response!!
JumpCrisscross 4y ago
> how little attention is given in non financial newspapers to the movements in the fed balance sheet The rate is the nail, the balance sheet the hammer. Balance sheet movement informs professionals of the trades the Fed is placing to reach its target. For most people, who aren't looking at financial markets but instead the real economy, the rate per se is enough.
- cm2187 4y ago
  No it's not. The movements you see in chart I linked have little to do with rates. It is the fed injecting or draining liquidity in/out of the system to push asset prices up and force risky investments, or do the reverse. The fed will likely keep draining its balance sheet after interest rates have stabilised.
  - JumpCrisscross 4y ago
    > movements you see in chart I linked have little to do with rates Buying and selling assets is the main way the Fed enforces its monetary policy [1]. > injecting or draining liquidity in/out of the system to push asset prices up and force risky investments, or do the reverse Buying bonds pushes their price up which lowers rates; selling bonds pushes their price down which raises rates [2]. > fed will likely keep draining its balance sheet after interest rates have stabilised This is correct [3]. The Fed's balance sheet is roughly double what it is optimally estimated to be [4]. [1] https://www.federalreserve.gov/monetarypolicy/fomc.htm https://www.federalreserve.gov/monetarypolicy/fomc.htm [2] https://www.investopedia.com/ask/answers/why-interest-rates-have-inverse-relationship-bond-prices/ https://www.investopedia.com/ask/answers/why-interest-rates-... [3] https://advisors.vanguard.com/insights/article/thefedsplantoshrinkitsbalancesheetquickly https://advisors.vanguard.com/insights/article/thefedsplanto... [4] https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL
    - cm2187 4y ago
      > Buying and selling assets is the main way the Fed enforces its monetary policy > Buying bonds pushes their price up which lowers rates; selling bonds pushes their price down which raises rates I know. But you seem to think this is the only purpose and only effect. If it was the case the rates would have gone deeply negative while the Fed kept printing QE for 15 years. But they didn't, rates stayed around zero during that time. [edit] And by the way, the Fed doesn't control rates by buying and selling ABS and treasuries (except for a short time for operation twist). ABS and treasuries are the bulk of the Fed balance sheet. The Fed controls rates by intervening in money markets (short term funding between banks).
      - JumpCrisscross 4y ago
        > you seem to think this is the only purpose and only effect Nobody said that. You said the Fed's balance sheet "movements...have little to do with rates." That's false. That's the main reason it buys and sells. That there are also other motivations and effects is not a counterargument. > rates would have gone deeply negative while the Fed kept printing QE for 15 years Why? Rates went down and were held down. Selling a dollar of bonds doesn't lock rates to a specific level, it directionally nudges them. > Fed doesn't control rates by buying and selling ABS and treasuries Agreed—mortgages are different. Those were bought to pursue market stability, not purely monetary, goals. Treasuries, on the other hand, are absolutely a credit-channel monetary intervention, albeit on the tail [1]. > Fed controls rates by intervening in money markets (short term funding between banks) Yes, those interventions are it buying and selling securities [2]. If banks have cash from sold assets, they don't need to borrow as much and can more freely lend (and vice versa). [1] https://www.cfr.org/blog/how-fed-bond-binge-predictably-stoked-inflation https://www.cfr.org/blog/how-fed-bond-binge-predictably-stok... [2] https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf#page=24 https://www.federalreserve.gov/aboutthefed/files/the-fed-exp...

by cm2187 4y ago

chollida1 4y ago

Fully agree, and to be honest I didn't have that on my quick checklist for FED reporting. Appreciate the response!!

JumpCrisscross 4y ago

> how little attention is given in non financial newspapers to the movements in the fed balance sheet The rate is the nail, the balance sheet the hammer. Balance sheet movement informs professionals of the trades the Fed is placing to reach its target. For most people, who aren't looking at financial markets but instead the real economy, the rate per se is enough.

cm2187 4y ago
No it's not. The movements you see in chart I linked have little to do with rates. It is the fed injecting or draining liquidity in/out of the system to push asset prices up and force risky investments, or do the reverse. The fed will likely keep draining its balance sheet after interest rates have stabilised.
- JumpCrisscross 4y ago
  > movements you see in chart I linked have little to do with rates Buying and selling assets is the main way the Fed enforces its monetary policy [1]. > injecting or draining liquidity in/out of the system to push asset prices up and force risky investments, or do the reverse Buying bonds pushes their price up which lowers rates; selling bonds pushes their price down which raises rates [2]. > fed will likely keep draining its balance sheet after interest rates have stabilised This is correct [3]. The Fed's balance sheet is roughly double what it is optimally estimated to be [4]. [1] https://www.federalreserve.gov/monetarypolicy/fomc.htm https://www.federalreserve.gov/monetarypolicy/fomc.htm [2] https://www.investopedia.com/ask/answers/why-interest-rates-have-inverse-relationship-bond-prices/ https://www.investopedia.com/ask/answers/why-interest-rates-... [3] https://advisors.vanguard.com/insights/article/thefedsplantoshrinkitsbalancesheetquickly https://advisors.vanguard.com/insights/article/thefedsplanto... [4] https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL
  - cm2187 4y ago
    > Buying and selling assets is the main way the Fed enforces its monetary policy > Buying bonds pushes their price up which lowers rates; selling bonds pushes their price down which raises rates I know. But you seem to think this is the only purpose and only effect. If it was the case the rates would have gone deeply negative while the Fed kept printing QE for 15 years. But they didn't, rates stayed around zero during that time. [edit] And by the way, the Fed doesn't control rates by buying and selling ABS and treasuries (except for a short time for operation twist). ABS and treasuries are the bulk of the Fed balance sheet. The Fed controls rates by intervening in money markets (short term funding between banks).
    - JumpCrisscross 4y ago
      > you seem to think this is the only purpose and only effect Nobody said that. You said the Fed's balance sheet "movements...have little to do with rates." That's false. That's the main reason it buys and sells. That there are also other motivations and effects is not a counterargument. > rates would have gone deeply negative while the Fed kept printing QE for 15 years Why? Rates went down and were held down. Selling a dollar of bonds doesn't lock rates to a specific level, it directionally nudges them. > Fed doesn't control rates by buying and selling ABS and treasuries Agreed—mortgages are different. Those were bought to pursue market stability, not purely monetary, goals. Treasuries, on the other hand, are absolutely a credit-channel monetary intervention, albeit on the tail [1]. > Fed controls rates by intervening in money markets (short term funding between banks) Yes, those interventions are it buying and selling securities [2]. If banks have cash from sold assets, they don't need to borrow as much and can more freely lend (and vice versa). [1] https://www.cfr.org/blog/how-fed-bond-binge-predictably-stoked-inflation https://www.cfr.org/blog/how-fed-bond-binge-predictably-stok... [2] https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf#page=24 https://www.federalreserve.gov/aboutthefed/files/the-fed-exp...