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The fed has absolutely abandoned QT. The fed has already added hundreds of billions to their books this week and is looking at a 25bps hike. From where we're a

The fed has absolutely abandoned QT. The fed has already added hundreds of billions to their books this week and is looking at a 25bps hike. From where we're at, this is effectively QE.

adventured 4y ago
The Fed had to know that as they kept pushing, more serious stress would show up in the financial system as they went higher. This is exactly what they have been looking for. To the Fed this means what they have been doing is working (their goal has rather openly been to slow the US economy, and to a lesser extent the global economy, to bring down inflation via demand destruction). Nothing quite brings economic growth to a halt like a large banking crisis and the corresponding panic.
- nemo44x 4y ago
  Yeah but this could be an instance where the cure is worse than the disease.
  - adventured 4y ago
    I think it's very likely to be worse (certainly drastically more risky). The Fed has a history of hard landings. There was a level at which more modest rates would have gradually bent inflation downward over time, and it would have taken a while (a year or two longer, say). IMO the Fed was too aggressive in trying to stop it asap. They went too far too fast and we'll see a rolling fallout from it for several years yet. Lower rates with elevated inflation for a bit longer, would have been the more prudent choice, than cranking the volume fast and risking a financial crisis.
silentsea90 4y ago
Maybe, maybe not. The Fed has wiped out 6 months of QT's impact within a week. They might temporarily slow rate hikes but I am not convinced they will stop. I see this more as them plugging a hole in the economy. It will take a collapse for them to pivot and admit defeat to inflation.
- JumpCrisscross 4y ago
  > Fed has wiped out 6 months of QT's impact within a week How are you calculating that?
  - silentsea90 4y ago
    It should be 4 months in 4 days, but the broader point still stands: https://fallacyalarm.substack.com/p/the-fed-just-reversed-4-months-qt https://fallacyalarm.substack.com/p/the-fed-just-reversed-4-...
almost_usual 4y ago
They haven’t abandoned QT yet, Treasuries mature twice a month, mid month and end. Last week 7.1 billion in 3 year notes rolled off which was the only asset scheduled. There is a larger roll off end of month. The “QE” money on the books is a loan as of right now which isn’t QE. Now will QT continue? Probably not, we’re hitting a liquidity floor. I see rate hikes may continuing though.
- silentsea90 4y ago
  I am dumb. How does Treasuries maturing help with QT (not questioning this, just not clear on this)?
  - almost_usual 4y ago
    The Fed injects money into the economy by buying US Treasuries or GSE MBS traditionally from the open market (QE). During continued QE the Fed will re-purchase these assets when their existing ones mature. During QT on maturity rather than buy assets again they write them off and liquidity (money) is removed from the market.
    - silentsea90 4y ago
      Thanks!
nemo44x 4y ago
They need to cut at least 100bps. This is the only way to bring all those mortgage and treasury bonds back a bit and not be so under water. This may or may not restart inflation but it’s the only option that will be effective. The Fed has been cargo-culting Volkner in the 80’s without considering this is a different beast. They needed to raise rates but they needed to do it far more deliberately and cautiously. And of course should have started sooner. We need to accept multiple years of 6-10% (possibly more) inflation or collapse everything and create carnage no one wants to live in.
- benjaminwootton 4y ago
  This round of rate rises seem so political. They know they were slow out of the gate so now seem to want to compensate, appear strong and even actively cause some damage to prove their commitment. And all of this with the context that most of the inflation is supply side so interest rate rises are anaemic anyway. I don’t see a pivot unfortunately even though it seems they are playing with fire here.
- JumpCrisscross 4y ago
  > need to cut at least 100bps They need to hold pattern for a few months, then continue raising. The bank crisis is showing no signs of prompting deflation.
  - nemo44x 4y ago
    Deflation? Are you even understanding what’s going on right now? With 200+ banks insolvent basically? Hyper inflation is the risk right now. That it total anarchy as we see 40% unemployment. Pick your poison.
    - JumpCrisscross 4y ago
      > inflation is the risk right now When deposits are destroyed, that causes deflation. Deposits aren’t being destroyed. But wealth, in the form of banks’ non-deposit liabilities, is. The Fed would welcome such deflation (though not its cause). But that doesn’t seem to be likely. That said, nothing which is happening right now is inflationary other than, potentially, the Fed pausing its rate increases.

The fed has absolutely abandoned QT. The fed has already added hundreds of billions to their books this week and is looking at a 25bps hike. From where we're at, this is effectively QE.

adventured 4y ago

The Fed had to know that as they kept pushing, more serious stress would show up in the financial system as they went higher. This is exactly what they have been looking for. To the Fed this means what they have been doing is working (their goal has rather openly been to slow the US economy, and to a lesser extent the global economy, to bring down inflation via demand destruction). Nothing quite brings economic growth to a halt like a large banking crisis and the corresponding panic.

nemo44x 4y ago
Yeah but this could be an instance where the cure is worse than the disease.
- adventured 4y ago
  I think it's very likely to be worse (certainly drastically more risky). The Fed has a history of hard landings. There was a level at which more modest rates would have gradually bent inflation downward over time, and it would have taken a while (a year or two longer, say). IMO the Fed was too aggressive in trying to stop it asap. They went too far too fast and we'll see a rolling fallout from it for several years yet. Lower rates with elevated inflation for a bit longer, would have been the more prudent choice, than cranking the volume fast and risking a financial crisis.

silentsea90 4y ago

Maybe, maybe not. The Fed has wiped out 6 months of QT's impact within a week. They might temporarily slow rate hikes but I am not convinced they will stop. I see this more as them plugging a hole in the economy. It will take a collapse for them to pivot and admit defeat to inflation.

JumpCrisscross 4y ago
> Fed has wiped out 6 months of QT's impact within a week How are you calculating that?
- silentsea90 4y ago
  It should be 4 months in 4 days, but the broader point still stands: https://fallacyalarm.substack.com/p/the-fed-just-reversed-4-months-qt https://fallacyalarm.substack.com/p/the-fed-just-reversed-4-...

almost_usual 4y ago

They haven’t abandoned QT yet, Treasuries mature twice a month, mid month and end. Last week 7.1 billion in 3 year notes rolled off which was the only asset scheduled. There is a larger roll off end of month. The “QE” money on the books is a loan as of right now which isn’t QE. Now will QT continue? Probably not, we’re hitting a liquidity floor. I see rate hikes may continuing though.

silentsea90 4y ago
I am dumb. How does Treasuries maturing help with QT (not questioning this, just not clear on this)?
- almost_usual 4y ago
  The Fed injects money into the economy by buying US Treasuries or GSE MBS traditionally from the open market (QE). During continued QE the Fed will re-purchase these assets when their existing ones mature. During QT on maturity rather than buy assets again they write them off and liquidity (money) is removed from the market.
  - silentsea90 4y ago
    Thanks!

nemo44x 4y ago

They need to cut at least 100bps. This is the only way to bring all those mortgage and treasury bonds back a bit and not be so under water. This may or may not restart inflation but it’s the only option that will be effective. The Fed has been cargo-culting Volkner in the 80’s without considering this is a different beast. They needed to raise rates but they needed to do it far more deliberately and cautiously. And of course should have started sooner. We need to accept multiple years of 6-10% (possibly more) inflation or collapse everything and create carnage no one wants to live in.

benjaminwootton 4y ago
This round of rate rises seem so political. They know they were slow out of the gate so now seem to want to compensate, appear strong and even actively cause some damage to prove their commitment. And all of this with the context that most of the inflation is supply side so interest rate rises are anaemic anyway. I don’t see a pivot unfortunately even though it seems they are playing with fire here.
JumpCrisscross 4y ago
> need to cut at least 100bps They need to hold pattern for a few months, then continue raising. The bank crisis is showing no signs of prompting deflation.
- nemo44x 4y ago
  Deflation? Are you even understanding what’s going on right now? With 200+ banks insolvent basically? Hyper inflation is the risk right now. That it total anarchy as we see 40% unemployment. Pick your poison.
  - JumpCrisscross 4y ago
    > inflation is the risk right now When deposits are destroyed, that causes deflation. Deposits aren’t being destroyed. But wealth, in the form of banks’ non-deposit liabilities, is. The Fed would welcome such deflation (though not its cause). But that doesn’t seem to be likely. That said, nothing which is happening right now is inflationary other than, potentially, the Fed pausing its rate increases.