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The Fed is far from helpless. They can combat inflation by speeding up the run off of their egregiously large balance sheet and keep El Jefe happy by lowering

The Fed is far from helpless. They can combat inflation by speeding up the run off of their egregiously large balance sheet and keep El Jefe happy by lowering interest rates.

JumpCrisscross 1y ago
> can combat inflation by speeding up the run off of their egregiously large balance sheet and keep El Jefe happy by lowering interest rates The Fed lowers rates by buying assets, i.e. taking bonds out of the market and putting cash into them. Lowering rates means paring or reversing the last three years' balance sheet reductions [1]. Running down the balance sheet faster would require raising rates. You can't lower rates and reduce the balance sheet unless you're doing off balance sheet fuckery. [1] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
- tossandthrow 1y ago
  > The Fed lowers rates by buying assets ... Ahh yeah, the planned economy that we intellectually dress as something else. Is it the real estate sector that should be prioritized this time? Maybe corperate bonds? or the government? QE is an incredibly new instrument - we are still experimenting and it is not given that it is a success.
  - JumpCrisscross 1y ago
    > the planned economy that we intellectually dress as something else The price of a bond, mathematically, moves inversely with its yield. If you want to raise or lower the yield, i.e. rate, you have to move the price. This isn't a policy option, it's literally the definition of a rate (coupon over price). > QE is an incredibly new instrument QE means buying assets that are not Treasuries. Most of the Fed's balance sheet is Treasuries, i.e. not QE. You can't reduce the balance sheet and lower rates. You can pretend. You could sell bonds and then immediately "borrow" them back. Or start up a bunch of swap lines to banks or whatnot, so they run out and buy the bonds for you.
    - tossandthrow 1y ago
      > QE means buying assets that are not Treasuries. The short answer is that it depends - it is not not QE. it depends on the magnitude. Current operations seem to go deeper into QE than regular OMO. > The price of a bond, mathematically, moves inversely with its yield. Yes? But the central bank han many other ways to influence the rate, eg. overnight rate and OMO instead of buying MBS, etc. As you indicate yourself, having the FED as a market participant will artificially lower the yield on MBS, which is a form of planned economy on the housing market. > You can't reduce the balance sheet and lower rates. Why the insane focus on lowering the rate? Keeping rates below 0 in real terms for long terms can arguable have very adverse effects - especially the day the currency is not backed by the largest military in the world (Which, surprise, is not decades into the future anymore). Regardless, the future will show what happens. We can nothing but speculate.
    - lisbbb 1y ago
      I don't think you understand bonds. The rates don't float once issued. They discount the price in order to sell at a certain yield at time of issue. After that, the prices float in the market based on current rates, but it's not a very liquid market. I own bonds with like 2.5% coupon and nobody will buy them and the estimated price is just that, an estimate, because nobody will actually buy them. I can hold to maturity and be made whole. I just missed out on buying higher rate bonds for the duration. It's fine. I honestly don't know what the Fed does or how it does it. I think if you dig deep enough, it's like that Rick & Morty episode where Rick brings down the entire Galactic Bug Empire by changing a "1" to a "0" in their computer system, thereby making their entire currency immediately worthless. Monetary systems work on trust until they don't. Then there is a world war.
- CGMthrowaway 1y ago
  What do you mean? Fed has been lowering rates and reducing the balance sheet for the last 12 months: https://fred.stlouisfed.org/graph/?g=1Mcbz https://fred.stlouisfed.org/graph/?g=1Mcbz (edited )
  - JumpCrisscross 1y ago
    > Fed funds/OMOs and balance sheet are separate tools Fed funds is a market rate. OMO stands for "open market operations," i.e. buying and selling assets. Guess where assets bought and sold wind up? > throughout 2022. Fed reduced balance sheet while hiking target rate Yes. It sold bonds to push the price down and thus, causally, yield up. Yield is another word for rate. The Fed hikes rates by selling assets. Selling assets shrinks the balance sheet. It lowers rates by buying assets. Buying assets grows the balance sheet. What it can't do, at least not in net effect, is shrink its balance sheet while lowering rates. (The Treasury can do this because the Treasury can create and destroy money more freely.)
    - CGMthrowaway 1y ago
      I have overcaffeinated and said the wrong thing. What I meant was: What do you mean? Fed has been lowering rates and reducing the balance sheet for the last 12 months: https://fred.stlouisfed.org/graph/?g=1Mcbz https://fred.stlouisfed.org/graph/?g=1Mcbz
  - ericpauley 1y ago
    There are two sets of rates at play here, short-term OMO rates (which the Fed talks about in terms of target rate) and long-term rates (which are directly impacted by the Fed balance sheet). At the end of the day they're both rates, and nobody sophisticated is going to be fooled if only the short-term rates go down.
adrr 1y ago
Fed has to buy treasuries or risk the price bottoming out on them. It has the affect as QE which is inflationary. US can't keep running a trillion+ deficit, thats the cause of inflation.
- npoc 1y ago
  The cause of inflation is printing more money than they destroy. But that's how the incentives lie. The banks get paid (interest) to print (loans). This is why we bitcoin.
throw0101d 1y ago
> They can combat inflation by speeding up the run off of their egregiously large balance sheet and keep El Jefe happy by lowering interest rates. You want to combat inflation by lowering interest rates? Also you want to "run off" the balance sheet (quantitative tightening) and lower rates at the same time? I.e., do two contradicting at the same time?
quickthrowman 1y ago
Just FYI, selling bonds (not notes) back into the market would likely raise rates. Longer duration yields are set by the market (supply and command) The Fed only sets the federal funds rate, they have less control over the rates further along the curve.l and can only influence them by buying or selling assets.

The Fed is far from helpless. They can combat inflation by speeding up the run off of their egregiously large balance sheet and keep El Jefe happy by lowering interest rates.

JumpCrisscross 1y ago

> can combat inflation by speeding up the run off of their egregiously large balance sheet and keep El Jefe happy by lowering interest rates The Fed lowers rates by buying assets, i.e. taking bonds out of the market and putting cash into them. Lowering rates means paring or reversing the last three years' balance sheet reductions [1]. Running down the balance sheet faster would require raising rates. You can't lower rates and reduce the balance sheet unless you're doing off balance sheet fuckery. [1] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

tossandthrow 1y ago
> The Fed lowers rates by buying assets ... Ahh yeah, the planned economy that we intellectually dress as something else. Is it the real estate sector that should be prioritized this time? Maybe corperate bonds? or the government? QE is an incredibly new instrument - we are still experimenting and it is not given that it is a success.
- JumpCrisscross 1y ago
  > the planned economy that we intellectually dress as something else The price of a bond, mathematically, moves inversely with its yield. If you want to raise or lower the yield, i.e. rate, you have to move the price. This isn't a policy option, it's literally the definition of a rate (coupon over price). > QE is an incredibly new instrument QE means buying assets that are not Treasuries. Most of the Fed's balance sheet is Treasuries, i.e. not QE. You can't reduce the balance sheet and lower rates. You can pretend. You could sell bonds and then immediately "borrow" them back. Or start up a bunch of swap lines to banks or whatnot, so they run out and buy the bonds for you.
  - tossandthrow 1y ago
    > QE means buying assets that are not Treasuries. The short answer is that it depends - it is not not QE. it depends on the magnitude. Current operations seem to go deeper into QE than regular OMO. > The price of a bond, mathematically, moves inversely with its yield. Yes? But the central bank han many other ways to influence the rate, eg. overnight rate and OMO instead of buying MBS, etc. As you indicate yourself, having the FED as a market participant will artificially lower the yield on MBS, which is a form of planned economy on the housing market. > You can't reduce the balance sheet and lower rates. Why the insane focus on lowering the rate? Keeping rates below 0 in real terms for long terms can arguable have very adverse effects - especially the day the currency is not backed by the largest military in the world (Which, surprise, is not decades into the future anymore). Regardless, the future will show what happens. We can nothing but speculate.
  - lisbbb 1y ago
    I don't think you understand bonds. The rates don't float once issued. They discount the price in order to sell at a certain yield at time of issue. After that, the prices float in the market based on current rates, but it's not a very liquid market. I own bonds with like 2.5% coupon and nobody will buy them and the estimated price is just that, an estimate, because nobody will actually buy them. I can hold to maturity and be made whole. I just missed out on buying higher rate bonds for the duration. It's fine. I honestly don't know what the Fed does or how it does it. I think if you dig deep enough, it's like that Rick & Morty episode where Rick brings down the entire Galactic Bug Empire by changing a "1" to a "0" in their computer system, thereby making their entire currency immediately worthless. Monetary systems work on trust until they don't. Then there is a world war.
CGMthrowaway 1y ago
What do you mean? Fed has been lowering rates and reducing the balance sheet for the last 12 months: https://fred.stlouisfed.org/graph/?g=1Mcbz https://fred.stlouisfed.org/graph/?g=1Mcbz (edited )
- JumpCrisscross 1y ago
  > Fed funds/OMOs and balance sheet are separate tools Fed funds is a market rate. OMO stands for "open market operations," i.e. buying and selling assets. Guess where assets bought and sold wind up? > throughout 2022. Fed reduced balance sheet while hiking target rate Yes. It sold bonds to push the price down and thus, causally, yield up. Yield is another word for rate. The Fed hikes rates by selling assets. Selling assets shrinks the balance sheet. It lowers rates by buying assets. Buying assets grows the balance sheet. What it can't do, at least not in net effect, is shrink its balance sheet while lowering rates. (The Treasury can do this because the Treasury can create and destroy money more freely.)
  - CGMthrowaway 1y ago
    I have overcaffeinated and said the wrong thing. What I meant was: What do you mean? Fed has been lowering rates and reducing the balance sheet for the last 12 months: https://fred.stlouisfed.org/graph/?g=1Mcbz https://fred.stlouisfed.org/graph/?g=1Mcbz
- ericpauley 1y ago
  There are two sets of rates at play here, short-term OMO rates (which the Fed talks about in terms of target rate) and long-term rates (which are directly impacted by the Fed balance sheet). At the end of the day they're both rates, and nobody sophisticated is going to be fooled if only the short-term rates go down.

adrr 1y ago

Fed has to buy treasuries or risk the price bottoming out on them. It has the affect as QE which is inflationary. US can't keep running a trillion+ deficit, thats the cause of inflation.

npoc 1y ago
The cause of inflation is printing more money than they destroy. But that's how the incentives lie. The banks get paid (interest) to print (loans). This is why we bitcoin.

throw0101d 1y ago

> They can combat inflation by speeding up the run off of their egregiously large balance sheet and keep El Jefe happy by lowering interest rates. You want to combat inflation by lowering interest rates? Also you want to "run off" the balance sheet (quantitative tightening) and lower rates at the same time? I.e., do two contradicting at the same time?

quickthrowman 1y ago

Just FYI, selling bonds (not notes) back into the market would likely raise rates. Longer duration yields are set by the market (supply and command) The Fed only sets the federal funds rate, they have less control over the rates further along the curve.l and can only influence them by buying or selling assets.