Fed lifts rates by half point, starts balance sheet reduction June 1
reuters.com
reuters.com
This is pretty key IMO. This indicates to me (and the market) that the Fed will retain a sense of dovishness which means that if key indicators (other in than inflation) start going down too fast, we may see the Fed rethink their decision to hike rates.
I have no faith that there will be 3 consecutive years of data for them not to change course and balloon that balance sheet right on up.
Its an interesting start, they just have so much to do! Fortunately this is a bit of a word game for them, as their balance sheet consists of assets that mature and otherwise self-delete eventually (and dollars the Federal Receives receives as principle or interest is deleted, instead of pooling or recirculating in the economy). So they are selling $95bn of those per month, and also letting the clock run out on others, while the price/valuation declines on all if they flood the market with stuff they've been holding, all while not buying any more. so maybe they really can get the value of their balance sheet down, without exactly crashing the market but still somewhat risking flooding it. A 10% decline (in those particular markets, bonds) reduces their balance sheet by nearly $1 trillion by itself.
A) So the technical reason is that its their primary way of stimulating the economy. It doesn’t mean that it works, there is limited efficacy of doing things this particular way.
B) The nontechnical reason is because they want to. Because they are buying from their buddies, or stimulating sectors of the economy that they have exposure to. And also, nobody else wants to buy low interest rate things. (But thats also part of the technical point: force people to invest in the actual economy instead of the lower yielding risk free things while the individuals pretend it was their own individual idea. But people still didnt really want to do that, although the last 2 years were the natural extreme of this, as people did do it en masse)
When the central bank buys things, the person they bought from has new dollars. And that person slowly pays back those new dollars, while also using those dollars elsewhere in the economy, diluting the supply of dollars and also making sure dollars are still circulating at all. None of those three things happen perfectly.
When they stop buying, they stop diluting the dollar supply. And theyre only slowly receiving new dollars back which they then delete/destroy/permanently remove from circulation. When they sell things, the same occurs: they get more dollars back at once.
Merry Christmas y’all, not only did we bail Wallstreet out in 2008, we’re now bailing out the bail out with inflation lol.
And we’re too stupid to even realize it. They have no intention of curbing inflation until the debt is handled.
Can you elaborate on that? It seems related to my observation that balance sheet reduction ideas partially handle themselves.
The Fed and the rest of us are still operating on the general expectation that the borrower repays. The Fed holds collateralized debt backed by mortgages being repayed, they hold corporate bonds, and they hold US treasuries. A default of course would be largely inconsequential and only mildly embarrassing for the Fed, as there are no Federal Reserve shareholders affected by the Fed's performance (although there are shareholders).
Aside from being able to point at their balance sheet and say "see, numba go down!" I really can't extrapolate too much more from that. It is convenient that the Fed's own market manipulations assist in the declining asset valuations to make that number go down faster. But its merely an observation.
The balance sheet expansion beginning in 2008 was mostly the purchasing of these mortgage backed securities, but more than half was from covid relief packages that Congress forced the Fed to participate in (but lets not pretend a scared congress wrote those packages overnight, that stuff was prewritten opportunist end game moves, accelerating the existing macroeconomic trends that were just waiting for a catalyst)
Given so many purchasing sprees and balance sheet increases have occurred since 2008, I can't really focus on 2008. The maturing assets are being repaid and most(? maybe?) have a fixed interest rate thats already set in stone, so I can't really worry about this idea of the Fed's hands tied or actions related to this. Yes, if the mortgage holders have a disruption in ability to repay - and the same for the corporations - then the Fed.... has faster declining asset values? I don't know if they really care about the performance.