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>Let's be clear, the issue wasn't that the Fed raised rates to a historically average level, it was that they were manipulating the bond market in 2021 with trillions of dollars of QE.

One of the principle, statutory purposes of the Federal Reserve is to conduct monetary policy to achieve maximum employment and stable prices. That means it's the job of the Fed to manipulate interest rates.

Sure it is their job to set interest rates. It is far less clear that it is their job to buy government and corporate debt, and allow the government to issue unprecedented amounts if debt. Or to attempt to completely erase the business cycle.

That would be the Fed pursuing the "maintain the stability of financial markets and contain their systemic risks" part of its statutory purpose.

From current evidence, their efforts seem to have had the opposite effect.

These actions which the fed has never before undertaken (qe and zirp and even buying corp bonds) were to blame for the bubble, and the problems caused by unwinding it.

Covid would have forced a much harder reset, probably in 2021.

Covid came at the end of a decade of QE. They tried QT in 2019 before Covid hit and had to give up.

QE and ZIRP is the original sin here which created the dilemma the fed now faces - hard inflation or hard recession. They didn’t solve the GFC or Covid, they just postponed the impact and made it far worse.

I have absolutely no objection to counter-cyclical monetary policy but the monetary policy has become the cycle.

mind you the alternave is far worse.

Having unstable prices for staple goods will lead to unrest very, very quickly, which in term results in a downturn in the econonmy, which in term leads to even more unstable prices and thus more unrest.

Actually, they are sacrificing employment to stabilize prices: https://time.com/6253699/federal-reserve-inflation-interest-.... The interest rate hikes are designed to cause unemployment, and it's not even working.

Well, yeah, their "dual mandate" is contradictory. You're not the first to notice, trust me. And that means that sometimes they have to sacrifice one for the other. When one is doing historically well, and the other not so great, it's probably not a hard choice.

You’re inferring good faith, which - when dealing with humans - is an unsupported assumption. You don’t have to be an economist to draw the connection between printing money and a rise in nominal prices (irrespective of the interest rates and lending).

The Fed knows that there is no real ongoing inflation. The devaluation of the dollar already occurred and the new price has to propagate through the market. Their actions have no effect on the cause or broader course of apparent inflation only on who “wins and loses.”

>The Fed knows that there is no real ongoing inflation.

Can you cite any metric showing there is "no real ongoing inflation"? CPI, PPI, PCE, and other less-commonly used metrics all indicate ongoing inflation. It would be interesting to understand how you've arrived at the conclusion there isn't ongoing inflation.

>The devaluation of the dollar already occurred and the new price has to propagate through the market.

The DXY has been uptrending for nearly a decade, even more rapidly so since mid-2021.

They have a dual mandate. Pricing stability and employment. They're trying to trade one for another to achieve a better balance. Employment is far too hot right now.

It's a dual mandate because it's impossible to accomplish both. They have to decide which to focus on.

Don't see how anyone could view the feds actions in the last few years and conclude that they had this as their mandate

> maximum employment and stable prices

It's a dual mandate. If I'm not mistaken, we recently reached pre-pandemic employment levels. There is no way we would have reached this point without low interest rates through the pandemic.

Other countries have the same inflation rate that we do, but with lower employment rates. Ours is a better position to be in.

the economists at the fed think the only possible cause for inflation is demand pressure, forgetting the historical supply crunches that have led to inflation. wages are up and unemployment is down because production is still reeling from covid, especially as the largest generation in history retires. so amusingly, in their failed ploy to crush labor power, the feds have fucked the banks.

(this is not to excuse the greed of the bankers - this crisis is the purest essence of capitalism, it's inherent contradictions on full and gory display.)

> the economists at the fed think the only possible cause for inflation is demand pressure, forgetting the historical supply crunches that have led to inflation.

No, the economists at the Fed do not think that. Or rather, they try to find out what is driving inflation in any given situation, like they did with this 2022 study:

> Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.

* https://www.frbsf.org/economic-research/publications/economi...

It is more like, demand is the only thing the Fed can control.

The Fed can’t end the invasion of Ukraine or cure avian flu or speed up cargo ships. They can raise rates and that’s about it.

Nah, the bank is responsible for their decisions.

They bought $80b of fixed-rate bonds at historically and artificially low interest rates in a time of massive QE. Even based on the information available at the time, this is not a surprising outcome at all.

And the $80 bill was about 40% of their assets. And their depositors are all businesses who will move the money out fast because it's not insured over 250k.

Yeah, this is all very odd. What the hell happened there?

In retrospect, the Chief Risk Officer leaving and not being replaced immediately was a bad sign: https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris...

That's a good find...

100% speculation: the CRO told them loading up on long term bonds was crazy, and that they'd just have to eat lower earnings. The CEO/CFO disagreed, and the CRO didn't want to have any part of it. Hindsight is 20/20, but... this really was a disaster waiting to happen.

Not completely sure about that:

"A risk officer typically anticipates and manages regulatory, operational, competitive or other risks faced by a firm."

That looks like _non-financial_ risks. If that was the role of the CRO at SVB, the risk for this event probably should have been with the CFO?

“Operational” at a bank includes financial risks.

I know of at least one large European bank where it explicitly doesn't.

that doesn't excuse the Fed's behaviors.

It's easy to criticize the fed, but they did a pretty good job during COVID and they did a pretty good job during 2008.

The charge of "manipulating bond markets" is pretty absurd - their mandate is to influence inflation and employment via interest rates. Of course it has an impact on bond markets.

Not to let the banks off the hook, but

>They did a pretty good job during COVID

One word: "transitory".

And it was. The prediction was that covid supply/demand constraints would resolve when covid problems clear themselves.

Unless, of course, you are expecting the Fed to predict the war in ukraine, the energy crisis, etc.

And in any case, people who take the Fed's predictions at face value, and base their financial positions on it, can only blame themselves when the Feds do something contrary (as they are always entitled to). These predictions aren't promises.

It was surprisingly accurate.... mom inflation has been reasonable for several months now

By that metric, and it took quite a bit longer to get there than ideal. It's also still elevated historically and compared to FFR, all of which is a roundabout way of saying that inflation has and continues to destabilize the outlook. Stability historically comes after an n-month lag of the FFR and core inflation meeting, right? Well, banks are failing now, and 4Q24 is a ways off.

I just don't know if I'd call it a "pretty good job," is all. They were caught-off guard and didn't move quickly enough.

They are always caught off guard. Try predicting anything macro and see how well it goes to plan. Then try not moving too fast or too slow.

The idea that they aren't doing a good job because they aren't perfectly precise with their timing is misguided. It's a crazy hard job.

The difficulty is somewhat artificial. Their statements give away the game, namely their obsession with a "soft landing." Translation: an undue focus on securities markets and saving entities who'd made bad investments, i.e., picking winners. They were late because they were trying to balance a factor that isn't part of their quasi-mandate (but that is important to politicians, and to the institutions that Fed officers revolving doored from). Without that factor, you see radical hikes in 2021 and QT not being undermined by waves hands vaguely. It hurts, but less than what's coming now.

The only entities they seem to worry about is banks. And banks going under is bad news for everyone, always has been. Being a lender of last resort to banks is explicitly part of their mandate.

They worry about banks because they are a bank. If it weren't for government oversight they'd be a private bank.

>The only entities they seem to worry about is banks.

You'll have to support thay with something. Again, the language of their correspondence over the past few years says otherwise.

That's.. Delusional. It's barely budged.

https://www.bls.gov/news.release/pdf/cpi.pdf

Note all the months since July 2022. It's good to read the source material rather than hyperventilating news articles.

Mean MoM % change in CPI-U from January to preceding July, 2016-2023:

* 2016: 0.01

* 2017: 0.20

* 2018: 0.27

* 2019: 0.10

* 2020: 0.21

* 2021: 0.30

* 2022: 0.61

* 2023: 0.27

Raw monthly data: https://data.bls.gov/timeseries/CUSR0000SA0&output_view=pct_...

I was skeptical that month-over-month CPI had come down to reasonable levels over a wider time window, but it is much lower than the same period a year ago, and close to recent historical norms outside that inflationary spike. I am eager to see Tuesday's numbers for February inflation.

> One word: "transitory".

It has been. We're barely at 1.5-2 years in length and it looks to be either stabilized and perhaps dropping.

A number of folks estimated that the COVID recovery stimulus would take about this long to work its way through the system, using Korean War spending as an analogue:

* https://www.piie.com/blogs/realtime-economic-issues-watch/in...

The fact that energy and food prices spiked due to geopolitical events threw a monkey wrench in the works temporarily, but now that those have stabilized, so has inflation.

The magnitude matters, too. Stimulus did not constitute an annualized increase in average consumer purchasing power equivalent to the inflation we've seen. I imagine that wage inflation fills the difference, but of course, the stimulus is over and wage growth is not enough. So "transitory" is not an accurate characterization for most people looking at their finances; it has come to eat their purchasing ability, and stayed.

To say they did a good job during covid can only be determined through history… many would disagree.

They acted as aggressively as possible to remedy a short term problem, which just created longer term problems. Its easy to throw money at a problem and worry about the consequences later.

SVB wouldn’t have failed if the Fed hadn’t artificially suppressed rates to the extent they did, for example. And Id venture there’s a lot more to come on the economic front. Many assets became extremely overvalued which makes the larger downside on price more disruptive… commercial real estate is a big one to watch in the coming years

If inflation remains entrenched we may require a GFC style hard landing to quench it.

The fed did head off an immediate disaster through suppressing the rapidly widened credit spreads, but everything after that will likely be remembered as a failure

They did a terrible job after the Euro sovereign debt crisis passed, so let's say after 2014, and they did a terrible job starting mid-2021, after vaccines and opening up. Always too slow to raise rates and stop financial froth that was obvious to everyone.

The first half of stopping a panic is always easy if you're the Fed with the exorbitant privilege to print money with virtually no immediate ill effects. The second half is the hard part and they've failed 11 times out of 10.

The fed wasn't buying bonds for lulz, they were doing it to carry out their primary function.

What's the fed's obligation to that bank that you are making this point?

Dollars to donuts they’re a “sound money” kook who wants the Federal Reserve not to be able to manipulate the money supply to achieve societal objectives like “low unemployment” and “inflation that closely tracks growth in economic activity and population” and “preventing a deflationary spiral because economic activity shut down due to a global pandemic” because all of that is interference with the Holy Free Market.

Because after all the purpose of society is to serve the market, not the other way around, right?

Two wrongs don't make a right!

Whether or not the Fed's behaviors are excused is not the topic of conversation.

... housing prices have continued to rise at wildly unsustainable rates, leading to record homelessness. Which is the exact opposite of what happened with the crypto market, where the Ponzi scheme collapsed.

When the assets haven't even moved in the same direction, I don't know how you are going to blame federal policy to counteracted the recessionary impact of covid for moving them. Whereas the fed has caused significant damage & also been ineffective at fighting the current supply-side inflation caused by Russia's war of aggression.

There's always degrees of speculation that are going to vary - cryptocurrencies, tech stocks, consumer staple stocks, gold, commodities, real estate, etc.

No one expects that real estate will skyrocket and tank like shitcoins (even in 2008, the residential real estate market didn't bottom out until 2012). But that doesn't mean that Federal Reserve policy has been good.

I'd highly recommend the book (or audiobook) "The Lords of Easy Money: How the Federal Reserve Broke the American Economy" for anyone who is interested in a historical summary of the FOMC.

Is there a reason they couldn't have just purchased shorter term bonds and securities instead?

Greed. Those were yielding close to zero and they wanted the 1.x%

It's an interesting reward mechanic for the bankers, "heads I walk home with big bonuses, tails I go home with a big severance and our customers get screwed".

This is the essence of the moral hazard created by the bank bailouts in 2008

The yield has been inverted so short-term has been paying just as much or more than the long-term depending upon which securities you're looking at. 30 to 90 day treasuries have been yielding over 4%

Yes-- if they kept that cash until now they would be sitting pretty

> SVB being a bank was basically forced by regulation to buy long-dated bonds for yield.

Is this true?

nope, there's no mandate to buy for yield - they do it to make money.

> When central bankers make government bonds trade like meme stocks this is what happens

That’s what happens when people buy meme stock. I think the failure of the goverment and the bank are unrelated here.