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Federal Reserve Hesitates on QE Unwind / Balance Sheet Reduction

October 29, 2017

Federal Reserve Hesitates on QE Unwind / Balance Sheet Reduction

Federal Reserve balance sheet reduction not happening yet even as the Fed applauds its own successIs the Federal Reserve’s Great Unwind already coming unwound? I thought it would be good to check up on Federal Reserve balance sheet reduction since the Fed is supposed to be up and running on the move out of quantitative easing this month. It should be fascinating to see what progress the Fed is making as it happily applauds its own successful recovery.

The Federal Reserve balance sheet reduction that didn’t happen

By Kikuyu3 (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons

Is balance sheet reduction the Fed’s Gordian knot?

After all, the Federal Reserve’s End of Quantitative Easing Didn’t Happen last time they said it would. It turned out the Fed actually planned to continue QE at a gradual level by reinvesting matured assets. Nevertheless, the mere announcement in 2013 that it would terminate QE in 2014 created the infamous “Taper Tantrum.” The Fed hadn’t said anything back then that I was able to find about reinvesting the funds in its balance sheet until after they supposedly stopped QE in the fall of 2014. It turned out the stop was not a quite a full stop.Unwinding its balance sheet is likely to prove to be the Fed’s Gordian knot.

Federal Reserve balance sheet reduction that didn’t happen … again … so far

 

So, here we are, and so far there is no reduction. It is now three years since the Fed “ended quantitative easing,” and its balance sheet is still holding around the $4.5 trillion mark where QE was supposed to end. Now that’s gradual! It’s taken three years just for the Fed to say it is going to start reducing the balance; so, let’s see how that balance sheet reduction is going for them now that it has supposedly started:

…click on the above link to read the rest of the article…

 

What A Fed Rate Hike Means For U.S. Shale

September 24, 2017

What A Fed Rate Hike Means For U.S. Shale

Permian

North American shale oil and gas companies have proven that they can adapt their business model through the lower crude oil prices cycle. Now, the new challenge for shale producers is how to adjust their financial strategy when the Federal Reserve (Fed) raises interest rates.

Since the 2007 financial crisis, the Fed interest rate has declined from 5 to 1.25 percent, having hit the record low of 0.25 percent in December 2008, just four months after the Lehman Brothers bankruptcy that triggered a domino effect across the financial sector.

The Fed’s actions weren’t enough to stabilize the American economy, but thanks to U.S. Congress approval of the American Recovery and Reinvestment Act of 2009, business activities began to re-emerge due to the nation’s economic stimulus package supported by tax breaks, quantitative easing (QE), and government spending.

At last, those recovery measures and the Fed’s rate cut helped stabilize the financial markets following the financial crisis. But most important for the Fed, it led to lower unemployment rates, which dropped 4.4 percent lower in August 2017.

For these reasons, the Fed has struggled with ‘rate normalization’ (returning rates to pre-crisis levels), having seen market participants become highly reliant on its record-low interest rates and improved access to finances with QE.

QE has also played a key role in capital allocation decisions by forcing investors out of the bond markets and into the riskier stocks/equities markets by suppressing bond yields with the purchase of billions in government debt since late 2008.

The Fed has watched crude oil price closely since the crisis, because when oil prices fall they tend to pull down inflation with them. However, once they begin to stabilize—at whatever level—their impact on inflation dissipates over time. Since the beginning of 2017, not only have crude oil prices stabilized, but they’ve also increased, but the impact on U.S. inflation remained weak throughout this time.

…click on the above link to read the rest of the article…

QT1 Will Lead to QE4

September 22, 2017

QT1 Will Lead to QE4

QT1 Will Lead to QE4

There are only three members of the Board of Governors who matter: Janet Yellen, Stan Fischer and Lael Brainard. There is only one Regional Reserve Bank President who matters: Bill Dudley of New York. Yellen, Fischer, Brainard and Dudley are the “Big Four.”

They are the only ones worth listening to. They call the shots. The don’t like dots. Everything else is noise.

Here’s the model the Big Four actually use:

1. Raise rates 0.25% every March, June, September and December until rates reach 3.0% in late 2019.

2. Take a “pause” on rate hikes if one of three pause factors apply: disorderly asset price declines, jobs growth below 75,000 per month, or persistent disinflation.

3. Put balance sheet normalization on auto-pilot and let it run “on background.” Don’t use it as a policy tool.

Simple.

What does this model tell us about a rate hike in December?

Disinflation has been strong and persistent. The Fed’s main metric for this (core PCE deflator year-over-year) has dropped from 1.9% in January to 1.4% in July. The August reading comes out on September 29. This time series is moving strongly in the wrong direction from the Fed’s perspective. This is what caused the September “pause” (which we predicted for readers last March).

After seven months of decline, one month of increase, if it comes, will not be enough to get the Fed to end the pause. It would take at least two months of increases to change the Fed’s mind.

That’s unlikely given the impact of Hurricanes Harvey and Irma. Those effects may be temporary, but they come at exactly the time when the Fed was looking for a turnaround in core inflation. They won’t get it. The pause goes on.

How do I know this?

…click on the above link to read the rest of the article…

This Fed is on a Mission

September 21, 2017

This Fed is on a Mission

QE Unwind starts Oct. 1. Rate hike in Dec. Low inflation, no problem.

The two-day meeting of the FOMC ended on Wednesday with a momentous announcement that has been telegraphed for months: the QE unwind begins October 1. It marks the end of an era.

The unwind will proceed at the pace and via the mechanisms announced at its June 14 meeting. The purpose is to shrink its balance sheet and undo what QE has done, thus reversing the purpose of QE.

Countless people, worried about their portfolios and real estate investments, have stated with relentless persistence that the Fed would never unwind QE – that it in fact cannot afford to unwind QE.

The vote was unanimous. Even no-rate-hike-ever and cannot-spot-housing-bubbles Neel Kashkari voted for it.

The Fed also telegraphed that it could raise its target range for the federal funds rate a third time this year, from the current range of 1.0% to 1.25%. There is only one policy meeting with a press conference left this year: December 13, when the two-day meeting ends, remains the top candidate for the next rate hike.

This has been the routine since the rate hike last December: The FOMC decides to change its monetary policy at every meeting with a press conference: December, March, June, today, and December.

Even hurricanes won’t push the Fed off track.

The Fed specifically mentioned Harvey, Irma, and Maria. No matter how destructive, they won’t impact the economy “materially” over the “medium term” and therefore won’t impact the Fed’s policies:

Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.

…click on the above link to read the rest of the article…

Federal Reserve Will Continue Cutting Economic Life Support

September 20, 2017

Federal Reserve Will Continue Cutting Economic Life Support

I remember back in mid-2013 when the Federal Reserve fielded the notion of a “taper” of quantitative easing measures. More specifically, I remember the response of mainstream economic analysts as well as the alternative economic community. I argued fervently in multiple articles that the Fed would indeed follow through with the taper, and that it made perfect sense for them to do so given that the mission of the central bank is not to protect the U.S. financial system, but to sabotage it carefully and deliberately. The general consensus was that a taper of QE was impossible and that the Fed would “never dare.” Not long after, the Fed launched its taper program.

Two years later, in 2015, I argued once again that the Fed would begin raising interest rates even though multiple mainstream and alternative sources believed that this was also impossible. Without low interest rates, stock buybacks would slowly but surely die out, and the last pillar holding together equities and the general economy (besides blind faith) would be removed. The idea that the Fed would knowingly take such an action seemed to be against their “best self interest;” and yet, not long after, they initiated the beginning of the end for artificially low interest rates.

The process that the Federal Reserve has undertaken has been a long and arduous one cloaked in disinformation. It is a process of dismantlement. Through unprecedented stimulus measures, the central bank has conjured perhaps the largest stock and bond bubbles in history, not to mention a bubble to end all bubbles in the U.S. dollar.

Stocks in particular are irrelevant in the grand scheme of our economy, but this does not stop the populace from using them as a reference point for the health of our system. This creates an environment rife with delusion, just as the open flood of cheap credit created considerable delusion before the crash of 2008.

…click on the above link to read the rest of the article…

Why Quantitative Tightening Will Fail

July 4, 2017

Why Quantitative Tightening Will Fail

After nine years of unconventional quantitative easing (QE) policy the Federal Reserve is now setting out on a new path for quantitative tightening (QT).

QE was a policy of money printing. The Fed did this by buying bonds from the big banks. The banks would then deliver bonds to the Fed, and the Fed would in turn pay them with money from thin air. QT takes a different approach.

Instead, the Fed will set out policy that allows the old bonds to mature, while not buy new ones from the banks. That way the money will shrink the balance sheets ahead of any potential crisis.

For years leaders at the Federal Reserve have been rolling over the balance sheet to keep it at $4.5 trillion.

Here’s what the Fed wants you to believe.

The Fed wants you to think that QT will not have any impact. Fed leadership speaks in code and has a word for this which you’ll hear called “background.” The Fed wants this to run on background. Think of running on background like someone using a computer to access email while downloading something on background.

This is complete nonsense. They’ve spent eight years saying that quantitative easing was stimulative. Now they want the public to believe that a change to quantitative tightening is not going to slow the economy.

They continue to push that conditions are sustainable when printing money, but when they make money disappear, it will not have any impact. This approach falls down on its face – and it will have a big impact.

…click on the above link to read the rest of the article…

Get Ready for ‘QT1’: A First Look at the Federal Reserve’s Hidden Policy

June 25, 2017

Get Ready for ‘QT1’: A First Look at the Federal Reserve’s Hidden Policy

Get Ready for ‘QT1’: A First Look at the Federal Reserve’s Hidden Policy

[Ed. Note: Jim Rickards’ latest New York Times bestseller, The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, is out now. Learn how to get your free copy – HERE. This vital book transcends rhetoric from the Federal Reserve to prepare you for what you should be watching now.]

The Federal Reserve is now setting out on a new path for quantitative tightening (QT) after nine years of unconventional quantitative (QE) easing policy. It is the evil twin of QE which was used to ease monetary conditions when interest rates were already zero.

First, it is important to examine QE and QT in a broader context of the Fed’s overall policy toolkit. Understanding the many tools the Fed has, which of them they’re using and what the impacts are will allow you to distinguish between what the Fed thinks versus what actually happens.

We have a heavily manipulated system. For years, if not decades, monetary policy has been flipping back and forth between how the economy actually works and what the Fed believes works.

QE was a policy of printing money by buying securities from primary dealers and to ease monetary conditions when interest rates were at zero. QT takes a different approach.

In QT, the Fed will “sell” securities to the primary dealers, take the money, and make it disappear. This is an attempt to ultimately reduce the money supply and implement a policy of tightening money.

There’s a bit of a twist to that selling. Today the Fed’s balance sheet stands at $4.5 trillion. It started at $800 billion in 2008 and has increased over five times that since the crisis. Now they’re going to try to get the balance sheet back to normal levels.

…click on the above link to read the rest of the article…

Dying Petrodollar Ripples Through Markets As Asset Managers Bemoan Loss Of Saudi Bid

September 28, 2015

Dying Petrodollar Ripples Through Markets As Asset Managers Bemoan Loss Of Saudi Bid

One of the key things to understand about China’s liquidation of hundreds of billions in US paper is that far from being a country-specific phenomenon, it actually marks the continuation of something that’s been taking place in other emerging markets for some time.

As we outlined in “Why It Really All Comes Down To The Death Of The Petrodollar,” the forced sale of Beijing’s UST reserves is simply the most dramatic example of what Deutsche Bank has called “quantitative tightening.” For years, reserve managers in the world’s emerging economies worked to accumulate war chests of USD-denominated paper in an effort to ensure that in a crisis, they would have sufficient firepower to guard against speculative attacks on their currencies and/or accelerating capital outflows. Slumping commodity prices and the threat of a supposedly imminent Fed hike have conspired to put pressure on these reserves and outside of China, nowhere is this dynamic more apparent than in Saudi Arabia. Indeed it was the Saudis who dealt the deathblow to the great EM reserve accumulation.

By intentionally killing the petrodollar, Riyadh effectively ensured that the pressure on commodity currencies would continue unabated, but as we’ve documented exhaustively, that was and still is considered an acceptable outcome if it means bankrupting the US shale complex and securing market share. But for Saudi Arabia, this is all complicated by three things: 1) the necessity of preserving the lifestyle of everyday citizens, 2) spending associated with the proxy war in Yemen, and 3) defense of the riyal’s dollar peg. All of those factors have served to weigh heavily on the county’s already depleted petrodollar reserves, and if the “lower for longer” crude thesis plays out, Riyadh may see further pressure on its current and fiscal accounts which are now both squarely in the red.

…click on the above link to read the rest of the article…

 

The “Great Accumulation” Is Over: The Biggest Risk Facing The World’s Central Banks Has Arrived

September 1, 2015

The “Great Accumulation” Is Over: The Biggest Risk Facing The World’s Central Banks Has Arrived

To be sure, there’s been no shortage of media coverage regarding the collapse in crude prices that’s unfolded over the course of the past year. Similarly, it’s no secret that commodity prices in general are sitting near their lowest levels of the 21st century.

When Saudi Arabia, in an effort to bankrupt the US shale space and tighten the screws on a recalcitrant Moscow, endeavored late last year to keep oil prices suppressed, the kingdom killed the petrodollar, a move we argued would put pressure on USD assets and suck hundreds of billions in liquidity from global markets. 

Thanks to the fanfare surrounding China’s stepped up UST liquidation in support of the yuan, the world is beginning to understand what we meant. The accumulation of USD assets held as FX reserves across the emerging world served as a source of liquidity and kept a bid under things like US Treasurys. Now that commodity prices have fallen off a cliff thanks to lackluster global demand and trade, the accumulation of those assets slowed, and as a looming Fed hike along with fears about the stability of commodity currencies conspired to put pressure on EM FX, the great EM reserve accumulation reversed itself. This is the environment into which China is now dumping its own reserves and indeed, the PBoC’s rapid liquidation of USTs over the past two weeks has added fuel to the fire and effectively boxed the Fed in.

On Tuesday, Deutsche Bank is out extending their “quantitative tightening” (QT) analysis with a look at what’s ahead now that the so-called “Great Accumulation” is over.

…click on the above link to read the rest of the article…

 

 

 

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