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Is Powell Playing Fed Games?
Is Powell Playing Fed Games?
The Federal Reserve will be adding assets to its balance sheet again, but Powell insists it’s not “quantitative easing”
The Federal Reserve will be adding assets to its balance sheet again, but Powell insists it’s not “quantitative easing”James GorrieWRITEROctober 10, 2019 Updated: October 10, 2019Share
Apparently, the “repo market” purchases by the Federal Reserve we discussed earlier this week —which don’t count as quantitative easing (QE)—were just the beginning of the new, non-quantitative easing but money printing period.
Fed “repos,” you may recall, are now necessary to boost weak overnight liquidity reserves of the big banks and don’t permanently expand the Fed’s balance sheet, unless they go on forever, in which case they would be QE. Now they are more of a short-term bail-out.
It’s Time for “Non-Quantitative Easing”
But in his Tuesday speech, Federal Reserve Chairman Jerome Powell explained that for the first time in five years, the “time is now upon us” for the Fed to resume buying U.S Treasury bills and bonds. That means that come November, the American economy will officially enter into another period of quantitative easing, you know, the Fed buying assets to expand its balance sheet.
Or not.
Typically, when the Federal Reserve buys Treasury assets, it’s because of weakness, either in the economy or in the financial system. A weakness that needs to be papered over by money printing, expanding the Fed’s balance sheet and bank reserves. Or the Fed buys other assets that nobody wants to buy at a decent price, like the purchases of mortgage backed securities (MBS) it conducted after the financial crisis.
…click on the above link to read the rest of the article…
ECB “Whistleblowers” Emerge: Former Central Bankers Cry Out Against Draghi’s Monetary Insanity
ECB “Whistleblowers” Emerge: Former Central Bankers Cry Out Against Draghi’s Monetary Insanity
It’s not just disgruntled CIA officials that have decided the best way to stage a coup is by way of “whistleblowing” – former central bankers are using a similar approach when it comes to the root cause of all of society’s ills: failed central bank policies, and nowhere more so than at the European Central Bank.
On Friday, a group of former senior European central bankers published a memo attacking the unhinged monetary policy of the European Central Bank, which they claim is “based on the wrong diagnosis” and risks ending its independence. Their criticism is in response to a package of massive easing measures announced by the ECB last month, including “open-ended QE” that triggered unprecedented opposition within the top echelons of the central bank, and set up a “resistance” faction within the ECB itself spearheaded by Germany, France and the Netherlands, as it has now emerged that all along Mario Draghi was the central banker of Europe’s insolvent periphery, even as his NIRP policies crushed Europe’s legacy banking system.
The rare public attack on the ECB – in the eyes of the FT – underlined how Christine Lagarde could have a fight on her hands after she takes over from Mario Draghi as president of the bank at the end of this month, when – not if – she decides to loosen monetary policy even more in the face of the eurozone’s mounting economic slowdown.
Commenting on the unprecedented mutiny against the former Goldmanite Mario Draghi, whom the extremely confused socialist elements – desperate for acceptance by some, any echo chamber – have called “legendary” even though it is his policies that have crushed Europe’s working classes, One River CIO Eric Peters said…
…click on the above link to read the rest of the article…
What the Hell is the ECB Doing?
What the Hell is the ECB Doing?
Danielle DiMartino poses an interesting question regarding the ECB. I have a set of answers.
What is the ECB Doing?
I started thinking about that question weeks ago.
I have a set of answers and even started writing this post before DiMartino brought it to the forefront.
There are only two answers. One of them is very unsettling.
- Ignorance
- On Purpose
Occam’s Razor
Occam’s razor is a principle from philosophy. Suppose there exists two explanations for an occurrence. In this case the one that requires the least amount of assumptions is usually correct. Another way of saying it is that the more assumptions you have to make, the more unlikely an explanation.
Occam’s Razor typically eliminates most conspiracy theories. It’s not that conspiracies don’t happen, but that simpler solutions are far more likely.
My corollary to the theory is very easy to understand: If stupidity is one of the possible answers, it is the most likely answer.
I am a normally a big fan of Occam’s Razor.
But this is so bizarre that I have my doubts.
Importantly, this may not be a conspiracy at all. Mario Draghi can easily be acting alone.
My Lead Question
How stupid can things get before one starts believing something else is in play?
I had already been thinking about that question when not only did ECB president Mario Draghi further push interest rates into negative territory but he also said it was a good idea for the ECB to think about MMT.
Shocking ECB Dissent
Dissent at the Fed happens all the time. It is rare at the ECB. The ECB builds a consensus and it is typically unanimous.
…click on the above link to read the rest of the article…
Fiat Money Cannibalization in America
Fiat Money Cannibalization in America
An Odd Combination of Serenity and Panic
The United States, with untroubled ease, continued its approach toward catastrophe this week. The Federal Reserve cut the federal funds rate 25 basis points, thus furthering its program of mass money debasement. Yet, on the surface, all still remained in the superlative.
S&P 500 Index, weekly: serenely perched near all time highs, in permanently high plateau nirvana. [PT]
Stocks smiled down on investors from their perch upon what Irving Fischer once called “a permanently high plateau.” As of the market close on Thursday, the Dow Jones Industrial Average held above 27,000, the S&P 500 above 3,000, and the NASDAQ above 8,000. 401k accounts, to the delight of working stiffs of all ages, origins, and orientations, are swollen beyond expectations.
Below the surface, however, the overnight funding market was subject to much weeping and gnashing of teeth. Sometime between Monday night and Tuesday morning the overnight repurchase agreement (repo) rate hit 10 percent. Short-term liquidity markets essentially broke.
After several technical glitches, the Fed executed its first repo operation in a decade – $53 billion – to keep the interbank funding market flowing. Zero Hedge documented the chaos real time.
This was followed up with additional repo operations on Wednesday and Thursday – at $75 billion a pop, and both oversubscribed. Perhaps Fed repo operations will be a daily occurrence, at least until the Fed launches QE4.
US overnight repo rate – as Fed chair Jerome Powell remarked: “Funding pressures in money markets are elevated this week”. Evidently, nothing escapes his eagle eyes. [PT]
At the same time, the effective federal funds rate – the upper range limit of the federal funds rate – continues to push above the rate the Federal Reserve pays on excess reserves (IOER). In other words, the Fed’s primary tool for price fixing credit markets is not behaving according to plan. Greater Fed intervention will be needed to keep things in line.
…click on the above link to read the rest of the article…
More Money Pumping Won’t Make Us Richer
More Money Pumping Won’t Make Us Richer
Whenever a central bank introduces easy monetary policy, as a rule this leads to an economic boom — or economic prosperity. At least this is what most commentators hold. If this is however the case then it means that an easy monetary policy can grow an economy.
But loose monetary policies do not generate economic growth. These policies set in motion the diversion of real savings from wealth generators to the holders of the newly pumped money. Real savings, rather than supporting individuals that specialize in the enhancement and expansion of the infrastructure are consumed by various individuals that are employed in non-wealth generating activities.
Moreover, not all consumption is a good thing. The consumption of real savings by individuals engaged in the enhancements and the expansion of the infrastructure is productive consumption. Conversely, the consumption of real savings by individuals that are employed in non-wealth generating activities is non-productive consumption.
It is non-productive consumption that sets the foundation for the weakening of the existing infrastructure thereby weakening future economic growth. In contrast, productive consumption sets the foundation for a better infrastructure, which permits stronger future economic growth. Needless to say, productive consumption leads to the increase in individuals living standards while non-productive consumption results in the lowering of living standards.
Why then is loose monetary policy seen as a major contributor towards economic growth?
Given that economic growth is assessed by means of the gross domestic product (GDP) framework — which is nothing more than a monetary turnover — obviously then when the central bank embarks on monetary pumping (i.e., loose monetary policy) it strengthens the monetary turnover in the economy and thus GDP.
…click on the above link to read the rest of the article…
Stunning Consensus Emerges: Fed May Announce Launch Of QE In Just A Few Hours
Stunning Consensus Emerges: Fed May Announce Launch Of QE In Just A Few Hours
It was back on August 6, in an article titled “Forget China, The Fed Has A Much Bigger Problem On Its Hands“, where we explained why in response to the coming dollar funding shortage and liquidity crunch (we warned about this month’s repo crash over a month ago), we first said that Fed will likely resume QE as soon as the fourth quarter. Needless to say, with the Fed having only just cut rates for the first time in over a decade just a week earlier, others looked at us funny, even though just two days later we got the clearest sign yet that the Fed was indeed contemplating QE when we described a very odd email we received from a Fed researcher in “When You Get An Email Like This From The Fed, It May Be Time To Panic.”
In any event, virtually no ‘serious’ Wall Street analyst predicted that QE would be on traders lips in the immediate future, and certainly nobody predicted the coming “dollar funding storm”, which we warned readers about just last Friday.
Fast forward to today when one analyst after another is scrambling to “predict” that today, with its repo operations woefully inadequate to calm the storm that has gripped the funding markets and the dollar shortage, the Fed may go so far as to expend its balance sheet by announcing the launch of permanent open market operations, i.e., the monetization of bonds.
Just please don’t call it QE.
ECB Restarts QE, Lowers Deposit Facility Rate to -0.5%
…click on the above link to read the rest of the article…
Will the Bank of England join the loose money bandwagon?
Will the Bank of England join the loose money bandwagon?
As the year of the 325th anniversary of the Bank of England’s foundation, and as the month of one of the Bank’s more important rate-setting decisions since 2008, September provides a congruous occasion on which to reflect on the history of the BoE and consider what the future holds for it. Founded in 1694 as a private bank to the government, it was in 1998 that the BoE was granted independence from the government in setting monetary policy. Now the UK faces perhaps its greatest political uncertainty in a generation, it is worth asking the question: to what extent will this independence continue?
We have already seen the effect of populist leaders on central banks that are ostensibly independent. The obvious case is that of the US, but there are other examples to be found of central banks facing political pressure to keep monetary policy easy, from Turkish President Erdogan’s sacking of the then central bank governor, to the ECB’s reaction to persistently low growth in Europe. Even if Trump doesn’t control the Fed directly, he certainly controls the market, which in turn has forced the hand of the central bank and led to the Fed cutting rates with the economy in expansion. And with ever more monetary sweets to choose from in the jar, which politician could resist raiding the cupboard and giving their economy a sugar high of rate cuts, QE and lending?
Pressure on the Fed is likely only to increase as the 2020 elections approach: if President Trump is able to engineer further cuts, and then get the markets soaring with a trade deal and promises of tax cuts just in time for elections, we might begin to agree he is – in his words – “a very stable genius”.
Draghi Goes All Out: ECB Cuts Rates, Restarts Open-Ended QE, Changes Forward Guidance, Eases TLTRO, Introduces Tiering
Draghi Goes All Out: ECB Cuts Rates, Restarts Open-Ended QE, Changes Forward Guidance, Eases TLTRO, Introduces Tiering
With the market worried that Mario Draghi could surprise hawkishly in his parting announcement…
… that is how the market initially interpreted today’s ECB press release, which cut already negative deposit rates for the first time since 2016 to stimulate the sagging European economy, but by a smaller than expected 10bps to -0.50% while restarting QE but by “only” €20 billion, less than the €30 billion baseline.
However, there was more than enough offsetting dovish bells and whistles, because while the restarted QE (or the Asset Purchase Program) was smaller than expected, it will be open-ended, and the ECB will run it “for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.” Of course, the question here is how long can a safe-asset constrained Europe run an “open-ended” QE, and the answer is it depends on what the issuer limit by nation is, with Frederik Ducrozet observing that “at €20bn/month, assuming up to €5bn in corporate bonds, QE can run for ~9 months under current limits… and for more than 7 years if limits are raised to 50%!” So look for more information on that angle.
· 43m
OPEN-ENDED QE. Let that sink in. Much more important than the monthly pace of asset purchases, i.e. even better than we hoped.
At €20bn/month, assuming up to €5bn in corporate bonds, QE can run for ~9 months under current limits… and for more than 7 years if limits are raised to 50%!
We might get details about issuer limits in the separate press releases and/or the press conference.
…click on the above link to read the rest of the article…
Blain’s Morning Porridge – Sept 5th 2019
Blain’s Morning Porridge – Sept 5th 2019
“Slipping down Raki and reading Maynard Keynes…”
We really should focus on the signals emanating from bond markets. Forget the current political madness – yesterday saw a number of key moments for bond markets: UK Chancellor Sajid Javid hitting the spend button in the UK (whether it actually happens is a moot point), another $30 bln new issuance day in the US, BAWAG launching a 10-year negative yield Covered Bond, Spain about to launch a 50 year issue at a smidge over nothing, and Christine Lagarde lecturing the European Parliament about the need for Fiscal Policy initiatives.
It really feels like we are at something of a nexus for bonds and fiscal spending. Central Bankers and politicians are tinkering with new ideas (ie: old ones rehashed) about Monetary policy – because nothing they tried re QE and zero rates really worked the last 10-years. I can’t help but feel it’s like something out of The Walking Dead – the Neo-Keynesians have suddenly risen and now stalk the Earth. (Queue Thriller on the turntable…)
Politicians now see low interest rates as a phenomenal opportunity to sort out the bleak mess of the last 10-years of Austerity driven under-investment, and spend economies back into growth. It looks attractive. And, if they’d started 10-years ago.. then we’d probably not be where we are today…
Of course, corporates would be mad not to take advantage of current ultra-low rates to borrow. But what are they going to spend the money on? More distorting stock buy-backs and dividend recharges back to private equity owners? Should investors be worried about the growing leverage? If the crunch comes – well, 5% of issuers might default, but the rest will be fine… ish. Meanwhile, ultra-low rates are great for stocks. Not because companies are inherently more profitable, but largely because low rates make stocks relatively more attractive compared to low-yielding bonds, and encourage corporate buy-backs which further push up prices!
…click on the above link to read the rest of the article…
For Second Week In A Row, Fed Buys Treasuries (AKA, QE4!?!)
For Second Week In A Row, Fed Buys Treasuries (AKA, QE4!?!)
Summary: After 250 weeks without a purchase of Treasuries (since Oct. 2014), for the second week in a row, the Federal Reserve bought Treasuries.The $14 billion in purchasing is in stark contrast to zero purchases since Quantitative Easing ended and selling during Quantitative Tightening.When the Fed sells Treasuries, asset prices struggle, but when the Fed buys Treasuries, asset prices have surged.Chart below shows the Fed’s total Treasury holdings (red line) versus the weekly change in Treasuries (black columns) since 2014. The QE taper is visible with the first dashed yellow line, the Quantitative Tightening the second dashed yellow line, and then the QT taper highlighted by the third dashed yellow line. Now, the Fed seems to have begun a new period of Treasury purchasing…but for how long and for what purpose, only Mr. Powell knows.
To put things in perspective, the chart below shows the Fed holdings of Treasuries (red line) and weekly change in Treasury buying (black columns) since 2003. Clearly visible is the activist role the Fed has taken since the GFC…QE1, QE2, Operation Twist, QE3, Quantitative Tightening…and now???
And just to highlight the immediate and incredible impact of the Federal Reserve purchasing of Treasuries on equity prices, the chart below is weekly changes in Treasury purchases (yellow columns) versus the Wilshire 5000 (red line), representing all publicly traded US equities.
Data via St. Louis FRED.
Mr. President, This Is How To Get The Fed To Launch Quantitative Easing
Mr. President, This Is How To Get The Fed To Launch Quantitative Easing
Yesterday, after countless demands that the Fed cut interest rates, Trump finally made his first, long anticipated formal demand that the Fed should pursue “some quantitative easing“:
Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to “will” the Economy to be bad for purposes of the 2020 Election. Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world…
…..The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!
The good news for Trump is that he has now fully figured out that he has the Fed in the palm of his hand, as he demonstrated just hours after Powell’s July 31 rate cut when Trump broke the US-China trade ceasefire and re-escalated trade war, in the process sending rate cut odds soaring. The flowchart logic, as shown below, is quite simple: all Trump has to do is engage in action that threatens to destabilize the global economy and Powell – as he certified during the last FOMC meeting – has to respond by cutting further, until he eventually reaches a point where QE may be the only possible outcome (as we explained previously in “How The Fed Is Now Underwriting Trump’s Trade War, In One Chart“).
Obviously extending the logic of the above diagram to its logical conclusion also lays out the path that Trump must follow if he wishes to force the Fed to launch QE. And just in case it is unclear, it involves a “gray rhino”, an economic war, and negative rates.
…click on the above link to read the rest of the article…
Aussie Reserve Bank, Considering “Extreme Measures”, Admits “We’re Almost Out Of Ammo”
Aussie Reserve Bank, Considering “Extreme Measures”, Admits “We’re Almost Out Of Ammo”
At least one reserve bank globally is starting to ponder the question that many central banks across the world will soon inevitably be asking: what happens if we cut to zero and the economy continues to falter?
This has led Australia to start considering QE, following in the footsteps of a world full of central bankers all offering each other as much confirmation bias necessary to continue to walk down the path of eventual economic destruction.
In Australia, the reserve bank has cut to 1% and “nobody expects them to stop cutting,” according to News.com.au. The bank released this chart days ago, showing that market is expecting further cuts.
The average of all expectations is for the market to fall to 0.37% by September 2020. That exact outcome is described as “unlikely”, but the RBA could have rates at 0.25% or 0.5% by then. That would only leave room for one or two more cuts before rates are at zero.
Then what? Destroy your currency and print your way out of your problems.
Apparently convinced that economies only exist as permanent booms now, the RBA said last week that it would begin a program similar to QE in the United States, wherein the central bank would buy financial assets in exchange for cash. The RBA is considering buying Australian government bonds.
“We could take action to lower the risk-free rates further out along the term spectrum,” said the RBA Governor.
Justifying this nonsense, the article then gives the quintessential example of how QE bond buying works in practice:
Bonds are how the government borrows. Here’s how it works in simplified terms:
The government offers to sell a piece of paper that says, “Australia will pay you back a million dollars in 10 years” (a 10-year bond).
Someone buys that for, let’s say, $900,000.
…click on the above link to read the rest of the article…
12 Reasons Why Negative Rates Will Devastate The World
12 Reasons Why Negative Rates Will Devastate The World
It has been a thesis over 20 years in the making, but with every passing day, SocGen’s Albert Edwards – who first coined the term “Ice Age” to describe the state of the world in which every debt issue ends up with a negative yield as capital markets and economies collapse into a deflationary singularity – is that much closer to having the victory lap of a lifetime. Although, we doubt he is happy about it.
Commenting on the interest rate collapse he has been (correctly) predicting ever since he first observed Japan’s great bubble bust of the 1980s and which resulted in both NIRP and QE, and which he (correctly) expected would spread across the rest of the world, leading to a “Japanification” of every major bond market…
… Edwards said that what bond markets are telling us is “that the cycle is ending with the central banks having failed to drive core CPI inflation higher. So Japanese-style outright deflation lies ahead at a time when western economies have piled debt sky high.”
Needless to say that’s not good, not least of all because we now live in a world in which the bond universe with negative yields continued to grow at an exponential pace, rising rapidly over the past two weeks and reaching a record $16.4 trillion…
… rising significantly above the previous mid-2016 record high of around $12.2tr. The expansion of the universe of negatively yielding bonds as a percentage of total is shown below: as of the last week, this proportion increased further to around 30.0%, above the mid-2016 record high of 25.8%.
…click on the above link to read the rest of the article…
For The First Time In 6 Years, No Central Bank Is Hiking
For The First Time In 6 Years, No Central Bank Is Hiking
The global central bank experiment with renormalization is officially over.
After roughly half the world’s central banks hiked rates at least once in 2018, the major central banks have returned to easing mode, and as the chart below shows, for the first time since 2013, not a single central bank is hiking rates.
Commenting on the violent reversal away from tightening financial conditions which emerged following the Q4 2018 selloff, Goldman’s Jan Hatzius writes that “The FOMC looks set to cut the funds rate next week, the ECB today sent a strong signal that action in September is likely, and China has resumed easing policy after a spring pause. With global growth running at a below-trend rate of 2¾%—down from about 4% a year ago—a synchronized tilt towards easing looks like a natural response to a weaker outlook.”
Yet even Goldman can’t help but ask just why the Fed is rushing to commence the first easing cycle in years, pointing out that “the US economy is in decent shape, with a tight labor market, inflation close to target and— in our forecast— growth running a little above 2% both this year and next. We are modestly above consensus because we expect the negative inventory cycle to end and final demand to continue growing robustly on the back of easier financial conditions.”
This, according to the Goldman economist, should limit Fed easing to two 25bp insurance cuts, one next week and another in September, although the bank, which until very recently did not expect any rate cuts at all, fails to justify just why the Fed is doing what it is about to do, unless of course Powell is merely folding to Trump pressure.
Uncertain Future for Monetary Policy as POTUS Publicly Calls for Rate Cut While Fed Holds Steady
Photo by The White House
Uncertain Future for Monetary Policy as POTUS Publicly Calls for Rate Cut While Fed Holds Steady
On Tuesday, POTUS took to Twitter and called for the Fed to cut rates by 1%, pointing to 3.2% GDP growth and “wonderfully low inflation.”
China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go…
….up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!
However, it’s hard to say if inflation is as “wonderfully low” as POTUS claims.
After all, official sources saw CPI inflation jump to 1.9%, with rapidly rising food prices reported as the leading cause. Plus, the “growing” economy POTUS alludes to appears to have topped out since January 2018 (see red arrow in the chart below – source):
Additionally, according to an official source, a 3.2% or higher GDP growth rate has happened on 3 differentoccasions before POTUS took office. The same source also reports that GDP Growth Rate in the United States averaged 3.22 percent from 1947 until 2019. So really, current GDP growth only appears to be on par with the average.
White House officials including POTUS and top economic advisor Larry Kudlow have recommended the Fed cut rates by half a point in the past. Despite all the information above, CNBC reports that, with his 1% cut recommendation, POTUS has “doubled down” on this approach.
…click on the above link to read the rest of the article…
