Home » Posts tagged 'monetary policy' (Page 2)

Tag Archives: monetary policy

Olduvai
Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

One Bank Finally Admits The Fed’s “NOT QE” Is Indeed QE… And Could Lead To Financial Collapse

One Bank Finally Admits The Fed’s “NOT QE” Is Indeed QE… And Could Lead To Financial Collapse

After a month of constant verbal gymnastics (and diarrhea from financial pundit sycophants who can’t think creatively or originally and merely parrot their echo chamber in hopes of likes/retweets) by the Fed that the recent launch of $60 billion in T-Bill purchases is anything but QE (whatever you do, don’t call it “QE 4”, just call it “NOT QE” please), one bank finally had the guts to say what was so obvious to anyone who isn’t challenged by simple logic: the Fed’s “NOT QE” is really “QE.”

In a note warning that the Fed’s latest purchase program – whether one calls it QE or NOT QE – will have big, potentially catastrophic costs, Bank of America’s Ralph Axel writes that in the aftermath of the Fed’s new program of T-bill purchases to increase the amount of reserves in the banking system, the Fed made an effort to repeatedly inform markets that this is not a new round of quantitative easing, and yet as the BofA strategist notes, “in important ways it is similar.”

But is it QE? Well, in his October FOMC press conference, Fed Chair Powell said “our T-bill purchases should not be confused with the large-scale asset purchase program that we deployed after the financial crisis. In contrast, purchasing Tbills should not materially affect demand and supply for longer-term securities or financial conditions more broadly.” Chair Powell gives a succinct definition of QE as having two basic elements: (1) supporting longer-term security prices, and (2) easing financial conditions.

Here’s the problem: as we have said since the beginning, and as Bank of America now writes, “the Fed’s T-bill purchase program delivers on both fronts and is therefore similar to QE,” with one exception – the element of forward guidance.

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

Blain’s Morning Porridge – Nov 15th 2019

Blain’s Morning Porridge – Nov 15th 2019

“Liberty, equality, fraternity, or death; the last, much the easiest to bestow, O Guillotine!”

As it’s a Friday I am contractually entitled to have a rant and whine about whatever I want to write about. Which, today, isn’t really the cut and thrust of markets. 

To be brutally frank – we all know what the problems are: Too much money in the markets pushing up the prices of market assets. The fact is too much of that too much money is owned by too few people who use their too much money to buy all these financial assets. These too few people who own all the financial assets get richer everyday as their too much money makes their too many financial assets even more valuable. And these too few people get even richer by getting even more too much money to put into the already too expensive financial markets by “persuading” central banks to keep rates low, to buy financial assets through QE, and get their in-the-pocket politicians to enact tax cuts so their too much money is even more too much money… 

With me so far??

Meanwhile, politicians pay for the too much money they give to too rich people, by taking it away from the much more numerous too many too poor people through Austerity. The too many people who don’t have any assets and owe any money they have to the people who have too much money and too many assets – aren’t happy. They blame society, they blame governments and as they get even more unhappy they get angry. These too poor too angry people then get very angry and start blaming people. which is what is happening across the globe..

Still there?… 

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

The Fed Is Losing Control Over Rates Again, This Time In The Other Direction

The Fed Is Losing Control Over Rates Again, This Time In The Other Direction

Starting in late March, something unexpected happened: as the Effective Fed Funds rate drifted higher, it broke above the implicit upper bound on the interest rate corridor defined by the Interest on Excess Reserves. It was not meant to do this.

This loss of control over the effective Fed Funds rate prompted many to speculate that reserves (i.e. liquidity) in the system was too low, and sure enough, it all culminated with the end of the Fed’s tightening cycle which was followed by 3 rate cuts in the past 4 months, but more importantly, resulted in the repo crisis in late September (which we had previewed in August) and which served as the catalyst for Powell to launch “NOT QE” in October, whereby the Fed is now injecting $60 billion per month in liquidity via monetization of T-Bills, a process that has promptly sent the Fed’s balance sheet back over $4 trillion, an increase of $280 billion in 7 weeks.

Yet while the Fed’s emergency response to the repo crisis helped restore a “normal” level of liquidity to the system, another unexpected consequence has emerged: the Fed is now losing control of rates again, only this time in the opposite direction!

As Bloomberg points out this morning, as a result of its recent interference with market liquidity levels, the Fed’s key effective fed funds rate – aka the “main interest rate” that the Fed controls – is getting close to the edge of the range the Fed is targeting.

As shown in the chart below, after the Effective Fed Funds rate kept drifting ever high during the period of reserve scarcity, we now find ourselves on the other side of the boat, and as a result of the Fed’s actions such as repo operations and T-bill purchases, the effective fed funds rates has been pushed to 1.55%, just shy of the Fed’s lower bound target of 1.50% (the upper is at 1.75%). 

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

The Federal Reserve is a Barbarous Relic

The Federal Reserve is a Barbarous Relic

The Sky is Falling

The man from the good place. “As I was going up the stair, I met a man who wasn’t there. He wasn’t there again today, Oh how I wish he’d go away!” [PT]

Ptolemy I Soter, in his history of the wars of Alexander the Great, related an episode from Alexander’s 334 BC compact with the Celts ‘who dwelt by the Ionian Gulf.’  According to Ptolemy’s account, which survives via quote by Arrian of Nicomedia some 450 years later, when Alexander asked the Celtic envoys what they feared most, they answered:

Today, at the risk of being called Chicken Little, we tug on a thread that weaves back to the ancient Celts.  Our message is grave: The sky is falling.  Though the implications are still unclear.

Various Celts – left: fearsome warriors; middle: fearsome warriors afraid of the sky falling on their heads; right: Cernunnos, fearsome Celtic horned god amid his collection of skulls. [PT]

The sky, for our purposes, is the debt based dollar reserve standard that has been in place for the past 48 years. If you recall, on August 15, 1971, President Nixon “temporarily” suspended convertibility of the dollar into gold.  The dollar  became wholly the fiat money of the Treasury.

At the G-10 Rome meeting held in late-1971, Treasury Secretary John Connally reduced the new dollar reserve standard to a bite-sized nugget for his European finance minister counterparts, stating:

The Nixon-Connally tag team in the White House. [PT]

Predictably, without the restraint of gold, the quantity of debt based money has increased seemingly without limits – and it is everyone’s massive problem.  What’s more, over the past 30 years the Federal Reserve has obliged Washington with cheaper and cheaper credit.

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

Peter Schiff: When Is the Market Going to Wake Up to this Con?

Peter Schiff: When Is the Market Going to Wake Up to this Con?

As expected, the Federal Reserve cut interest rates another 25 basis points on Wednesday.

The mainstream read the post FOMC meeting comments to be relatively hawkish, saying Powell and Company seemed to indicate that future rate cutting is on pause.

Peter Schiff opened up his podcast reminding us that just one year ago, the Fed was raising rates and telling us it would continue to do so through 2019. It also claimed that quantitative tightening was on “autopilot.”

And they said this with a straight face. And everybody believed them.”

At the time, Peter was saying it wasn’t going to happen. He said the central bank would start cutting rates and relaunch QE. And here we are.

The central bank removed the phrase saying it was committed to “act as appropriate to sustain the expansion” from its forward guidance. This was widely viewed as a more hawkish stance. The Fed replaced that language, instead saying, “The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.” Powell was more emphatic during his press conference, saying bank officials “see the current stance of monetary policy as likely to remain appropriate.”

Of course, Powell again claimed that the Fed is not engaged in quantitative easing despite the repo operations and bond-buying program. He tried to draw a distinction between QE and today’s operations by pointing out that the central bank is buying short-term bonds today while it bought longer-term debt during QE.

This is really a distinction without a difference. I mean, who cares what the maturity of the bonds are?”

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

Fed Cuts Interest Rate 3rd Time in 2019 With Hints of a Pause

Fed Cuts Interest Rate 3rd Time in 2019 With Hints of a Pause

The FOMC committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.

Following the third rate cut in 2019, the Federal Reserve issued this short FOMC Statement.

Information received since the Federal Open Market Committee met in September indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and re

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

Fed Cuts Rates Again, But Drops “Act As Appropriate” Pledge Signaling It Is Done Cutting

Fed Cuts Rates Again, But Drops “Act As Appropriate” Pledge Signaling It Is Done Cutting

While the assumption is that Fed officials (having passed on the opportunity to lean against dovish market expectations) would not shock the market and vote to keep rates unchanged (96% odds and Fed has never surprised at that level), that’s precisely what happened when the Fed announced it would cut rates by another 25bps, the 3rd rate cut in the past 4 months, and now the big question is whether this will be the last rate cut for the foreseeable future.

Key takeaways (via Bloomberg) from the FOMC decision:

  • Fed cuts federal-funds rate target range by a quarter point to 1.5%-1.75% — as investors and most economists expected — in the third straight reduction aimed at protecting the record-long U.S. expansion from threats posed by tariff wars and weak global growth, amid “muted inflation pressures”
  • But FOMC signals it could pause, as the statement omits the familiar pledge from recent months to “act as appropriate to sustain the expansion”; Fed instead says it will monitor incoming information as it “assesses the appropriate path” of rates
  • Fed still leaves door open to easing, saying that uncertainties remain around its outlook even as it calls labor market and consumption “strong”; acknowledges that business investment and exports “remain weak”
  • Kansas City Fed President Esther George and Boston Fed President Eric Rosengren also dissent for third straight time, preferring no rate move at this meeting; St. Louis Fed President James Bullard votes with FOMC majority after dissenting at prior meeting in favor of half-point cut
  • Fed lowers two other key interest rates by quarter point, bringing interest on excess reserves rate to 1.55% and discount rate to 2.25%

As expected, and priced in, The Fed cut rates 25bps and shifted the wording in the statement to a more hawkish stancefrom:

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

BOJ To Start Lending ETF Shares To Prevent Market Freeze

BOJ To Start Lending ETF Shares To Prevent Market Freeze

While most central banks are contemplating how to gently break it to the public that since they are out of ammo with interest rates at all time low, and $15 trillion in global sovereign debt is now yielding negative – a financial abortion which suggests the value of money is negative – the only hope markets have to avoid collapse is for central banks to start buying stocks in the open market, the BOJ has no such problems: after all the Japanese central bank (alongside its Swiss peer) has for years been quite open that it purchases stocks and ETFs directly. Unfortunately, in its efforts to stabilize the market, the BOJ has been purchasing a little too many ETFs and it now owns far too much.

Last May, speaking to Japanese parliamentarians, BOJ Governor Haruhiko Kuroda noted that the central bank now owns nealry 80% of the country’s stock of ETFs, the result of a program begun in 2010 and ramped up in 2013.

Unfortunately, the program failed in its immediate task: the main goal of ETF buying was to lower Japan’s equity-risk premium – the extra returns investors expect for buying stock rather than simply parking their money in riskless government debt. A lower premium should raise stock prices and make equity financing easier for listed companies. But at just shy of 7%, Japan’s premium remains stubbornly above the U.S.’s 6%—with the gap little changed in six years – according to Aswath Damodaran, professor of finance at New York University’s Stern School of Business.

Now what is truly terrifying is that the impact of the BOJ’s massive equity purchases is actually not easily visible in Japanese stock valuations as share prices have actually fallen as a multiple of earnings during the course of the program.

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

Weekly Commentary: Whatever It Takes to Never Give Up

Weekly Commentary: Whatever It Takes to Never Give Up

Any central bank head that passes through an eight-year term without once raising rates has some explaining to do. To leave monetary policy extremely loose for such an extended period comes with major consequences (can we at least agree on that?). So, what went wrong? How did policy measures not operate as expected? With the benefit of hindsight, what could have been done differently?

What will be Draghi’s legacy? How will history view his stewardship over eurozone monetary policy? The years sure pass by. I still ponder how history will judge Alan Greenspan and Ben Bernanke. At this point, with securities prices (equities and bonds) basically at all-time highs, contemporary monetary policy – and its major architects – are held in high regard. I don’t expect this to remain the case following the next crisis.

A reporter question from Draghi’s Thursday press conference: “A recent survey by the Bank of America reveals that impotence and ineffectiveness of central banks, including the ECB, are the second risk perceived by investors. My question is: do you think that these investor concerns are justified? In other words, is there a risk of financial bubbles?”

Mario Draghi: “…You asked whether the expansionary monetary policies of central banks is the second-largest risk. I can answer for the eurozone; in the eurozone, and it’s a question we ask ourselves every day, many times a day, and I’m saying this because we monitor market developments very closely. We see some segments of financial markets where valuations are overstretched. One case is real estate, for example, and especially prime commercial real estate. Now, the causes of these overstretched valuations often don’t lead directly to our monetary policies. For prime commercial real estate, it’s the action of international investors…

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

Innovation BIS 2025: A Stepping Stone Towards an Economic ‘New World Order’

Innovation BIS 2025: A Stepping Stone Towards an Economic ‘New World Order’

The IMF’s annual meetings held in Washington DC last week demonstrated that when the institution issues new economic projections or warnings of a downturn, the mainstream press are not averse to giving them prominent coverage. After the Fund was founded in 1944 (off the back of World War Two), it became part of what internationalists call the ‘rules based global order‘. For 75 years, the IMF has been regarded by the political establishment and banking elites as a lynch pin of the world financial system.

Contrary to what some may believe, the IMF was not the first global monetary institution. That accolade belongs to the Swiss based Bank for International Settlements, which predates the IMF by fourteen years. Its creation in 1930 was, according to the BIS, primarily to settle reparation payments ‘imposed on Germany following the First World War‘. Without WWI – a major crisis event – there would have been no mandate for the BIS to exist. Much as there would have been no mandate for the IMF to exist were it not for the spectre of WWII.

As well as settling German reparation payments, the BIS was also recognised from the outset as a forum for central bankers – the first of its kind – where they could speak candidly and direct the course of global monetary policy.

The board of directors at the BIS is taken up predominantly by the heads of the leading central banks in the world. Right now the governor of the German Bundesbank Jens Weidmann is chairman of the board. As public servants they gather in Basel every eight weeks or so for a series of bimonthly meetings, the discussions from which ordinary citizens are not privy to.

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

Pondering the Collapse of the Entire Shadow Banking System

Pondering the Collapse of the Entire Shadow Banking System

Image courtesy of my friend Chris Temple.

What’s behind the ever-increasing need for emergency repos? A couple of correspondents have an eye on shadow banking.

Shadow Banking

  • The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.
  • It is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are.
  • The shadow banking system played a major role in the expansion of housing credit in the run up to the 2008 financial crisis, but has grown in size and largely escaped government oversight since then.

The above from Investopedia.

Hey It’s Not QE, Not Even Monetary

Yesterday, I commented Fed to Increase Emergency Repos to $120 Billion, But Hey, It’s Not Monetary.

Let’s recap before reviewing excellent comments from a couple of valued sources.

The Fed keeps increasing the size and duration of “overnight” funding. It’s now up $120 billion a day, every day, extended for weeks. That is on top of new additions.

Three Fed Statements

  1. Emergency repos were needed for “end-of-quarter funding“.
  2. Balance sheet expansion is “not QE“. Rather, it’s “organic growth“.
  3. This is “not monetary policy“.

Three Mish Comments

  1. Hmm. A quick check of my calendar says the quarter ended on September 30 and today is October 23.
  2. Hmm. Historically “organic” growth was about $2 to $3 billion.
  3. Hmm. Somehow it takes an emergency (but let’s no longer call it that), $120 billion “at least” in repetitive “overnight” repos to control interest rates, but that does not constitute “monetary policy”

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

Central Banks Trapped by Their Theories

Central Banks Trapped by Their Theories 

QUESTION: Hi Martin,

I can understand how JP and EU backed themselves into a corner with negative rates. Happy to give them the benefit of the doubt when this all started 3-4 years ago even though it was obvious this was not going to end well.
However, what I don’t understand is the thought process that reserve banks today need to perpetuate eternal growth when I would think their role should be to smooth out extremes (debatable this is even possible).

RBA is a case in point as while the Australian economy is slowing, it is nowhere near terrible. There is talk that they will now also look to lower rates to near zero and start QE. I get that all reserve banks are looking to maintain lower exchange rates and so they need to keep pace with the rest of the world but one would think they would learn better from mistakes of EU and JP.

My question is, is this a global conspiracy or just plain stupidity?

Thanks for all ….

David

ANSWER: The original theory was to smooth out the business cycle. The political governments turned to the central banks and argued that they were responsible for the money supply. Therefore, it was allegedly their duty to control inflation irrespective of the spending of politicians. This was an inconvenient economic truth.

The problem is that the ONLY theory they have is the Keynesian Model. They really have no other theory to rely on. So they keep lowering rates, hoping to stimulate demand and are oblivious to the economic reality that the political side is hunting taxes and becoming more aggressive in tax enforcement. The two sides are clashing and the central banks are now TRAPPED with no alternative.

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

“Money’s Not Worth Anything Anymore” – Ex-Credit Suisse CEO Blasts “Crazy” Negative Rates

“Money’s Not Worth Anything Anymore” – Ex-Credit Suisse CEO Blasts “Crazy” Negative Rates

Oswald Gruebel, who served as Credit Suisse CEO from 2004 to 2007 and as UBS Group AG’s top executive from 2009 to 2011, has slammed ECB policy in an interview with Swiss newspaper NZZ am Sonntag.

“Negative interest rates are crazy. That means money is not worth anything anymore,” Gruebel exclaimed.

“As long as we have negative interest rates, the financial industry will continue to shrink.”

Who can blame him – judging by the all-time low in European inflation expectations, ECB policy has been an utter failure…

Source: Bloomberg

Gruebel is not alone. As European bank bosses cast their eyes at their share prices, they are fighting back, some have said – biting the hand that feeds, in their attack on ECB policies, warning of severe consequences to asset prices and the broader economy.

Source: Bloomberg

As Bloomberg reports, The ECB’s imposition of negative interest rates have created an “absurd situation” in which banks don’t want to hold deposits, rages UBS CEO Sergio Ermotti, arguing that this policy is hurting social systems and savings rates.

Additionally, Deutsche Bank CEO Christian Sewing warned that more monetary easing by the ECB, as widely expected next week, will have “grave side effects” for a region that has already lived with negative interest rates for half a decade.

“In the long run, negative rates ruin the financial system,” Sewing said at the event, organized by the Handelsblatt newspaper.

Another cut “may make refinancing cheaper for states, but has grave side effects.”

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

Negative Interest Rates are the Price We Pay for De-Civilization

Negative Interest Rates are the Price We Pay for De-Civilization

Do central bankers really think negative interest rates are rational? 

“Calculation Error,” which Bloomberg terminals sometimes display1, is an apt metaphor for the current state of central bank policy. Both Europe and Asia are now awash in $13 trillion worth of negative-yielding sovereign and corporate bonds, and Alan Greenspan suggests negative interest rates soon will arrive in the US. Despite claims by both Mr. Trump and Fed Chair Jerome Powell concerning the health of the American economy, the Fed’s Open Market Committee moved closer to negative territory today — with another quarter-point cut in the Fed Funds rate, below even a measly 2%. 

Negative interest rates are just the latest front in the post-2008 era of “extraordinary” monetary policy. They represent a Hail Mary pass from central bankers to stimulate more borrowing and more debt, though there is far more global debt today than in 2007. Stimulus is the assumed goal of all economic policy, both fiscal and monetary. Demand-side stimulus is the mania bequeathed to us by Keynes, or more accurately by his followers. It is the absurd idea, that an economy prospers by consuming and borrowing instead of producing and saving. Negative interest rates turn everything we know about economics upside down.

Under what scenario would anyone lend $1,000 to receive $900 in return at some point in the future? Only when the alternative is to receive $800 back instead, due to the predicted interventions of central banks and governments. Only then would locking in a set rate of capital loss make sense. By “capital loss” I mean just that; when there is no positive interest paid, the principal itself must be consumed. There is no “market” for negative rates.

 …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…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
Click on image to purchase