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Tag Archives: Federal Reserve

Chart: The Fed Is Hiking Rate Faster Than Any Time in History

Source : Chartr

The Fed vs. the Economy in the U.S.

James Rickards wrote . . . . . . . . .

Right now, it’s basically a case of the Fed versus the economy. You might say, “Wait a second. Isn’t the Fed supposed to help the economy?”

Well, not exactly. They may want to help the economy, but helping the economy actually isn’t job one. Job one is helping the banks. The Fed was essentially created to prop up the banking system and prevent bank runs.

Everything else it tries to accomplish, such as price stability and maximum employment, comes second.

So it’s not clear that the Fed’s always aligned with the best interests of the economy. People don’t realize that, but it’s important to keep in mind.

Everyone knows the Fed’s raising interest rates right now. But which rates? The rate that the Fed actually raises is called the fed funds target rate. And what is that?

That’s the rate at which banks lend to each other to meet their reserve requirements on an overnight basis. Fed funds are amounts that banks lend to each other to meet overnight reserve requirements.

It’s an extremely short-term rate. The Fed targets that rate as a way to control the money supply and perhaps tweak inflation or achieve other economic goals.

The Fed Is Targeting a Rate That No Longer Exists

I don’t want to get into the mechanics of the banking system, but here’s the essential point I want to make:

There hasn’t been a real fed funds market for about 12 or 13 years, ever since the Fed began flooding the system with money during the Great Financial Crisis. Today, reserves are close to an all-time high.

In other words, the banks have excess reserves. Their actual reserves are multiple trillions of dollars in excess of the requirement. So there is no shortage of reserves.

There’s no overnight lending for reserve requirements, because all the banks have excess reserves.

So the Fed is targeting a rate that doesn’t exist anymore. Why are they doing it?

Banks aren’t lending to each other, but they are lending to the Fed in the form of excess reserves. Those are deposits at the Fed, which the Fed pays interest on. So in a sense, the interest on excess reserves is a modern substitute for the old fed funds rate.

But this money is basically sterilized. It stays within the banking system without making its way into the real economy. That’s why all the QE the Fed engaged in after 2008 never led to consumer price inflation.

The inflation we’re seeing today has nothing to do with QE (more on that in a minute). Now people say the Fed’s raising interest rates. But it’s not that simple.

The Fed Has Limited Influence Over Long-Term Rates

The Fed really only controls that overnight rate. It doesn’t have that type of control over longer-term interest rates like those on the 10-year Treasury note, for example.

The Fed can target 10-year note rates to some extent with quantitative easing or quantitative tightening, through buying and selling them in the market. They can move the rate around a little bit, but that influence is limited.

The market for 10-year Treasuries is much, much larger than the Fed. It’s the deepest and most liquid market in the world.

So the Fed’s really targeting one minor rate, the overnight rate. It’s a really narrow target.

They don’t control long-term interest rates directly, nor do they have the capacity to do so.

So how does raising the fed funds rate reduce inflation?

The Supply Side

There are two major sources of inflation. There’s the supply side and there’s the demand side. Either one of them can drive inflation, but they’re very, very different in terms of how they work.

The supply side, as the name implies, comes from input. The supply just isn’t there. Farm prices are going up because fertilizer prices are going up, partly because of the war in Ukraine. Oil prices are going up because there’s a global shortage, and there’s disruption in supply chains.

Actually, I need to refine my comments about oil shortages. Rising gasoline prices don’t have all that much to do with the oil supply. There’s not a shortage of oil, but in the United States, there’s a shortage of refining capacity.

You don’t put crude oil in your gas tank, you put gasoline in your gas tank, or diesel, or jet fuel, which is basically kerosene. All of it has to be refined, and that’s where the bottleneck is.

Raising Rates Won’t Plant Crops or Increase Oil Production

So there are increasing shortages in some of the refined products, and that also accounts for today’s extremely high prices. And transportation costs go into the prices of everything.

So what can the Fed do about that? Nothing. Does the Fed drill for oil? Does the Fed run a farm? Does the Fed drive a truck? Does the Fed pilot a cargo vessel across the Pacific or load freight at the Port of Los Angeles?

No, they don’t do any of those things, and so they can’t fix that part of the problem. Raising interest rates has no impact on the supply side shortages we’re seeing. And that’s where the inflation’s coming from.

Since the Fed has misdiagnosed the disease, they are applying the wrong medicine. Tight money won’t solve a supply shock. Until the supply shortages are fixed, higher prices will continue. But tight money will hurt consumers, increase the savings rate and raise mortgage interest rates, which hurts housing.

The Demand Side

Then there’s demand-side inflation, called demand-pull inflation. That’s when people build inflation into their day-to-day behavior, when they think inflation’s here to stay.

They say, “Well, I was thinking of buying a new refrigerator. Better go get it today because the price is going up.”

The same logic applies to buying a new car, a new house, etc. The motivation to buy now accelerates demand because consumers think the price will only go up. These expectations can take on a life of their own and feed on themselves as people rush to the stores.

Supply can’t keep up, which is a recipe for higher prices. We’re not there yet. We’re not at the demand-pull side, but we’re dangerously close.

Are you running right out today to go buy a new refrigerator because you fear the price is going up? Probably not. You’re certainly aware of price increases; you see them at the pump and at the grocery store. But at least so far, that part of the behavior has not changed very much.

The Cure May Be Worse Than the Disease

Here’s the point: The Fed can’t create supply but it can destroy demand. If they raise interest rates enough, mortgage rates will rise and monthly payments with them. People will stop buying houses and credit card balances will rise because they’re paying higher interest. Financing starts to dry up, which spreads throughout the economy.

So the Fed can destroy demand, but only at the cost of the economy. It’s one thing if the inflation is coming from the demand side, but it’s not. It’s coming from the supply side, and the Fed can’t do anything about that.

They can destroy enough demand to maybe bring inflation down, but only by destroying the economy. And that’s the point. The idea that the Fed can squash inflation without squashing the economy is false.

I’m afraid we’re going to find that out the hard way.


Source : Daily Reckoning

Powell’s “Soft Landing” Is Impossible

Daniel Lacalle wrote . . . . . . . . .

After more than a decade of chained stimulus packages and extremely low rates, with trillions of dollars of monetary stimulus fuelling elevated asset valuations and incentivising an enormous leveraged bet on risk, the idea of a controlled explosion or a “soft landing” is impossible.

Powell’s “Soft Landing” Is Impossible

In an interview with Marketplace, Federal Reserve chairman admitted that “a soft landing is really just getting back to 2% inflation while keeping the labor market strong. And it’s quite challenging to accomplish that right now”. He went on to say that “nonetheless, we think there are pathways … for us to get there.”

The first problem of a soft landing is the evidence of the weak economic data. While headline unemployment rate appears robust, both the labor participation and employment rate show a different picture, as they have been stagnant for almost a year. Both the labor force participation rate, at 62.2 percent, and the employment-population ratio, at 60.0 percent remain each 1.2 percentage points below their February 2020 values, as the April Jobs Report shows. Real wages are down, as inflation completely eats away the nominal wage increase. According to the Bureau of Labor Statistics, real average hourly earnings decreased 2.6 percent, seasonally adjusted, from April 2021 to April 2022. The change in real average hourly earnings combined with a decrease of 0.9 percent in the average workweek resulted in a 3.4-percent decrease in real average weekly earnings over this period.

The University of Michigan consumer confidence in early May fell to an 11-year low of 59.1, from 65.2, deep into recessionary territory. The current conditions index fell to 63.6, from 69.4, but the expectations index plummeted to 56.3, from 62.5.

The second problem of believing in a soft landing is underestimating the chain reaction impact of even allegedly small corrections in markets. With global debt at all-time highs and margin debt in the US alone at $773 billion, expectations of a controlled explosion where markets and the indebted sectors will absorb the rate hikes without a significant damage to the economy are simply too optimistic. Margin debt remains more than $170 billion above the 2019 level, which was an all-time high at the time.

However, the biggest problem is that the Federal Reserve wants to curb inflation while at the same time the Federal government is unwilling to reduce spending. Ultimately, inflation is reduced by cutting the amount of broad money in the economy, and if government spending remains the same, the efforts to reduce inflation will only come from obliterating the private sector through higher cost of debt and a collapse in consumption. You know that the economy is in trouble when the fiscal deficit is only reduced to $360 billion in the first seven months of fiscal year 2022 despite record receipts and the tailwind of a strong recovery in GDP. Now, with GDP growth likely to be flat in the first six months but mandatory and discretional spending still virtually intact, government consumption of monetary reserves is likely to keep core inflation elevated even if oil and gas prices moderate.

The Federal Reserve cannot expect a soft landing when the economy did not even take off, it was bloated with a chain of newly printed stimulus packages that have made the debt soar and created the perverse incentive to monetize all that the Federal government overspends.

The idea of a gradual cooling down of the economy is also negated by the reality of emerging markets and European banks. The relative strength of the US dollar is already creating enormous financial holes in the assets of a financial system that has built the largest carry trade against the dollar in decades. It is almost impossible to calculate the nominal and real losses in pension funds and the negative result of financial institutions in the most aggressively priced assets, from socially responsible investment and technology to infrastructure and private equity. We can see that markets have lost more than $7 trillion in capitalization in the year so far with a very modest move from the Federal Reserve. The impact of these losses is not evident yet in financial institutions, but the write-downs are likely to be significant into the second half of 2022, leading to a credit crunch exacerbated by rate hikes.

Central banks always underestimate how quickly the core capital of a financial institution can dissolve into inexistence. Even the financial system itself is unable to really understand the complexity of the cross-asset impact of a widespread slump in extremely generous valuations throughout all kinds of assets. That is why stress tests always fail. And financial institutions all over the world have abandoned the healthy process of provisioning expecting a lengthy and solid recovery.

The Federal Reserve tries to convince the world that rates will remain negative in real terms for a long time, but borrowing costs globally are surging while the US dollar is strengthening, creating an enormous vacuum effect that can create significant negative effects on the real economy before the Federal Reserve even realizes that the market is weaker than they anticipated, and liquidity is significantly lower than they calculated.

There is no easy solution. There is no possible painless normalization path. After a massive monetary binge there is no soft hangover. The only thing that the Federal Reserve should have learnt is that the enormous stimulus plans of 2020 created the worst outcome: stubbornly high core inflation with weakening economic growth. There are only two possibilities: To truly tackle inflation and risk a financial crisis led by the US dollar vacuum effect or to forget about inflation, make citizens poorer and maintain the so-called bubble of everything. None is good but they wanted a decisive and unprecedented response to the pandemic lockdowns and created a decisive and unprecedented global financial risk. They thought money creation was not an issue and now the accumulated risk is so high it is hard to see how to tackle it.

One day someone may finally understand that supply shocks are addressed with supply-side policies, not with demand ones. Now it is too late. Powell will have to choose between the risk of a global financial meltdown or prolonged inflation.


Source : Daniel Lacalle

What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?

Mish wrote . . . . . . . . .

The above chart shows percentage weights in the CPI according to the latest CPI Report, relative weights.

I believe the BLS has a subtotal error in the table. Specifically, the Shelter Less Energy Services subtotals do not add up to 57.395 (32.802+6.971+5.597=45.37). I believe the BLS is missing Education, Recreation, and other services.

Items in blue are inelastic, that is demand for them will not change regardless of what the Fed does.

Items in green are elastic items. The Fed can reduce demand for them by hiking rates.

What the Fed Can and Cannot Do

The Fed cannot directly influence the price of anything because it cannot produce either goods or services.

The Fed can reduce or increase demand where demand is elastic by raising or lowering the cost of money.

Demand Destruction

I have often spoken of demand destruction by Fed rate hikes. Curiously, the primary demand destruction is not even in the tables.

Home prices are not in the CPI. Yet by hiking rates, the Fed will certainly cool the demand for housing.

With decreased demand for housing comes decreased demand for things like furniture, landscaping, carpet, etc.

By hiking rates, the Fed also reduces the demand to hold stocks. The price of equities drops. That also reduces the demand for housing, new cars, eating out, and travel.

Elastic vs Inelastic Demand

Elastic items total only 19.59%.

Inelastic items total a whopping 80.41%.

This is why inflation Expectations theory the Fed abides by is total nonsense.

People will not rent two homes if they perceive prices will rise. Nor will people stop paying rent and wait for declines in they believe prices will fall.

The same applies to buying food, gas etc.

CPI Percentage Weights

The idea behind inflation expectations is that if consumers think prices will go down, they will hold off purchases and the economy will collapse. The corollary is that is consumers think inflation will rise, they will rush out and buy things causing the economy to overheat.

With that backdrop, let’s have a Q&A. I believe the answers are obvious in all cases.

Inflation Expectations Q&A

Q: If consumers think the price of food will drop, will they stop eating out?

Q: If consumers think the price of food will drop, will they stop eating at home?

Q: If consumers think the price of natural gas will drop, will they stop heating their homes and stop cooking to wait for the event.

Q: If consumers think the price of gas will drop, will they stop driving or not fill up their car if it is running on empty?

Q: If consumers think the price of gas will rise, can they do anything about it other than fill up their tank more frequently?

Q: If consumers think the price of rent will drop, will they hold off renting until that happens?

Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?

Asset Irony

People will rush to buy stocks in a bubble if they think prices will rise. They will hold off buying stocks if they expect prices will go down.

People will buy houses to rent or fix up if they think home prices will rise. They will hold off housing speculation if they expect prices will drop.

The very things where expectations do matter are the very things the Fed ignores.

Demand destruction will occur in the small subset of elastic items plus housing and stocks.

Except as related to recreation and eating out, rate hikes will not impact food, energy, or shelter, the overwhelming majority of the CPI.


Source : Mish Talk

聯儲局由鴿轉鷹的預警

作者: 謝國生, 何敏淙 . . . . . . . .

當前冠狀病毒病大流行之下,經濟復甦一如2008年金融危機之後,需靠央行長期保持低利率政策。2020年初,美國聯邦儲備局(聯儲局)把利率由1.75厘大幅降至0.25厘,並推行量化寬鬆政策,以拯救經濟。隨着今年年初通脹升溫,市場預期擴張性貨幣政策將有所調整。聯儲局於本年6月宣布議息結果,0厘至0.25厘的聯邦基金利率維持不變。

主席鮑威爾透露,聯邦公開市場委員會已就縮減資產購買計劃進行了討論,進一步強化外界對聯儲局減少買債的預期。

貨幣環境正常化

聯儲局大部分成員預計在2023年前會加息至少兩次。市場估計,聯邦公開市場委員會實際最早會在2022年首季開始減少購買資產。聯儲局將加息預期提前至2023年,反映美國經濟基礎更為穩固,通脹亦將會長期上升。值得留意的是,聯儲局18名成員中有7名預期局方會在2022年加息,顯示市場對美國未來幾個季度經濟全面復甦的共識日漸加強。

聯儲局貨幣政策的最終目標,一是維持物價穩定,實現2%的平均通脹目標;二是實現充分就業。上月美國消費物價指數達5.4%,是1991年年底以來最大升幅。針對通貨膨脹,聯儲局放慢買債步伐是正確的方向,但若局方的時間表比市場預期快,或會令市場出現波動。本月上旬,聯儲局的逆回購工具創下約1萬億美元的紀錄,銀行間充斥着大量廉價資金,並透過極低利率逆流到聯儲局,這亦是支持政府減少買債的原因。

美國貨幣政策何時可以重拾正軌?除了貨幣流動性以外,通脹和失業率也是重要考慮因素。勞動市場的結構性問題取決於財政政策和疫情,而非貨幣政策。若經濟創新投資不足,勞動力下滑,須透過結構性改革,促進產業升級與經濟轉型,方可帶動持續增長。長期維持超低利率亦會加速勞動市場的扭曲。一旦經濟過熱(亦即在充分就業情況下,通脹仍然超過平均2%),聯儲局才會加息。要是美國經濟陷入滯脹,雖然目前機會甚微,但也是加息條件之一。

就業復甦的期望

上月美國非農業就業職位增加85萬個,較預期中的72萬為多;失業率則為5.9%,高於預期的5.6%。從非農業就業數據可見,就業市場復甦仍然存在結構性問題,恢復速度參差,服務業雖然復甦加快,但就業水平仍未及疫情之前。加上政府大力補貼失業人士,降低他們重投職場的誘因,進一步減慢就業復甦。非農業職位較疫前相差800萬個,即使市場每月能增加數十萬個新增職位,亦需約1年才可望重回舊日水平。部分製造業更因供應鏈瓶頸問題,呈就業放緩跡象。

受疫情影響,供應鏈投入價格上升,以致2021年1月生產者價格指數(Producer Price Index;簡稱PPI)按年增幅達5%,刷新10年來的最高紀錄。剛公布的6月PPI仍較5月增加1%,比去年同期增加7.3%;同月製造業採購經理人指數(Purchasing Managers’ Index)更達62.6,超過預期的61.5。企業因此已提高產品售價來收回成本。由需求驅動、供應緊張的經濟,通常會引發通貨膨脹,但美國勞動力市場正在擺脫困境,預計今年第三季將恢復就業強勁增長。

逐步退市的框架

相對於啟動時機,「收水」的節奏與規模更形重要,皆因聯儲局已在上月示意提早加息,市場自然預期貨幣政策將會有所調整。回顧2013年的經驗,時任聯儲局主席貝南奇當年5月22日向市場發放縮減買債的訊號,但到12月18日才正式採取行動,直至2014年10月29日才完成整個過程。有鑑於此,聯儲局可能於明年首季開始將買債金額下調,若每月縮減150億美元,大概需經6至8次會議(6至12個月)方能完全撤除量寬。

此前,聯儲局可能最快在今年8月或9月宣布縮減資產購買的策略。與會者表示,聯儲局希望在正式發表前,減少購買按揭抵押證券(Mortgage-Backed Securities,簡稱MBS)。現時該局正以每月1200億美元的規模購買債券,當中800億美元用於國債,400億美元則購買MBS。筆者預期聯儲局會每個月首先減少購買MBS 100億美元,而會保持購買國債,原因有二:

首先,紐約聯儲銀行早前多次對樓市上升發出警告,並已開始少量沽售所持的MBS,就是逐步減持的訊號。再者,拜登政府正為其基建方案爭取支持,由於開支規模超過萬億美元,預計財政部因需發行巨額國債,而要聯儲局維持買債規模。

通脹升溫,投資者憂慮債券價格下跌而加以拋售,導致美國10年期國債收益率暴漲。隨着聯儲局近期表示將提早加息,美債息逐漸回穩。數據顯示,在孳息率上升的大前提之下,美國及環球股票仍可帶來回報,這與經濟復甦及企業利潤恢復的時機吻合。對於黃金及加密貨幣等不能產生任何收益的資產而言,這將是個挑戰。估值較高的股票亦不穩,因為其昂貴估值的一部分要依賴充足的流動性支持,而當前金融體系的流動性正逐漸被撤回;美國科技公司亦可能面對更加波動的時期。

儘管聯儲局對政策利率走向的預測轉趨鷹派,但10年期美國國庫券孳息率已跌至低於1.5厘,為3月初以來的低位。短期債券則反應較大,2年期美國國庫券孳息率升至0.25厘,可見投資者逐步消化政策正常化的消息。即使長期債券孳息率未見急升,美元亦會在鷹派推動下走強,除日圓外,6月大多數成熟市場貨幣兌美元匯率下跌約3至4%。

前路障礙尚存

高利率將成為所有背負廉價債務借款人的重擔,尤其是主權政府和企業。在2020年,各國政府用於刺激經濟的財政債務躍升16.3萬億美元,增幅達20%。

而美國政府的公共債務在2020財政年度更增加超過3萬億美元,佔GDP 120%,為第二次大戰後的最高水平。以為經濟增長可讓債務問題自動解決,無疑是一廂情願的想法。

長遠而言,美國沉重的債務有礙整體經濟發展。美國國會預算辦公室預計,到2051年,單是聯邦政府的債務將高達GDP的202%。自疫症爆發以來,美國企業承擔的新債務已有1.5萬億美元之多。在2020年,家庭債務增長2.9%至14.6萬億美元。現時利率低企,借款人在償還方面尚可應付;若利率攀升,則存在引發壞賬的風險,高利率亦會增加借款人的再融資成本,並削弱其融資能力。

聯儲局上月發表的聲明指出,今後的經濟發展,勢將繫於疫情的走勢。疫苗接種的進度,將有望持續減輕當前公共衞生危機對經濟所造成的影響,但經濟前景面臨的風險依然存在。正如本文所列種種,同樣預示經濟復甦前景並非康莊坦途。


Source : HKU

Chart of the Day: The U.S. Fed Balance Has Nearly Double After One Year to a New Record

Source : Bloomberg

U.S. Federal Reserve: The Most Profitable Company in the U.S.

Source : RIA

ECRI Future Inflation Gauge vs Fed Fund Rate

Is the Fed setting the stage for economic bust as in the ultra-loose stance during 2002 to 2004?

U.S. Treasury Yield and Credit Market

Current Rise in Yield vs 1994


Yields of 5-year, 10-year, 30-year have been rising since mid-2012


Enlarge chart ….


5-year yields rose 37% this week – the most in 50 year

1-year Chart of 10-year Treasury Yield Index

1-Year Chart of 10-year Treasury Price Index


Recent rise in yield likely linked to Fed taper concern rather than growth outlook


Enlarge chart ….

Note: CDX IG is the Credit Default Swap Index of 125 investment grade CDSs.

Germany Bond Yields Rised Sharply After Fed Taper Talk

10-year Bund Yields