The long suffering bond market took a double hit gut punch today. First slammed by a supply-driven tail-heavy auction of thirty year Treasuries, J Powell delivered the knockout blow in reminding markets that the possibility of more rate hikes is most definitely on the table. So bond prices were pummeled from both ends, the long and the short. The Treasury market as a whole (GOVT) declined by 0.72%, unusually severe for a market weighted towards less volatile shorter term securities.
Commodities remained lackluster with copper off 0.09%, crude back in the mid-seventies and gold still hovering below $2000.
Overbought stocks were unable to stand up to the competition of higher yielding bonds. The cap-weighted averages understated the breadth of the selloff with small caps taking the bigger hit. As a whole though, the world market (VT) was off only 0.64%. It may have felt worse to most traders if only because so many had bought into the media narrative the worst was over because Fed was done.
Such been there done that.
This by the way is likely just what Powell wanted; in the Fed’s policy paradigm easing financial conditions won’t help its inflation fight.
https://financology.net/2023/11/01/fomc-2023-1101/#comment-3299
Well that didn’t last long. The Fed’s balance sheet is shrinking and rates are obviously higher than in many years, but rumors of the demise of inflation are premature. I don’t know where all the money is coming from; it may be that the relevant base for the balance sheet is pre-2020 … on that basis it’s still pretty obese. Interest rate policy also may very well work differently than it did in the scarce reserves regime when rates were assessed as opposed to paid.
It seems to me that the money is coming from all the trillions of dollars of unnecesssary reserves the Fed created to goose asset prices which are now accruing interest at about 5.5%, which the Fed must pay out to prevent the money from being lent out and adding to money multiplier effect.
The estimated annualized interest in Treasury debt is now over $1T/year. Unless all of that interest is going to be recycled into more Treasury debt or sit around as savings, it’s going into various assets.
My understanding is that’s accounted for in the Fed’s reporting of its balance sheet. If it’s not, then the balance sheet figures it reports are meaningless or at least need to be adjusted for that portion of money creation.
Assuming it is, then my first guess would be the issue … the Fed is indeed shrinking its balance sheet but the effect has been underwhelming so far because it’s still much larger than pre-2020. In other words, the operative base is not a few months ago, relative to which the balance sheet has contracted, but a few years ago, relative to which it remains expanded.
>Is that accounted for in the Fed’s reporting of its balance sheet?
I don’t know. However, I think what I wrote didn’t make my intention clear. All of the interest that must be paid out on U.S. Treasury debt–not just what the Fed is paying out on excess reserves–is projected to top $1T annually. What I cannot find the amount of money the Fed must pay out in excess reserves. I saw that data sometime this year and I seem to recall it being in the $100B – $200B range.
So the Fed is supposedly letting Treasuries and MBS on its balance sheet run off, thus taking money out of the economy, but an annualized rate of $1T is being created by the interest on the debt the government has run up.
The Fed gives the appearance of tightening but the federal government is now as reckless as the Fed has been since the Greenspan era.
This might say it more clearly than I did:
Could it Be the Fed’s Mega-QE Created so Much Liquidity that Tightening Doesn’t Work until this Excess Gets Burned Up?
As far as fiscal policy goes…
In a system where money is created by being lent into existence, monetary policy “works” by encouraging or discouraging borrowing. This applies to both the public and private sector. Years of easy money (2008-2022) resulted in massive borrowing across the board. The private sector is well on its way to responding to tighter policy since, but the public sector has yet to budge.
So if monetary policy is truly tight, but fiscal policy isn’t, the full brunt of tightening will have to be borne by the private sector. We’re seeing some signs of that … ask anyone trying to buy a home or car … but other indicators like the labor market and the stock market have shown only incremental response so far.
I look at the markets & the rigging is so easy to see now its a joke.
As Moscow said “The Americans are going to run out of paper to print $!”
They shorting the HELL out of Oil, the Oil demand is clibig not falling…they shorting the Hell out of Gold even with 140 tons has just left GLD……………..its all over barthe bloodshed