Converging crises
Monetary policy
No easy fixes
Showing posts with label monetary policy. Show all posts
Showing posts with label monetary policy. Show all posts
Thursday, September 29, 2022
Tuesday, December 01, 2015
Federal Reserve Rate Rise Waiting Game
The anticipation over the Federal Reserve's likely target rate increase is approaching fever pitch, at least for a few thousand economists, bond traders, and analysts who are otherwise surgically attached to capital markets information systems. We can amuse ourselves with what-ifs while awaiting the Fed's formal announcement.
What if the Fed raises rates by only a notional amount, like 25bps? Money market fund managers will probably breathe a sigh of relief that they won't face extraordinarily large redemptions. We cannot say the same for fixed-income fund managers, especially those with actively managed portfolios skewed towards the long end of the yield curve.
What if the Fed raises rates more than the notional amount, like anything from 25bps to 100bps? Money market funds would scramble to meet redemptions if they own anything other than overnight paper. Some of the funds would have to lean on the Fed's emergency tools, making all of the dry runs up until now worthwhile. The US equity markets would likely suffer a severe drop as companies with the weakest balance sheets immediately face higher overnight borrowing costs.
What if the Fed leaves rates unchanged? Bond fund managers breathe a sigh of relief for another quarter and the US stock market gets a little bump. The market bump continues into January if Christmas sales are better than expected. The large investors moving markets, particularly hedge funds, will tend to ignore whether the holiday sales are better or worse than last year's numbers. They only notice the headlines.
The first scenario for a 25bps increase is the most likely one, but doing nothing is always an option. A larger rate increase is probably not an option given its consequences. The Fed needs to test its new emergency levers under real world conditions before it puts the economy on a path to a more normal yield curve. The end of the Fed's emergency lending policy for SIFIs changes one such lever significantly. Testing with minimal stress is always best, but the test must come at some point.
What if the Fed raises rates by only a notional amount, like 25bps? Money market fund managers will probably breathe a sigh of relief that they won't face extraordinarily large redemptions. We cannot say the same for fixed-income fund managers, especially those with actively managed portfolios skewed towards the long end of the yield curve.
What if the Fed raises rates more than the notional amount, like anything from 25bps to 100bps? Money market funds would scramble to meet redemptions if they own anything other than overnight paper. Some of the funds would have to lean on the Fed's emergency tools, making all of the dry runs up until now worthwhile. The US equity markets would likely suffer a severe drop as companies with the weakest balance sheets immediately face higher overnight borrowing costs.
What if the Fed leaves rates unchanged? Bond fund managers breathe a sigh of relief for another quarter and the US stock market gets a little bump. The market bump continues into January if Christmas sales are better than expected. The large investors moving markets, particularly hedge funds, will tend to ignore whether the holiday sales are better or worse than last year's numbers. They only notice the headlines.
The first scenario for a 25bps increase is the most likely one, but doing nothing is always an option. A larger rate increase is probably not an option given its consequences. The Fed needs to test its new emergency levers under real world conditions before it puts the economy on a path to a more normal yield curve. The end of the Fed's emergency lending policy for SIFIs changes one such lever significantly. Testing with minimal stress is always best, but the test must come at some point.
Wednesday, November 04, 2015
Slicing The Federal Reserve's December Layer Cake
Here we go again. Federal Reserve Chair Janet Yellen is making noise about an interest rate increase. If it's not happening in 2015, it's probably not happening in 2016 either. One of my finance friends is very kind and intelligent. She often shares her wisdom with me on what this serial messaging means. It all comes down to a "layer cake" metaphor. Here is what the cake tastes like to me.
A public official's message to the general public is built on several layers of meaning. Most of those layers are intended for a general audience but other insiders hear the message too. General statements about a desire to raise rates are for the general public to hear. The public must remain confident that central bankers care about a normal economy. That reassurance is one layer of the cake.
Expressing faith in higher rates someday pushes bond yields up now, while prices of existing bonds decline. The second-order effect is to gradually make bonds less attractive as an asset class. Investors are thus less inclined to put new money into bonds, and more inclined to give bonds a lower weight in blended portfolios by selling some now. Reducing bond overweights makes an eventual bond market crash or crisis less severe, with a less stressful imposition of exit gates on bond funds. That scenario is another layer of the cake.
I cannot name my contact or describe her background in detail. She often speaks in guarded metaphors because she has access to privileged and confidential information she cannot discuss in public, and certainly not with me in private. I totally respect confidentiality imperatives. Suffice it to say that her assessments reflect a widely held culture among public policy officials, and this culture also informs the decisions of private sector financial executives. One could even say this culture circumscribes the decision making ability of private actors, because it signals how far they can push innovation before they cross a red line into public sector decisions they cannot influence.
The Fed still owns an enormous amount of mortgage-backed paper and cannot destroy its balance sheet by playing with rates. The policy innovations standing ready to impose bond fund exit gates, trading halts, and money market backstops are mostly for public officials to adjudicate, and mostly for private sector actors to execute. Wall Street's key influencers need enough advance warning to ensure their capital market decisions do not constrict the Fed's ability to act in a crisis. The Fed also continues to push for stronger capital buffers and resolution authority for SIFIs, and Wall Street gets that message too at the same time it gets the interest rate messages. That's why layer cake messaging matters.
A public official's message to the general public is built on several layers of meaning. Most of those layers are intended for a general audience but other insiders hear the message too. General statements about a desire to raise rates are for the general public to hear. The public must remain confident that central bankers care about a normal economy. That reassurance is one layer of the cake.
Expressing faith in higher rates someday pushes bond yields up now, while prices of existing bonds decline. The second-order effect is to gradually make bonds less attractive as an asset class. Investors are thus less inclined to put new money into bonds, and more inclined to give bonds a lower weight in blended portfolios by selling some now. Reducing bond overweights makes an eventual bond market crash or crisis less severe, with a less stressful imposition of exit gates on bond funds. That scenario is another layer of the cake.
I cannot name my contact or describe her background in detail. She often speaks in guarded metaphors because she has access to privileged and confidential information she cannot discuss in public, and certainly not with me in private. I totally respect confidentiality imperatives. Suffice it to say that her assessments reflect a widely held culture among public policy officials, and this culture also informs the decisions of private sector financial executives. One could even say this culture circumscribes the decision making ability of private actors, because it signals how far they can push innovation before they cross a red line into public sector decisions they cannot influence.
The Fed still owns an enormous amount of mortgage-backed paper and cannot destroy its balance sheet by playing with rates. The policy innovations standing ready to impose bond fund exit gates, trading halts, and money market backstops are mostly for public officials to adjudicate, and mostly for private sector actors to execute. Wall Street's key influencers need enough advance warning to ensure their capital market decisions do not constrict the Fed's ability to act in a crisis. The Fed also continues to push for stronger capital buffers and resolution authority for SIFIs, and Wall Street gets that message too at the same time it gets the interest rate messages. That's why layer cake messaging matters.
Sunday, April 19, 2015
The Limerick of Finance for 04/19/15
China makes a reserve ratio cut
Swap rates drop to their deepest rut
They keep easing hard
Playing Beijing's last card
Shadow banking rests on a weak strut
Swap rates drop to their deepest rut
They keep easing hard
Playing Beijing's last card
Shadow banking rests on a weak strut
Monday, April 13, 2015
Sunday, November 09, 2014
The Limerick of Finance for 11/09/14
The euro is taking big hits
Its value has gone down the pits
Draghi's stimulus pledge
Pushed it over the edge
Investors deserve to have fits
Its value has gone down the pits
Draghi's stimulus pledge
Pushed it over the edge
Investors deserve to have fits
Saturday, October 11, 2014
Sunday, September 07, 2014
The Limerick of Finance for 09/07/14
Draghi goes for new Europe boost
His own bank does not rule the roost
Central banking demand
Finally forced his hand
He can't control what he has loosed
His own bank does not rule the roost
Central banking demand
Finally forced his hand
He can't control what he has loosed
Sunday, December 29, 2013
Alfidi Capital Endorses Stanley Fischer for Vice Chair of the Federal Reserve
The ascension of Janet Yellen to the chair of the Federal Reserve's Board of Governors is just about settled, with only formalities remaining. This leaves an immediate need for a highly competent vice chair. I can think of no better candidate than Stanley Fischer, former governor of the Bank of Israel.
My first introduction to Dr. Fischer's work was his textbook Macroeconomics (with co-authors) that I used in my undergraduate business studies. The writing was clear and brilliant. I still refer to this textbook sometimes, along with my graduate school textbooks, when I need to revisit an economic concept for my blog. I'm a genius but I do learn from geniuses like Dr. Fischer once in a while.
Dr. Fischer's credentials as an economist are impeccable. This WaPo article shows how he was able to bridge the divide between competing academic trends. He was the number two person at the IMF through the Asian currency crisis of the late 1990s and the world came out just fine. His skillful stewardship of the Israeli economy during the 2008 global financial crisis helped that country avoid the troubles that caught the rest of the world in a bind.
Stanley Fischer added his expertise to the world consensus advocating containment of Iran's nuclear ambitions. He noted in 2012 that sanctions would exert political pressure on Iran to moderate its behavior. Sure enough, Tehran eventually came around to negotiations. The diplomatic agreement governing Iran's use of uranium isn't perfect but its finalization vindicated Dr. Fischer's opinion.
This guy would serve as a much-needed counterpoint to Janet Yellen at the Fed. His intellectual flexibility in academia means he is open to policy innovations that can help the Fed extricate itself from its enormous balance sheet and ZIRP. He has an enviable track record of successful crisis management at central banks, transnational institutions, and the private sector. He's the ideal candidate to restore the Fed to sane policy.
I searched for open source discussions of his record and I was dismayed to find anti-Semitism in the financial blogosphere. That is disgusting. This man is a success and yet losers throw hatred around the Internet. I'll remind these fools that the US has the right to favor those nations that share its democratic values. Israel is a stable, free society that is open to immigration. It has long been one of America's best friends in the Middle East. The US also has a long tradition of granting dual citizenship to Americans who share their personal histories with our closest allies. All of these are factors in Dr. Fischer's favor.
Dr. Fischer comes highly recommended by the power centers that matter - CFR, Bilderberg, and all the rest. They're my kind of crowd and that's good enough for me. Go Stan!
My first introduction to Dr. Fischer's work was his textbook Macroeconomics (with co-authors) that I used in my undergraduate business studies. The writing was clear and brilliant. I still refer to this textbook sometimes, along with my graduate school textbooks, when I need to revisit an economic concept for my blog. I'm a genius but I do learn from geniuses like Dr. Fischer once in a while.
Dr. Fischer's credentials as an economist are impeccable. This WaPo article shows how he was able to bridge the divide between competing academic trends. He was the number two person at the IMF through the Asian currency crisis of the late 1990s and the world came out just fine. His skillful stewardship of the Israeli economy during the 2008 global financial crisis helped that country avoid the troubles that caught the rest of the world in a bind.
Stanley Fischer added his expertise to the world consensus advocating containment of Iran's nuclear ambitions. He noted in 2012 that sanctions would exert political pressure on Iran to moderate its behavior. Sure enough, Tehran eventually came around to negotiations. The diplomatic agreement governing Iran's use of uranium isn't perfect but its finalization vindicated Dr. Fischer's opinion.
This guy would serve as a much-needed counterpoint to Janet Yellen at the Fed. His intellectual flexibility in academia means he is open to policy innovations that can help the Fed extricate itself from its enormous balance sheet and ZIRP. He has an enviable track record of successful crisis management at central banks, transnational institutions, and the private sector. He's the ideal candidate to restore the Fed to sane policy.
I searched for open source discussions of his record and I was dismayed to find anti-Semitism in the financial blogosphere. That is disgusting. This man is a success and yet losers throw hatred around the Internet. I'll remind these fools that the US has the right to favor those nations that share its democratic values. Israel is a stable, free society that is open to immigration. It has long been one of America's best friends in the Middle East. The US also has a long tradition of granting dual citizenship to Americans who share their personal histories with our closest allies. All of these are factors in Dr. Fischer's favor.
Dr. Fischer comes highly recommended by the power centers that matter - CFR, Bilderberg, and all the rest. They're my kind of crowd and that's good enough for me. Go Stan!
Monday, December 23, 2013
Happy 100th Birthday to the Federal Reserve!
The central bank of the United States is one hundred years old today. I'll bet the Board of Governors is having a blast celebrating the Federal Reserve's long history of achievement. Let's review the Fed's more notable achievements.
Here's a CPI chart showing how the Fed has degraded consumers' purchasing power since World War II by managing inflation. The Fed kept inflation artificially high after the war to make it easier for the US government to repay its war debt. Patriotic Americans who bought war bonds got ripped off in later years as inflation eroded the purchasing power of the bonds' principal at maturity. Oh BTW, the Fed learned this inflation war-funding trick in World War I according to the Mises Institute.
Here's what the NBER had to say about the Fed's ability to control inflation during World War II. Economic legends Milton Friedman and Anna Jacobsen Schwaartz saw the Fed's expanded balance sheet as a plus, if only the Fed had sold securities to control inflation. The implications for Fed's huge balance sheet today are obvious. If the Fed begins to reduce its balance sheet by selling the agency paper it has acquired through QE, the deflationary effects on our economy will destroy the stock and bond markets. The Fed must really like inflation. Remember that the next time you buy groceries or pay your energy bill.
The Fed's greatest hits aren't all in ancient history. The hits keep on coming today. Bloomberg's US bond data shows us what the Fed's ZIRP is doing to the short end of the yield curve. Rates from three months to two years are at zero, so investors using bond ladders are forced to seek yield buying much longer termed bonds as their shorter maturities expire. Those long bonds are much more sensitive to interest rate changes than short term bonds. Rates at the long end have risen this year. Prices have an inverse relationship to rates. Fixed-income investors can thank the Fed for any unhappy birthdays to come as their bonds decline in value.
Hey, I just thought of something. The Fed's periodic audits have not shown us physical proof of the system's gold reserves. Who's watching that bullion? I have an idea. Here's an exclusive look inside the NYFRB's bullion vault courtesy of Alfidi Capital.
LOL, just kidding. I've never been inside the Fed's vaults. I think cats running the show would be an improvement over the current state of affairs. Someone has to provide continuity while Helicopter Ben hands the baton to Calamity Jane. They could always pick me for a vacant Fed BOG seat, as I have more qualifications than a LOLcat.
Central banks were once a great idea. I'm not clear how they add value today. They're supposed to stabilize our financial system but prolonged interventions give rise to instability. Artificially suppressing interest rates leads to distortions in the cost of capital that investment managers and corporate project managers use to plan investments. This places economic growth at risk. Playing games with interest rates means foreign central banks can't trust the value of their dollar-denominated securities. This places the dollar's world reserve status at risk. The Fed had a role to play the United States' growth as a world power. Its indefinite monetary stimulus is now risking our world power status. Happy birthday, indeed.
Here's a CPI chart showing how the Fed has degraded consumers' purchasing power since World War II by managing inflation. The Fed kept inflation artificially high after the war to make it easier for the US government to repay its war debt. Patriotic Americans who bought war bonds got ripped off in later years as inflation eroded the purchasing power of the bonds' principal at maturity. Oh BTW, the Fed learned this inflation war-funding trick in World War I according to the Mises Institute.
Here's what the NBER had to say about the Fed's ability to control inflation during World War II. Economic legends Milton Friedman and Anna Jacobsen Schwaartz saw the Fed's expanded balance sheet as a plus, if only the Fed had sold securities to control inflation. The implications for Fed's huge balance sheet today are obvious. If the Fed begins to reduce its balance sheet by selling the agency paper it has acquired through QE, the deflationary effects on our economy will destroy the stock and bond markets. The Fed must really like inflation. Remember that the next time you buy groceries or pay your energy bill.
The Fed's greatest hits aren't all in ancient history. The hits keep on coming today. Bloomberg's US bond data shows us what the Fed's ZIRP is doing to the short end of the yield curve. Rates from three months to two years are at zero, so investors using bond ladders are forced to seek yield buying much longer termed bonds as their shorter maturities expire. Those long bonds are much more sensitive to interest rate changes than short term bonds. Rates at the long end have risen this year. Prices have an inverse relationship to rates. Fixed-income investors can thank the Fed for any unhappy birthdays to come as their bonds decline in value.
Hey, I just thought of something. The Fed's periodic audits have not shown us physical proof of the system's gold reserves. Who's watching that bullion? I have an idea. Here's an exclusive look inside the NYFRB's bullion vault courtesy of Alfidi Capital.
LOL, just kidding. I've never been inside the Fed's vaults. I think cats running the show would be an improvement over the current state of affairs. Someone has to provide continuity while Helicopter Ben hands the baton to Calamity Jane. They could always pick me for a vacant Fed BOG seat, as I have more qualifications than a LOLcat.
Central banks were once a great idea. I'm not clear how they add value today. They're supposed to stabilize our financial system but prolonged interventions give rise to instability. Artificially suppressing interest rates leads to distortions in the cost of capital that investment managers and corporate project managers use to plan investments. This places economic growth at risk. Playing games with interest rates means foreign central banks can't trust the value of their dollar-denominated securities. This places the dollar's world reserve status at risk. The Fed had a role to play the United States' growth as a world power. Its indefinite monetary stimulus is now risking our world power status. Happy birthday, indeed.
Wednesday, December 18, 2013
Fed's Mild Taper Leaves ZIRP In Place
Well, I'm surprised that the FOMC decided to dial back its securities purchases by $10B per month. I'm further surprised that US stock markets rallied on this news. I did not expect them to change course. Market analysts are taking that as a vote of confidence in the economy's health. It's too bad they rely on rigged statistics to gauge the economy's health; they should read Shadow Government Statistics instead. The more significant news is that the Fed is leaving the target federal funds rate at zero. That ensures that banks will still be able to borrow at almost no cost and hold Treasuries, maintaining their risk-free carry trade. Perhaps the bond-buying program isn't as crucial to the economy as ZIRP. It's still worth $75B each month and it's not ending all at once.
I wonder whether the inventory of agency MBS available from GSEs was a factor in the Fed's decision. This May 2013 research paper from the Federal Reserve Bank of New York finds that the MBS market has plenty of liquidity. The housing market's recovery (which in turn is driven by ZIRP making mortgages cheap) also means MBS look more attractive to institutions. If that's really the case, the Fed won't have to work as hard to support MBS valuations. Lots of banks and pension funds own MBSs, so the taper means the Fed seems less worried now about supporting bank balance sheets and keeping pension funds solvent. The Mortgage News Daily MBS Dashboard shows that MBS prices fell slightly across the board today and Treasury yields rose slightly. Less Fed demand for agency paper means the prices fall. These price moves are a more relevant measure of the FOMC's taper decision.
I wonder whether the inventory of agency MBS available from GSEs was a factor in the Fed's decision. This May 2013 research paper from the Federal Reserve Bank of New York finds that the MBS market has plenty of liquidity. The housing market's recovery (which in turn is driven by ZIRP making mortgages cheap) also means MBS look more attractive to institutions. If that's really the case, the Fed won't have to work as hard to support MBS valuations. Lots of banks and pension funds own MBSs, so the taper means the Fed seems less worried now about supporting bank balance sheets and keeping pension funds solvent. The Mortgage News Daily MBS Dashboard shows that MBS prices fell slightly across the board today and Treasury yields rose slightly. Less Fed demand for agency paper means the prices fall. These price moves are a more relevant measure of the FOMC's taper decision.
Saturday, November 23, 2013
Sunday, November 10, 2013
The Limerick of Finance for 11/10/13
Central bank policy on the ropes
Planners fall back to desperate hopes
They still want to print
Markets can't take a hint
We'll need some new financial tropes
Planners fall back to desperate hopes
They still want to print
Markets can't take a hint
We'll need some new financial tropes
Wednesday, August 21, 2013
Fed July Meeting Notes Hint Taper That Will Never Come
I've said it before and I'll say it again: The Fed is not going to taper of its own accord. It will not taper on a boat, nor will it taper with a goat (apologies to Dr. Seuss). The FOMC meeting notes from July hint at a taper sometime between now and 2014, or whenever, depending on how much improvement they see in the macro numbers. Pfffffffttttt! That's me showing what I think of such baloney.
Every hint of a taper makes the US stock market sink. Consumers are still losing income and can't power a recovery through spending. Read what I wrote back in June about the BIS's finding that central bank monetary stimulus in the world's largest economies is the only thing moving stocks, bonds, and housing higher.
Bubbles are fun to ride on the way up. Timing the popping is impossible. I've avoided this mother of all bubbles and many of my peers in town have not.
Every hint of a taper makes the US stock market sink. Consumers are still losing income and can't power a recovery through spending. Read what I wrote back in June about the BIS's finding that central bank monetary stimulus in the world's largest economies is the only thing moving stocks, bonds, and housing higher.
Bubbles are fun to ride on the way up. Timing the popping is impossible. I've avoided this mother of all bubbles and many of my peers in town have not.
Thursday, December 13, 2012
Sunday, September 23, 2012
The Limerick of Finance for 09/23/12
The Fed has a new lease on life
With tools to fight financial strife
Well-intentioned but wrong
This bold style won't last long
When inflation sticks it with a knife
With tools to fight financial strife
Well-intentioned but wrong
This bold style won't last long
When inflation sticks it with a knife
Friday, September 14, 2012
Monday, September 10, 2012
Financial Sarcasm Roundup for 09/10/12
I love it when I'm right, especially when I'm ahead of the rest of Wall Street. I wrote a few days ago about the danger to the U.S. economy from the looming ILA strike at East Coast and Gulf Coast ports, and said strike now looks very likely. I am not alone in noting the severity of what we can expect; Asian shippers are getting very concerned. The financial analyst community needs to take a serious look at how re-routing container ships to the Port of Oakland leaves the U.S. economy exposed to a shutdown from as little as a few hundred Occupy Oakland idiot activists. I do not feel sorry for any hedge fund managers who insist on ignoring fundamentals just to pick up nickels in front of this steamroller. I want professional money managers to keep doing exactly what they're doing now, piling on one bad call after another by following each other in a herd over a cliff.
One thing I don't need cluttering my workspace is yet another prediction of monetary easing from the Fed. These Captain Obvious statements are pointless in the face of Helicopter Ben's repeated statements of intent, plus the proclivity of every academic to spend their entire careers justifying a PhD thesis (go read Ben's "printing press" speech and his Princeton work). Anyway, those economists are correct about further stimulus doing nothing but they're missing one thing. Money velocity is at rock bottom. Steroid injections go nowhere if blood isn't circulating. That can all change in a heartbeat if politicians force banks to lend. I am still convinced that some form of forced lending, like the HAMP mortgage modification program but much larger, will be one of the transmission mechanisms for a wage-price spiral into serious inflation.
Germany still wants to put the kibosh on the ECB's newfound willingness to destroy that country's credit rating with unlimited sovereign bond buying. The German constitutional court may vote to block German contributions to European rescue funds. That court needs to read Mario Draghi's speeches again, paying particular attention to the enormous caveats he put in about the austerity criteria any destitute country has to meet before getting a bailout. No way are Greece, Spain, and Italy going to meet those criteria with their economies already in austerity-driven death spirals. No way will they get more than token bailouts that temporarily prop up European stocks. No way is the ECB going to save the euro.
One thing I don't need cluttering my workspace is yet another prediction of monetary easing from the Fed. These Captain Obvious statements are pointless in the face of Helicopter Ben's repeated statements of intent, plus the proclivity of every academic to spend their entire careers justifying a PhD thesis (go read Ben's "printing press" speech and his Princeton work). Anyway, those economists are correct about further stimulus doing nothing but they're missing one thing. Money velocity is at rock bottom. Steroid injections go nowhere if blood isn't circulating. That can all change in a heartbeat if politicians force banks to lend. I am still convinced that some form of forced lending, like the HAMP mortgage modification program but much larger, will be one of the transmission mechanisms for a wage-price spiral into serious inflation.
Germany still wants to put the kibosh on the ECB's newfound willingness to destroy that country's credit rating with unlimited sovereign bond buying. The German constitutional court may vote to block German contributions to European rescue funds. That court needs to read Mario Draghi's speeches again, paying particular attention to the enormous caveats he put in about the austerity criteria any destitute country has to meet before getting a bailout. No way are Greece, Spain, and Italy going to meet those criteria with their economies already in austerity-driven death spirals. No way will they get more than token bailouts that temporarily prop up European stocks. No way is the ECB going to save the euro.
Tuesday, August 28, 2012
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