Posted on 02/06/2022 9:30:10 AM PST by Browns Ultra Fan
Let’s see how The Federal Reserve will handles its bloated balance sheet, particularly with a midterm election around the corner.
What a difference 25 years makes. Worried that inflation was about to turn higher, the Federal Reserve in February 1994 began raising interest rates, taking the federal funds rate from 3% to 6% a year later. As it turned out, those worries were unfounded: The U.S. consumer price index barely budged, finishing the year at 2.7%, right where it had started.
Some central banks say that rate hikes are coming, but their extraordinary reluctance to deal with actual inflation means it will become entrenched. Not only will policy makers have to raise rates more than they envision, but they will have to cut the size of their massive balance-sheet assets, too. Don’t expect that the process will be anything other than awful for risky assets of all stripes.
The policies of zero or negative rates and seemingly infinite QE looked idiotic (and were) when they were adopted, and time has not been kind. Paradoxically, they could only be sustained if central banks were wrong, and their policies failed to spark inflation. Now that inflation has taken hold, rates will go up substantially and balances sheets will need to shrink.
What would you pay for fixed-income assets now if you knew that central banks will become, in effect, forced sellers later? I can’t see how any financial asset will escape the damage from the likely lurch higher yields. The way out of these policies will be as nasty as the way in was nice.
Particularly since Fed Funds Futures are pointing toward 6 rate increases over the next year.
At least Treasury Secretary Janet Yellen is wearing her Mao jacket.
(Excerpt) Read more at confoundedinterest.net ...
The swamp world will do everything to protect the disgusting chomo in chief.
Some form of market rates for interest is the only way to slow the growth of government. Low interest has/will destroy the world. The faux growth of the past decades has relied on massive government spending and debt. Gen x, y, z etc are the biggest bag holders in the history of the world.
We are pretty much screwed. Turn off the money hose and our economy crashes almost for sure. Keep going the same way we are going and we risk s pretty serious bout of stagflation. Open up the money hose and we risk hyperinflation. You simply can’t shut down the worlds economies for 2 years without consequences .
He keeps saying they will now have to shrink their balance sheets. Why? The truth is they dont. They could just hold the debt till they expire. 2, 5, 10, 20, 30 year notes and bonds could just be held till maturity.
They HAVE to raise rates - savings accounts are practically worthless.
Never thought a central bank was a bank. Words.
“Bloated Central Bank Balance Sheets Are the Real Risk”
No, they aren’t. Government overspending is the real risk.
No, they aren’t. Government overspending is the real risk.
“What will cause the cashflow to stop?”
Ending govt overspending is the only way. The FED is the only reason we still have a somewhat functioning economy.
Ending govt overspending is the only way.
Ill believe it when I see it. The market has already built in 4 rate increases. Rates are still in the three’s.
On a lesser scale, those kinds of operations are conducted successfully all the time by the US Treasury Department and the NY Federal Reserve Bank. At the international level, central bank coordination and the BIS bank assure that the international financial system adapts without incident.
As in the 1980s under Ronald Reagan, the best answer for the larger policy problem of stagflation caused by too much debt and liquidity is a combination of monetary discipline and expanding the supply of goods and services by cutting taxes and regulation. Trump's economic success was based on such policies, and we may yet see a return to them if Trump and a Trumpified GOP Congress come back into power.
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