In addition to hiking today, the Fed announced its Plan to Shrink Asset Holdings Beginning This Year.
Balance sheet reduction hasn’t started yet, nor did the Fed even say when it would start. Since the Fed will announce the start date in advance, its eye would appear to be focused on December.
Once balance sheet reduction starts, the cap will be $10 billion a month rising to $50 billion a month, on a schedule not posted.
How to Build Up a Balance Sheet
The initial $10 billion cap on reductions is $6 billion in Treasury securities and $4 billion in mortgage bonds.
The maximum reduction rises to $50 billion a month, $30 billion a month for Treasurys and $20 billion a month for mortgage securities.
How Long Will It Take?
At $10 billion a month, $120 billion a year, it would take the Fed 29 years to reduce its balance sheet to $1.0 trillion from $4.5 trillion.
At $50 billion a month, $600 billion a year, it would take 5.8 years. If the Fed slowly ratchets up its cap, we are talking about a 10-year time frame.
Those are the absolute minimum and maximums assuming the Fed starts reduction and does not stop until it’s done.
Those timeframes are highly unlikely in actual practice because they presume the Fed won’t halt or reverse balance sheet reductions when the next recession starts.
From a practical standpoint, somewhere between 30 years and never is about right.
Build Me Up Buttercup
In honor of the next Fed asset build-up, I offer this musical tribute.
Mike “Mish” Shedlock
So flooding the market with bonds means bond prices drop which means interest rates go up and up and up?
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There is no flood.
The Fed is not selling anything
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So not selling – just letting bonds mature?
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yes
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I think “The 12th of Never” is the appropriate theme song for this unwinding.
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I agree it’s hot air. There is no real market for this stuff. The FED always has to pretend it’s in control but in reality it reacts to natural forces by trying to get on the “bandwagon” early. Bond rates moving up will blow up all sorts of levered products…and since there are no real buyers except Fed associated banks they are basically stuck with this trash
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I think Mish means that they are just not replacing bonds that expire rather than selling their inventory of bonds.
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yes
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True, they are not selling. But they are not buying either. Someone else is going to buy the new mortgage loans and treasuries that the FED is not buying. So supply will increase which should increase yields.
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https://www.thebalance.com/how-does-the-fed-raise-or-lower-interest-rates-3306127
Though I am not an analyst, so cannot tell if reserve levels will be affected enough to move yields of various assets.
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If we are unwinding from $4.5 trillion to $1.0 trillion in 10 years, it will be an essential retrace of what we did in the past decade. We have seen what QE did to the rates in the past 10 years. And we can expect the reversal will affect yields in opposite direction. But I think the result would be far worse. So I don’t expect the full retrace in 10 years. Maybe 30 years if it ever happens.
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Please explain HOW they shrink the balance sheet, by selling those mortgages and securities??? To whom? At what price? I do wish I understood these things better
Bob Runk
>
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The plan is not to sell a damn thing. As bonds mature the Fed said it will not buy more.
Sell is not and never was in the vocabulary. Right now the Fed reinvests interest, It will stop – supposedly
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You are assuming that there are enough maturing bonds to meet the monthly target which may not be true. Regardless, the size of the bond market will increase by up to 3.5 trillion in 10 years(?). This is MASSIVE!
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Mish, let’s not forget the US budget deficit. Somebody has to finance another $1 trillion or so EVERY YEAR. The past few years that somebody has been the fed, as nobody else wants much more.
So the fed will be buying and selling at the same time. No significant draw down will ever happen.
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Since most of this is a confidence game, the Fed is trying to reload its only weapon so it can fire it again when we have the next recession. In real terms, this is a big nothingburger.
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The Fed is “going to” (future tense) start reducing its balance sheet in September, probably hopefully maybe but not definitely. It will start by reducing “up to” (possibly less than?) $10 billion, and will (more future tense) ramp that up over time.
Yellen is history at the end of February.
Yeah, yeah, Trump has bigger fish to fry at the moment — but if he hopes to get the economy moving or make America great again or whatever other stuff… the incompetents must go. Meritocracy must be restored.
Bernanke and Yellen have zero real world experience between them, and all too obviously don’t know what they are doing. Zero rates have failed in Japan for ~30 years, failed in Europe, and they are failing here in the US.
It doesn’t matter what the academic models say – those are just unproven theories. It matters what happens in the real world. ZIRP and QE don’t work. Rather they destroy the tax base from which Washington DC (and the Fed) get their influence.
Volcker raised interest rates to slay the broad based inflation dragon, and somebody is going to have to slay the sector inflation in education and health care. Washington DC’s survival depends on it (oh, and the rest of the country too if anyone in Washington still cares about us)
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ZIRP and QE have worked – they stimulated the economy and we are running again – also we got rid of the bad debt and restructured – Japan kept their bad debt and ran out of ideas when ZIRP wasn’t enough. The biggest issue we have is the increasing Gini and the subsequent slowing of money circulation as the top 20% vacuum up new income and dump it in index funds and other instruments, creating an across-the-board increase in asset prices.
A nice bout of tax increases on the top 5% (FYI I’m proposing raising my own taxes, so don’t accuse me of “class warfare”) and raising the minimum wage to put money into the hands of people who will immediately spend it and we can get the economy accelerating instead of limping along.
I presume I’m in the minority on this here.
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What do you think has created the inequality you’re complaining about?
ZIRP and QE overwhelming benefited asset holders at the expense of everyone else who now deals with non-existent interest on savings as well as unprecedented inflation in rent, housing, and education costs.
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“What do you think has created the inequality you’re complaining about?”
Trickle down economics.
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ZIRP and QE did what they did and left us where we are, there is no empirical comparison available as to what result any other route would produce, nor where the current one will lead to.
The trouble with your model is that the inflation is not organic, it is a product of monetary policy, the idea of then using further monetary policy ( taxation and redistribution is also monetary policy if you delve into the mechanics, a simple example being that it will influence the price of money, or be used to) is to move further into the realm of economic management by government as opposed to a more natural evolution of individual success or failure, or of freer market pricing and organisation.
Frankly, there is no way for anyone here to be able to judge whether you have not calculated that even with a higher tax you will not come out relatively better off according to your idea. That is to underline that outside management is likely to be biased, no matter how it is disguised, and just one more impediment to average people trying to calculate exactly what any value should or will be. You can add to that that the more intervention is used, the more the whole economy becomes dependent on that intervention, building in future expectations of intervention, and demanding of it.
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Well the taxes lower the deficit and the higher minimum wage promotes increases the velocity of money. Pretty basic economics.
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Socialist/progressive economic theory. Mostly fantasy and wishful thinking that is bankrupt when examined in terms of empirical results where implemented. Yes, increased velocity of money, but only because the currency becomes so devalued that it takes much more money to buy the price-inflated necessities of life.
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System wide debt is higher than in 2008. Stop your incessant lying
And only a socialist would suggest even higher taxes. I don’t care if you claim to be taxing yourself (I doubt your sincerity anyhow). The government has plenty of revenue — they waste it. Regardless of whether the subjects are worthy causes (which people of different politics will disagree on what is “worthy”) — it costs too f’ing much when the federal government does it.
War (even if necessary) can be done cheaper. Welfare can be done cheaper. Healthcare can be MUCH cheaper. Agriculture can be cheaper. Education can be cheaper…
Lets be honest here: even graft and corruption can be done cheaper.
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@ Medex :
On Attali, synthesis of state and finance into NWO
“He thinks the regulation of the economy by a global financial supervisory institution may be a solution to the financial crisis which started 2008. The financial institution is a first step towards the establishment of a democratic world government, of which the EU can be a laboratory.”
He is behind a lot of French government
https://leblogalupus.com/2017/06/13/le-monde-de-demain-selon-attali-ou-la-mise-en-esclavage-des-peuples-par-les-mondialistes-video/
On the voting stats – LREM takes parliament with the results of losing party
https://leblogalupus.com/2017/06/14/douce-france-apres-limposture-en-marche-en-finir-avec-la-ve-republique/
I guess you don’t read French maybe, but I put these articles down as reference… maybe they describe the mainstream version of Soros.
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I accused monosynaptic of lying. Most of what he writes is inaccurate. He is just an annoying human being, determined to make the rest of the world miserable
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“Healthcare can be MUCH cheaper.”
I assume you are referring to the evidence from the rest of the World that has better outcomes (measured in longevity) and that pay about 1/2 of the GDP we do.
What system do most of these countries use?
(Hint: single payer)
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First of all, single payer doesn’t make anything cheaper.
Even if other governments could control health costs (and the evidence proves they cannot — its all subsidies and misleading accounting tricks), the US government has proven beyond any shadow of a doubt that it cannot. Stop bringing up your stupid idea mono, you are an ass.
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Themonosynaptic is not lying. He is merely stating what he believes. Plus he can state it eloquently. Medex, however constantly lies. He takes what others say, changes the words, adds a couple of paragraphs of ranting, and then tries to insult them for something they never even said. I may not always agree with everything Themonosynaptic says, but at least I appreciate his opinions and think about his (her?) posts. Medex, on the other hand, is rarely worth reading. Just an angry old man. Best to ignore him as much as possible.
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Yes, mono is lying. Choosing winners then choosing other winners so that everyone is a winner is lying. It is a false arrangement that benefits only few in the real world but distorts the establishment of a granular society. That is what the link on Attali describes, he foresees/promotes an exceleration based on money becoming the most vital asset, where people become clones of themselves as a comodity.
Medex knows what he sees, he is blunt about it and does not always have the full detail, but his view is clear enough to understand for anyone who has any experience, not that that implies agreement is a given.
But the base problem in these arguments is most likely ethical. How much trust and power do you put in outside authority, how much use of force and legislation is acceptable, if any? We have our different views on freedom, society, governance, and so here at least we tend to reduce the power and say to the individual in the present as far as possible, not some nice organisation and safe space distribution of reality forced on society by the vote of others.
Government is supposed to be there to protect a high ethic, but to leave people to arrange amongst themselves as they choose, what we have now is very corrupt, and full of mission creep at all levels. Tell me these extensions are ‘for our own, or the greater, good’ and you will find someone who questions your self honesty.
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They will not sell because there are no buyers…….
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Who will buy the replacement bonds that the US T will have to issue to replace the matured ones?
Seems to me that they’re just dumping the mess back to the Treasury, which will have to find some way of financing itself.
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How do you equate this statement with the fact that interest rates on treasuries are at historic lows? There is an overabundance of wealth keeping bond prices high.
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When is the Fed expecting the next recession? Sometime after 2023?
That would make the current “recovery” the longest on record by a HUGE margin.
They apparently think they have “conquered the business cycle”.
Their arrogance and hubris is utterly breathtaking.
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Their meddling has extended this Deflation into like forever. They had to save all the bad assets, bad players and malinvestment to protect the corrupted government and corporate donors. Now they broke it-and presumably the FED owns it and “us”. The market is trying to deflate every second but the algorithm-based bots float it back up. A kabuki theater. Capitalism is very much dead.
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The deflation has come from China adding 100’s of millions of low cost workers onto the World economy at the same time as 10,000 mile supply chains have become economic and common. The rise of China has been the largest deflationary pressure on the World economy for almost two decades now. Our monetary policy is trivial in comparison.
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Let us never forget that Mr. Bernanke had the “courage to act” just when we needed him to remain inactive and let market forces clear out a lot of malinvestment and restore some true price discovery. Without such courage, we might still be waiting for Adam Smith’s invisible hand to show up and bring about the necessary order for capitalists to see where their capital will get treated best and to send it there.
Bernanke knew better and realized he must do away with all that “business cycle” malarky and stimulate never ending growth instead. It’s not easy being a banker you know. Just think how difficult being a central banker must be! The store of courage it requires must be inexhaustible, as must be our debt of gratitude to those rare souls who can lend even when there are no suitable borrowers to step forward in a crisis.
sarc /off
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Yellen’s Hint: For sale does not necessarily mean it will sell.
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So the bond matures and the money comes in to the fed from the bond issuer. What does the fed do with it? Does it give it to gov or does take it out of the system completely?
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When a bond matures, interest is paid, the bond is gone
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Don’t fight the Fed. Move your seed into physical gold / silver / cryto while you can. Relax until the storm has passed.
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Its a step in the right direction anyway.
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When the Treasury bond matures, I suppose the Treasury pays it back? Yet, they have no cash and we are back to printing money. That would cause inflation and the Fed needs to raise rates? Rates, inflation, stocks, real estate all up. Sounds like something might go wrong.
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When the bond matures, the loan has been paid back – it vanishes
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I don`t get the meaning of “it vanishes”…the bonds mature, the fed receives cash but doesn’t repurchase new bonds – but what happens to the cash they receive in this unwinding proccess? Do they burn it ? hold it? pay down government debt? But who does the central bank have to repay if they printed the money in the first place?
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Balance sheet reduction is a drain on cash
Reverse repos and reverse coupon passes are a drain on cash
When the Fed buys assets, cash in the economy goes up
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