The Federal Reserve has been pumping liquidity (aka, air) since late 2008. And the stock market and commercial real estate prices have soared.
Federal Reserve officials had “many questions” about the benefits of yield-curve control when they discussed its pros and cons during their meeting in early June.
“Many participants remarked that, as long as the committee’s forward guidance remained credible on its own, it was not clear that there would be a need for the committee to reinforce its forward guidance with the adoption of a YCT policy,” minutes published Wednesday of the June 9-10 Federal Open Market Committee meeting showed. YCT refers to yield caps or targets.
Here is today’s Treasury yield curve versus the yield curve on December 1, 2005. Looks more like wholesale panic to me.
Furthermore, Powell and The Fed have signaled in the minutes that more long-term debt will have be issued … and purchased by The Fed.
The Fed dots plot from the recent meeting shows low interest rates until after 2022.
To infiniti … and beyond!!
“In the field of monetary and credit policy, precautionary action to prevent inflationary excesses is bound to have some onerous effects— if it did not, it would be ineffective and futile. Those who have the task of making such policy don’t expect you to applaud. The Federal Reserve, as one writer put it after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”
William McChesney Martin, Speech to Investment Bankers Association of New York, October 1955
Perhaps The Fed removes the punch bowl in Muriburi Land, but The Fed certainly didn’t remove the punch bowl in the USA. The S&P 500 index and commercial real estate have both exploded with the perpetual punch bowl.
“We’re not even thinking about thinking about the consequences of our actions.”
Jerome Powell, Chairman, Federal Reserve
Apparently, Chairman Powell lives in financial Muriburiland.
Thanks to Jesse at Jesse’s Cafe Americain for the quotes!
10-year TIPs yield have dropped to their lowest level for the year.
Gold is tracking negative real yields.
The Federal Reserve has a basic instinct for asset bubbles.
Mortgage lenders should rejoice at the continuing low level of 30-year mortgage rates and the 10-year Treasury yield.
The Covid-crisis can be seen in the following chart, starting in January 2020. It has been all downhill since January 1st in terms of rates and yields. With the exception of the blip in the Freddie Mac US Mortgage Market Survey 30 Year Homeowner Commitment rate around March 19, 30-year mortgage rates are barely above 3%.
The US Ultra Bonds futures price continues to trade at an ultra-premium.
The ultra premiums in ultra bond futures indicates that the Covid shutdowns are likely to return. Or continue to ravage the economy. And endless interference in markets by The Federal Reserve.
Remember the rhetoric about The Federal Reserve using low interest rate policies to stimulate investment? Was it correct? Or did The Fed read the wrong book?
So now the USA has staggering levels of debt with historic low interest rates.
But corporations are letting their assets age rather than using low interest rates to purchase new assets.
Combine that with the
Apparently, Bernanke, Yellen and Powell read from the wrong book.
Here is Fed Chair Powell holding his “boomstick.”
The US economy has gotten pummeled by the economic shutdown. The Atlanta Fed’s GDPNow measure of Q2 GDP is now at -45.5% with two weeks to go until the end of Q2. Note that The Federal Reserve has been expanding the M2 Money supply with a vengeance since the end of February.
M2 Velocity (Nominal GDP / M2 Money Supply) was at an all-time low at the end of Q1. The economic destruction caused by the Covid-19 related economic shutdown is epic.
On the positive side, the Philadelphia Fed is showing a V-shaped recovery.
On the down side, the trillions of monetary stimulus generated by The Fed has helped the S&P 500 index detach from corporate earnings. Or out of sync.
I could also say “Fauci’d”, thanks to our own Grim Reaper of the economy.
One month after the first 20Y auction in 34 years, the 20Y auction priced at a yield of 1.22% amid surprisingly strong demand. Moments ago, the Treasury sold its second batch of the recently restarted 20Y Treasury in the form of a $17 billion reopening of the original cusip (SR0), which priced at a high yield of 1.314%, which while higher than last month’s 1.22% yield was unexpectedly strong, stopping through the When Issued 1.329% by 1.5bps.
The auction metrics are as follows:
- Bid to Cover: 2.63x, compared to 2.53x in the inaugural auction last month
- Indirects: 61.6%, higher than last month’s 60.7%
- Directs: 16.5%, also well above May’s 14.7%
- Dealers: 21.9%, obviously lower than last month’s 24.6%
The 20Y Treasury appears at near the peak of the Treasury yield curve
(Bloomberg) — The Federal Reserve pledged to maintain at least the current pace of asset purchases and projected interest rates will remain near zero through 2022, as Chairman Jerome Powell committed the central bank to using all its tools to help the economy recover from the coronavirus.
“We’re not even thinking about thinking about raising rates,” he told a video press conference Wednesday. “We are strongly committed to using our tools to do whatever we can for as long as it takes.”
Yes, The Fed kept their target rate at 0.25 basis points but are not allowing negative rates.
The Fed Dots Project suggests higher rates in the future but not until 2022 .. and beyond!
In a separate Operating Policy note from the NY Fed, we read that:
- the Desk plans to continue to increase SOMA holdings of Treasury securities at the current pace, which is the equivalent of approximately $80 billion per month
- the Desk plans to continue to increase SOMA holdings of agency MBS at the current pace, which is the equivalent of approximately $40 billion per month
Yes, Powell and The Fed are committed to printing money to infinity … and beyond!
Speaking of Powell’s proclamation that negative rates are not appropriate for the US, the Rudebusch (SF Fed) specification of the Taylor Rule says that the Fed Funds target rate should be -13.52%.
That represents a spread of 13.77% over the current Fed Funds Target rate of 0.25%, the largest disconnect since 2000.
Apparently, Powell has gone as low as he will go.
Economists at the University of Chicago estimate that more than two-thirds of the workers on unemployment insurance are making more in jobless benefits than they did at work. Some are even hauling in two to three times as much.