Will The Fed Buy Stocks Next?

Since he became Federal Reserve Chair two years ago, Jerome Powell has created a new mandate for the Fed above and beyond its “dual” Congressional mandate to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates” (that’s federal government math for you).

Powell has added putting a floor under stock prices, which usually has come to mean when the market reaches correction territory (i.e., prices fall by about 10%). When stocks reach that threshold, count on the Fed to cut interest rates or loosen monetary policy in order to restore order and investor confidence. So far in his tenure, the Powell Fed has been pretty successful in that regard. Even when overall economic conditions (GDP growth and unemployment) provide no justification for lowering rates, the Fed has stepped in to prop up the market.

Now, however, the current panic selling over the coronavirus has tested the Fed’s ability to wave its magic wand and restore peace to the market. As we know, the Fed’s recent decision to make an emergency 50 basis-point cut in the federal funds rate three weeks before its next scheduled meeting proved to be a dud. Investor confidence has now been so spooked by the uncertainty created by the virus that the rate cut caused barely a blip, and stock prices continued to tank.

Moreover, despite the market begging for the Fed to cut rates, Powell only opened himself up to criticism for actually delivering. The cut was either too small, some critics said, or a cut would have no effect in such a situation, so why bother doing it, others said. Yet the market consensus now seems to believe that another 50 basis-point cut is already baked in the cake when the Fed meets on March 17-18. But market anxiety being what it is, there’s no assurance that that will have any effect, either.

Already, many so-called experts are calling for some form of fiscal stimulus, as opposed to monetary stimulus, such as a Continue reading "Will The Fed Buy Stocks Next?"

"We Will Use Those Tools..."

Yesterday from Fed Chairman Powell…

Powell says Fed will aggressively use QE to fight next recession

Federal Reserve Chairman Jerome Powell said Wednesday the central bank would fight the next economic downturn by buying large amounts of government debt to drive down long-term interest rates, a strategy that has been dubbed quantitative easing, or QE.

Of course, they will. The fix is always in, isn’t it? Wouldn’t want to let a system and associated economy so far out on a brittle limb weighed down by exponential debt leverage go it on its own, now would we? Wouldn’t want anything like a naturally functioning economy because until an utter and complete crash and clean out, there can be no such thing. So more debt manipulation it is!

“We will use those tools — I believe we will use them aggressively should the need arise to do so,” Powell said.

The Fed has traditionally been able to slash interest rates to fight a recession often by as much as 5 percentage points. But that’s impossible now because the Fed’s benchmark rate is currently in a range of 1.5%-1.75%.

“We will have less room to cut,” Powell said.

Duh.

Now comes the money line Continue reading ""We Will Use Those Tools...""

QE or Not QE: The Consequences Are The Same

It may look, swim and quack like one, but Federal Reserve Chair Jerome Powell insists that the Fed’s recent reinflation of its balance sheet past the $4 trillion mark isn’t quantitative easing. Oh no, he says, just because the Fed’s portfolio recently rebounded to $4.175 trillion at the middle of January, up from a six-year low of $3.76 trillion since the beginning of September, doesn’t mean that the Fed is back to its old QE ways, which had pushed the Fed’s balance sheet to a steady $4.5 trillion between 2014 and 2018 when it started to shrink.

But QE by any other name is still QE.

At least one voting member of the Fed’s monetary policy committee has expressed some concern about the recent boost in the Fed’s balance sheet – more than $400 billion in just the past four months.

“The Fed balance sheet is not free and growing the balance sheet has costs,” Robert Kaplan, the president of the Dallas Fed, told reporters at a recent Economic Club of New York event, according to the Wall Street Journal. “Many market participants believe that growth in the Fed balance sheet is supportive of higher valuations and risk assets. [That’s Fed-speak for a bubble]. I’m sympathetic to that concern.”

For the past 12 years, ever since the financial crisis in 2008, the Fed has swollen the size of its balance sheet – its holdings of U.S. Treasury and government-insured mortgage-backed securities – from less than $1 trillion to more than four times that. Its first burst of bond-buying took place in 2008, during the depths of the meltdown when its portfolio more than doubled in less than a year. It then gradually increased to more than $3 trillion over the next five years, at which time QE took it to $4.5 trillion, where it held steady until 2018, when the Fed started to allow its holdings to run off as they matured, until its recent policy U-turn.

And what was the direct result of all that buying? Continue reading "QE or Not QE: The Consequences Are The Same"

Why Is The Federal Reserve Not Selling?

Lior Alkalay - INO.com Contributor


On March 15th, the Federal Reserve Chairman, Janet Yellen, announced that the Fed would raise its target rate to 0.75-1.00% from 0.5-0.75%. Yellen also stressed, in a clear, hawkish tone, that the United States economy is doing well. After roughly three months of “hints” embedded in the Fed’s many statements, that news was hardly a surprise.

But in the same speech, Yellen stressed that the Fed was not ready to start selling the $4.5 trillion in the Treasury Notes, Treasury Bonds and mortgage papers that it holds on its balance sheet. Instead, Yellen stressed that the Fed sees rate hikes as the monetary tool. Further, rate hikes, as a tightening measure, must first be exhausted before the Fed would start selling those trillions. That was a clear retreat from the hints the Fed had dropped in the weeks which followed President Trump’s inauguration.

In fact, one could go so far as to say Yellen’s rhetoric, with respect to the Fed’s balance sheet, has been dovish; the way Yellen specifically emphasized how cautious the Fed is about the prospect of trimming its balance sheet singled that option out as some kind of a “bomb” that the Fed doesn't really want to drop and which could send markets into panic mode. If, indeed, the US economy doing so well, why then is the Fed not ready to roll back Quantitative Easing, a stimulus measure generally considered life support for the banking system? Continue reading "Why Is The Federal Reserve Not Selling?"

Eurozone: 2017 Spells More Trouble

Lior Alkalay - INO.com Contributor


The year 2017 is just around the corner and it seems that more troubles are brewing for the Eurozone. The region faces a deadly combination of a premature ECB taper, Fed tightening and more political uncertainty. Together, those factors could disrupt the already fragile Eurozone recovery.

ECB Tapers While Fed Tightens

Mario Draghi, the ECB President, so far has proved (and more than once) his ability to stabilize the Eurozone economy and delicately navigate monetary policy. But, in the latest ECB rate decision, which was also the last for 2016, Mario Draghi may have slipped up and acted a bit too hastily. Draghi declared that the ECB would reduce its monthly bond purchases from the current pace of €80 billion a month to €60 billion, beginning in April 2017. Despite constant denials from the ECB, there is simply no other way to interpret Draghi’s declaration but as a tapering of the ECB’s Quantitative Easing program. And, in the world of monetary policy, especially ultra-loose monetary policy, less stimulus equals tightening.

The ECB is effectively rolling back part of the brakes it has used to curb volatility in the Eurozone debt market. When the Greek crisis loomed, the ECB used QE to curb volatility. Likewise, when the Spanish banking crisis erupted and, as of late, with Brexit and the Italian banking crises, the ECB quickly responded. The ECB’s massive QE program helped restrain the shocks to the system. Continue reading "Eurozone: 2017 Spells More Trouble"