The Fed Unwittingly Will Continue to Tighten

By Steve Saville

The Fed probably will implement another 0.25% rate hike this week, but at the same time it probably will signal either an indefinite pause in its rate hiking or a slowing of its rate-hiking pace. The financial markets have already factored in such an outcome, in that the prices of Fed Funds Futures contracts reflect an expectation that there will be no more than one rate hike in 2019. However, this doesn’t imply that the Fed is about to stop or reduce the pace of its monetary tightening. In fact, there’s a good chance that the Fed unwittingly will maintain its current pace of tightening for many months to come.

The reason is that the extent of the official monetary tightening is not determined by the Fed’s rate hikes; it’s determined by what the Fed is doing to its balance sheet. If the Fed continues to reduce its balance sheet at the current pace of $50B/month then the rate at which monetary conditions are being tightened by the central bank will be unchanged, regardless of what happens to the official interest rate targets.

Continue reading The Fed Unwittingly Will Continue to Tighten

Fed to Spark Sharp Reversal or Painful Plunge in Stocks?

By Chris Ciovacco

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Why No Fed Action is Needed for Lighter Quantitative Tightening in the Coming Months

By Rob Hanna

The Fed meeting this Tuesday and Wednesday is being closely watched by Wall St. Policy changes and rhetoric about future policy could set the tone for trading. A rate hike is currently expected, though there is some doubt. Futures are currently pricing in about a 76% chance of a hike on Wednesday.

In addition to rate policy, the Fed could also look to make changes to its Quantitative Tightening (QT) policy. An easy way for them to move from a hawkish to a more dovish approach at some point would be to reduce the monthly QT schedule. The current schedule calls for allowing up $50 billion per month to roll off the books through expirations that are not reinvested. The breakdown of the $50 billion is $20 billion in AMBS and $30 billion in treasuries. But looking at the treasury expiration schedule shows us that we are now in a period where $30 billion of expirations is becoming rare. This can be seen from the table below, which is taken from the Fed’s website.

2018-12-16

Continue reading Why No Fed Action is Needed for Lighter Quantitative Tightening in the Coming Months

Fed’s QE Unwind Reaches $364 Billion As Fed Funds Rate Continues To Climb

By Anthony B. Sanders

Since the beginning of the QE unwind — or “balance sheet normalization,” as the Fed calls it — in October 2017, the Fed has now shed $364 billion.

somall.png

Of course, The Fed still have a long way to go to unwind its $4 trillion balance sheet. But The Fed is, at the same time, raising its target rate (although through confusing messaging).

Continue reading Fed’s QE Unwind Reaches $364 Billion As Fed Funds Rate Continues To Climb

NY Fed’s Williams Says Strong Economy Warrants Further Rate Hikes…

By Anthony B. Sanders

…As Dow Crashes 550 Points And 10Y-2Y Slope Flattens To 10 BPS

It is markets like this that make me wish that I was sitting in the lounge at the Cap Ducal hotel in Valparaiso Chile staring off at the Pacific Ocean.

capducal.png

Except that my Spanish is so bad that a war would probably ensue.

Which is it? The fear that the Trump-Xie tariff truce is a big nothing burger? Or that NY Fed President came out after noon saying that inflation and jobs look good and isn’t worried that markets have dialed back ’19 hikes.

Continue reading NY Fed’s Williams Says Strong Economy Warrants Further Rate Hikes…

Debunking the Volcker Myth

By Bob Hoye

Click for PDF…

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Or better yet, subscribe to NFTRH Premium for an in-depth weekly market report, interim updates and NFTRH+ chart and trade ideas to get even more bang for your buck. You can also keep up to date with plenty of actionable public content at NFTRH.com by using the email form on the right sidebar. Or follow via Twitter @BiiwiiNFTRH, StockTwits or RSS. Also check out the quality market writers at Biiwii.com.

A Post-Powell View of USD, S&P 500 and Gold

By NFTRH

The Fed blinked. This was not news to Macro Tourist Kevin Muir or readers of Biiwii.com, which is very pleased to publish his work.

Fed Finally Blinks

Amid a weakening global economy, gathering signs of weakening in the US economy and a dump in inflation expectations, Jerome Powell implied that the Fed may be going on hold for a while after a December rate hike.

This graph from SG Cross Asset Research/Equity Quant by way of Kevin Muir’s article attempts to show that the accumulated rate hike tightening and “shadow” tightening as a result of QE suspension has now met or exceeded the levels that preceded the last two economic recessions.

Continue reading A Post-Powell View of USD, S&P 500 and Gold

Fed Shifts to a Less-Predictable (?) Approach to Policy Making

By Anthony B. Sanders

Nick Timiraos from the Wall Street Journal has an interesting article entitled  “Fed Shifts to a Less-Predictable Approach to Policy Making.”

Federal Reserve officials are moving into a more unpredictable phase of policy-making after two years of removing economic stimulus in regular, quarterly intervals.

They will be deciding whether and when to raise interest rates more on the basis of the latest signs of economic vigor—such as in inflation, unemployment and growth—and less on forecasts of how the economy is expected to perform in the months and years to come, they’ve indicated in interviews and public comments.

Less predictable???? One possible rule is the Taylor Rule. But The Fed kept their target rate at 25 basis points from late December 2007 to December 2015, far below the TR rate.

trrudesbuch

Here is the Fed Funds Target rate.

Continue reading Fed Shifts to a Less-Predictable (?) Approach to Policy Making

A History of First Cuts

By Kevin Muir

The market is definitely torn about whether last week the Federal Reserve signaled a pause in their rate-tightening campaign. You know where I stand (they did), so there is little to be gained by my shouting into the wind trying to convince anyone.

Yet one of my more astute readers sent a note to be careful what I wish for. Now, he knows we are a long way from the Fed actually cutting rates. In fact, I suspect we both think the Federal Reserve will raise rates this December. But let’s imagine that I am correct and the next meeting brings about a one-and-done rate rise. What if the Fed’s next move after December is a rate cut? I know that seems preposterous right now, yet there are many signs the American economy is slowing faster than the Federal Reserve forecasts.

Continue reading A History of First Cuts

Everything is Cool

By Trey Reik

Authored by Trey Reik, Senior Portfolio Manager, Sprott Asset Management USA, Inc.

On November 14, Fed Chair Jerome Powell and Dallas Fed President Robert Kaplan conducted an onstage question and answer session at the Dallas Fed. Responding to President Kaplan’s questions, Chair Powell’s cool-and-collected delivery made U.S. monetary policy seem like an absolute snap. The upbeat message from the Dallas stage was best summed by Mr. Powell’s observation that “Fed policy is part of the reason the economy is in such a good place right now.” However, because U.S. financial markets have remained noticeably rattled ever since Mr. Powell’s seemingly innocuous “long way from neutral” comment on 10/3/18, we find it constructive to parse cautious nuggets in Chair Powell’s copasetic narratives.

Along these lines, Chair Powell seemed to imply from the Dallas stage a subtle downshift in telegraphed Federal Open Market Committee (FOMC) tightening in stating “we have to be thinking about how much further to raise rates and the pace at which we will raise rates.” After referencing potential headwinds of slowing growth abroad, fading fiscal stimulus and lagged effects of eight Fed hikes, Chair Powell eventually narrowed in on one specific area of growing Fed concern: excessive corporate leverage. In Mr. Powell’s soft-spoken words, “There is some significant corporate borrowing and we have our eyes on that.” Having subsequently refreshed our focus on U.S. corporate debt levels, we can only characterize Chair Powell’s matter-of-fact depiction as dramatic understatement.

Corporate Leverage Locomotive

We have suggested improving U.S. bank balance sheets foster false investor confidence that the excessive leverage at the root of the financial crisis has been repaired. In reality, as the Fed has dedicated eight years and trillions of dollars to nursing systemically important banks back to health, QE (quantitative easing) and ZIRP (zero interest rate policy) have progressively compromised the financial strength of the U.S. corporate sector. Not only have share buybacks imperiled countless balance sheets in the name of ephemeral EPS (earnings per share) gains, but the bulk of U.S. corporate governance has eroded into a culture of undisciplined borrowing and zombie credits.

Continue reading Everything is Cool

Don’t Short the QT Hangover

By Kevin Muir

I love the ocean which is ironic as I live on a Great Lake more than 1,500 kilometers from the Atlantic. But you put me anywhere near an ocean and I guarantee it – I am jumping in. It doesn’t matter if the water is 15 degrees, I have to go for a dip.

Not having grown up with all the ocean-life, I try to rationalize my slight fear of sharks by convincing myself that my apprehension is like many other people’s fear of bears. Having spent many weekends at a cottage in the Canadian wilderness, I probably have an overly casual attitude towards bears. To me, they are just big raccoons. Yeah, a hungry grizzly deserves your complete and total respect, but most black bears want absolutely nothing to do with humans. After seeing dozens upon dozens in the wild, you realize they are not so scary. And this logic is what I use when thinking about sharks. Most of them want nothing to do with you.

However, I recently stumbled upon this research group that tracks different sharks, but specializes in Great Whites.

Continue reading Don’t Short the QT Hangover