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Federal Reserve to shed $4.5 trillion in bonds

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  • Schmidt
    2017-04-06 12:22:17 AM
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    CNBC, April 5, 2017: Federal Reserve wants to start unwinding the $4.5 trillion in bonds on its balance sheet this year

    "Federal Reserve officials said the shedding of the $4.5 trillion in bonds the central bank is holding on its balance sheet will begin this year.

    "The Fed amassed most of the bonds it owns during three rounds of "quantitative easing," a monthly bond-buying program aimed at juicing the economy following the financial crisis. The securities are mostly Treasurys and mortgage-backed securities. It has been reinvesting the proceeds from those bonds and rolling them over rather than shrink the balance sheet.

    "Unwinding the balance sheet is significant both because of its sheer size and the impact it could have on markets, as Fed members including Chair Janet Yellen have indicated that the move itself would amount to a rate hike."

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    I admit to having little insight as to the impact this will have on the economy as other factors can be more significant. With debate on raising the debt ceiling as well as political obstacles in passing the budget, emotions will be running high in Congress and the Executive branch. Who knows what the hell is going to happen? But I trust Carlitos will give us the MMT perspective.

  • Schmidt
    2017-04-06 09:33:14 AM
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    On the matter of the debt ceiling, the date at which we were supposed to run out of the ability to borrow was March 15th. That date came and went without much notice because Treasury Secretary Steven Mnuchin started using special accounting measures to keep paying everything the country owes without violating the borrowing limit. However, his ability to use special accounting measures does have its limits.

    As CNN Money reports, the Bipartisan Policy Center now estimates that the so-called "X" date -- or drop-deadline by which lawmakers must act -- will hit sometime in October or November. However, October 2nd is also the date by which Congress must pass a budget for the fiscal year 2018 (or another Continuing Resolution). So we'll get a "two-fer" at that time...debt limit increase and budget, or alternatively, maybe another government shutdown.

    In the meantime, the Fed will slowly start shedding it's $4.5 trillion hoard of bonds without much notice from Congress, the media or the public. Most people don't understand anyway, so why fuss about something no one understands unless there is a political motive to twist.

  • lonely bird
    2017-04-06 10:08:23 AM
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    Schmidt Wrote:

    On the matter of the debt ceiling, the date at which we were supposed to run out of the ability to borrow was March 15th. That date came and went without much notice because Treasury Secretary Steven Mnuchin started using special accounting measures to keep paying everything the country owes without violating the borrowing limit. However, his ability to use special accounting measures does have its limits.

    As CNN Money reports, the Bipartisan Policy Center now estimates that the so-called "X" date -- or drop-deadline by which lawmakers must act -- will hit sometime in October or November. However, October 2nd is also the date by which Congress must pass a budget for the fiscal year 2018 (or another Continuing Resolution). So we'll get a "two-fer" at that time...debt limit increase and budget, or alternatively, maybe another government shutdown.

    In the meantime, the Fed will slowly start shedding it's $4.5 trillion hoard of bonds without much notice from Congress, the media or the public. Most people don't understand anyway, so why fuss about something no one understands unless there is a political motive to twist.

    You can bet your ass that by October 2 the budget will include slashing spending for more programs than the previous pile of excrement proposed, more military spending and more tax cuts for the wealthy. The continuation of the move from debt state to consolidation state is moving smoothly forward.

  • Carlitos
    2017-04-07 12:43:17 PM
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    Schmidt,

    When the Fed sells the bonds on its balance sheet, it's simply changing the composition of dollars held in the economy from non-interest earning dollars to interest earning dollars. Much like moving the dollars in the economy from checking accounts or cash to savings accounts.

    This reverts the QE tax on the economy's interest income, as now instead of the Fed earning interest income by holding the Treasury securities (or agency debt) and turning that interest income over to the Treasury to reduce the deficit, the economy gets that interest income. This new interest income adds to the total dollars in the US economy and raises the government deficit, like a rate hike would, but without hiking borrowing costs in the banking system.

    .

    .

  • Chet Ruminski
    2017-04-07 02:19:03 PM
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    Shortage of dollars. And who will be buying 3.5 Trillion dollars of Bonds?
  • Carlitos
    2017-04-08 09:00:49 PM
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    Chet, I can't help but see the irony in the guy always complaining about the savings glut and 'low velocity of money' posing this question.

    The Fed didn't just seize the bonds; they paid for them; and the same funds that they spent into the system would be used to buy the bonds back from the Fed.

  • Schmidt
    2017-04-08 11:32:46 PM
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    Carlitos Wrote:

    Schmidt,

    When the Fed sells the bonds on its balance sheet, it's simply changing the composition of dollars held in the economy from non-interest earning dollars to interest earning dollars. Much like moving the dollars in the economy from checking accounts or cash to savings accounts.

    This reverts the QE tax on the economy's interest income, as now instead of the Fed earning interest income by holding the Treasury securities (or agency debt) and turning that interest income over to the Treasury to reduce the deficit, the economy gets that interest income. This new interest income adds to the total dollars in the US economy and raises the government deficit, like a rate hike would, but without hiking borrowing costs in the banking system.

    .

    .

    Carlitos -- Thanks. Since selling the bonds has similar effect as an interest rate hike, does this suggest that the Fed will defer raising interest rates in its usual 1/4 percent increments while they are shedding the bonds?
  • Carlitos
    2017-04-09 01:22:53 PM
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    Anyone's guess?

    The Fed has it all backwards anyways.

  • Chet Ruminski
    2017-04-09 02:27:05 PM
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    Carlitos Wrote:

    Chet, I can't help but see the irony in the guy always complaining about the savings glut and 'low velocity of money' posing this question.

    The Fed didn't just seize the bonds; they paid for them; and the same funds that they spent into the system would be used to buy the bonds back from the Fed.

    Carlitos, It was a rhetorical question. The money spent for the bonds will be returned to the purchasers the .001 in the form of tax cuts, higher interest rates and other returns when pseudo austerity will be the theme gradually forced onto the country. The group that has the reserves to buy the bonds will be the group that has the money to benefit from higher interest rates. The same people that receive windfall benefits after each correction/crash. The owners of the casino are never hurt because they make all the rules. The shortage of cash is a fraudulent invitation for more tax cuts.
  • Schmidt
    2017-04-11 07:51:09 AM
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    New York Times, April 7, 2017: The Economy May Be Stuck in a Near-Zero World

    Carlitos -- While its hard to say what the overall effect the shedding of the bonds will have on the economy, there are some economists who are suggesting that the Fed's low interest rate policy during recessions may have run its course. If we have another recession while the nominal interest rate is still relatively low, then the Federal Reserve's ability to stimulate the economy with interest rates cuts has its limits...a zero interest rate.

    If monetary policy changes in interest rate cuts are ineffective, then we will be dependent on Congress to use fiscal policy to stimulate the economy. With the hard case fiscal conservatives in Congress, it is hard to see Congress acting in even a modest way like they did with the stimulus package of spending to halt the slide in the Great Recession. There is even talk of a government shutdown.

    So in a sense, I suppose raising interest rates slowly now gives the Fed some room to cut the rates in a recession, whenever that occurs. But shedding bonds from the last recession at the same time as interest rate hikes are occurring could have the wrong effect on the economy.

    Just thinking out loud....wondering what's going to happen in the next year with Trump, Congress and the Fed not always working in unison.

  • Chet Ruminski
    2017-04-11 09:25:12 AM
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    Schmidt Wrote:

    New York Times, April 7, 2017: The Economy May Be Stuck in a Near-Zero World

    Carlitos -- While its hard to say what the overall effect the shedding of the bonds will have on the economy, there are some economists who are suggesting that the Fed's low interest rate policy during recessions may have run its course. If we have another recession while the nominal interest rate is still relatively low, then the Federal Reserve's ability to stimulate the economy with interest rates cuts has its limits...a zero interest rate.

    If monetary policy changes in interest rate cuts are ineffective, then we will be dependent on Congress to use fiscal policy to stimulate the economy. With the hard case fiscal conservatives in Congress, it is hard to see Congress acting in even a modest way like they did with the stimulus package of spending to halt the slide in the Great Recession. There is even talk of a government shutdown.

    So in a sense, I suppose raising interest rates slowly now gives the Fed some room to cut the rates in a recession, whenever that occurs. But shedding bonds from the last recession at the same time as interest rate hikes are occurring could have the wrong effect on the economy.

    Just thinking out loud....wondering what's going to happen in the next year with Trump, Congress and the Fed not always working in unison.

    Schmidt, List all the symptoms but totally deny or ignore the problem. Too much money is tied up with the stockmarket. The money changers have taken over the money supply when they are supposed to be an ancillary service.
  • Chet Ruminski
    2017-04-11 09:33:06 AM
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    "The Economy May Be Stuck in a Near-Zero World"

    Because some people have all the money they need and unemployment is their goal.

    Money has to be spent to have an economy. "Where has all the money gone?" Zero interest rates because they don't need to borrow money. Spend the money.

  • Schmidt
    2017-04-11 10:13:50 AM
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    Chet -- The topic is the effectiveness of the Federal Reserve monetary policy (interest rates and bond shedding) to control the economy, and how Congress's fiscal policy (the amount of deficit spending, borrowing, taxes, job programs, etc. ) in the next year could work for or against it. If you want to discuss the stock market and the rich again, we have other threads for that. Let's keep this on topic.
  • Chet Ruminski
    2017-04-11 05:43:31 PM
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    Schmidt, The financial system is being operated to benefit a few at the detriment of many. You deny that the Wall Street is operating unfairly and you deny that laws have been made to enhance private profits that hurt the country. To try and cover up a discussion by claiming off topic shows that you won't entertain any criticism of the status quo. You particularly object to repealing the laws passed to bypass and ignore lessons learned from the crash of 29. By eliminating references to current danger the discussion becomes artificially moot. Why not discuss the dangers unless you don't believe there are no dangers?
  • Chet Ruminski
    2017-04-11 05:48:48 PM
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    Schmidt, The financial system is being operated to benefit a few at the detriment of many. You deny that the Wall Street is operating unfairly and you deny that laws have been made to enhance private profits that hurt the country. To try and cover up a discussion by claiming off topic shows that you won't entertain any criticism of the status quo. You particularly object to repealing the laws passed to bypass and ignore lessons learned from the crash of 29. By eliminating references to current danger the discussion becomes artificially moot. Why not discuss the dangers unless you don't believe there are no dangers?
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