QE Debate: What Did Powell Mean by "Need to Resume Balance Sheet Growth"?

-edited

Some interpreted Powell's statement to mean more QE. There's a strong clue Powell meant something else. OK, but ....

What did Powell Mean?

I confess, I thought Powell was talking about QE, but I did not see the exact quote. Powell said "organic growth".

I believe Coppola has the correct intent.

Intention vs Reality

However, Coppola's point is mostly moot.

What the Fed thinks it will do and intends to do, typically miss the mark badly on what it actually does.

The Fed "intended" to dramatically shrink its balance sheet. Look what happened.

Look at a Dot Plot of interest rate expectations from 2017.

Dot Plot December 13, 2017

Fade This Consensus

That was my precise comment at the time.

Some FOMC participants actually believed the Fed would hike to over 4.0% by 2020 (next year!). The majority believed rates would be over 3.0%.

Fed's Intended Meaning

So what?!

The Fed may do a brief period of "organic" expansion (which by the way can mean anything the Fed wants), but I propose more QE is coming whether the Fed "intends" to do so or not.

Fed's 2019 Interest Rate Expectations vs Market's Expectations

Here's a look at the Fed's 2019 Interest Rate Expectations vs Market's Expectations

I propose the Fed is wrong, again, as usual.

For discussion of today's FOMC decision, please see Fed Cuts Rates 1/4 Percent, Three Dissents: Dot Plot Suggests No More 2019 Cuts

Finally, we really do not know what the Fed "intended".

Perhaps the the Fed wanted to open the door for more QE later but without alarming the market of that.

Powell's words were chosen for a purpose but we really don't know what purpose!

Mike "Mish" Shedlock

Comments (45)
No. 1-20
Casual_Observer
Casual_Observer

THE FEDERAL RESERVE had plenty to fret about as it prepared to discuss policy interest rates on September 17th and 18th. Trade tensions and wilting global growth have seen businesses cut back investment in the second quarter of the year. In manufacturing, production and capacity utilisation have been falling since the end of 2018. Though the Fed has described jobs growth as “solid”, some analysts worry that the labour market is wobbling. As expected, these concerns prompted the central bank to lower rates for the second time this year, by 0.25 percentage points, to a target of 1.75-2%. But the meeting was overshadowed by turmoil in money markets.

On September 17th, for the first time in a decade, the Fed injected cash into the short-term money market. The intervention was needed after the federal funds rate, at which banks can borrow from each other, climbed above the level targeted by the Fed. It rose as the “repo” rate—the price at which high-quality securities such as American government bonds can be temporarily swapped for cash—hit an intra-day peak of over 10%. On September 17th the Fed offered $75bn-worth of overnight funding, of which banks took up $53bn. The following day it again offered $75bn-worth. The amount demanded by banks rose to $80bn.

Casual_Observer
Casual_Observer

I smell liquidity crisis.

shrpblnd
shrpblnd

Very interesting chart on the balance sheet growth. I can understand the dramatic growth from 2009 - 20012, but why was there still a need to grow so much in late 2013 and into 2014? The economy had already largely recovered at that point.

Latkes
Latkes

Powell's words were chosen for a purpose but we really don't know what purpose!

It keeps a lot of analysts who speculate about the meaning of every minute detail employed. That stimulates the economy.

Webej
Webej

Well, it means they will not grow the balance sheet by conjuring up dollars from their keyboard, but they will fertilize it, give it water, let the sunshine in. It will grow in natural, healthy way, in concert with the "healthy" economy which they have nursed back to life from the intensive care unit.

2banana
2banana

The obama economy - summed up in one chart.

Amazing the dates of QE to infinity and end date.

Country Bob
Country Bob

Powell essentially said that the Fed doesn't understand the problem (or doesn't want to understand that Bernanke's stupid policies stunted economic growth for decades to come).

At this point, the Fed is spending 99% of its time attempting to deflect blame. Fixing the economy is, at best, a secondary goal.

Stealing from economically healthy savers to subsidize zombie entities was always a stupid idea, and never should have happened. Now the zombies are a big part of the G7 economies, and letting the zombies fail will be much much more painful.

The Fed needed to let nature take its course with the zombies, but instead Bernanke opted for the Bank of Japan "kick the can down the road" approach, which is much much much more costly.

Powell doesn't have Paul Volcker's courage, and the politicians (both parties) are self serving dopes. Powell is going to be a sissy and make the problems much worse. The ECB and BoJ already threw in the towel, they don't matter anymore

numike
numike

“Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States” ― Barry Goldwater

numike
numike

“In the United States, unmoored Markovian money can be manipulated at will by the Federal Reserve in the interests of its sponsors in government and their pseudo-private cronies.” ― George Gilder, Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy

Bam_Man
Bam_Man

Once "Peak Leverage" has been achieved, all sorts of liquidity/solvency problems begin to appear - seemingly out of nowhere, and all at once. We have currently arrived there. Enjoy the bat sheet craziness that will now ensue.

lol
lol

Obviously stealth QE (hidden off balance sheet)is ending,why?Simple…..the staggering amount of cash big govt is borrowing,"official" annual deficit is 1.5 -2 trillion,count all the off balance sheet,accounting gimmicks/scams and wala the real annual deficit is north of 3 tril,on top of the trillions that has to be printed to buy/prop up....well...everything!No doubt QE4 will be massive,and with prices on everything already soaring.....lookout below!

Casual_Observer
Casual_Observer

The New York Fed said it would conduct an overnight repurchasing operation for the third time this week at 8:15 a.m. Eastern on Thursday. The U.S. central bank will offer up to $75 billion of repos, temporarily buying securities from Wall Street dealers to inject liquidity into the system. Earlier this week, a surge in the repurchasing rate, used by hedge funds and banks to fund their trading operations, pushed the fed funds rate above its target range. Fed Chairman Jerome Powell said in a Wednesday press conference that the central bank would stand ready to use its current tools to address pressures in money markets.

Casual_Observer
Casual_Observer

Why the pressure in money markets? Anyone anyone know the answer?

thimk
thimk

ya i agree, feds mean the " normal" growth of the balance sheet will continue, but at a higher level. so in short no more QT. but as you said these guys might use the draghi approach of "whatever it takes" if push comes to shove.

Casual_Observer
Casual_Observer

Bring on the next monetary system. What's weird about this blog and some of the posters is they recognize the flaw of the current systems but still blame its ills on those most impacted negatively by the system

KidHorn
KidHorn

This is complete nonsense. If the FED doesn't start expanding their balance sheet, what we've seen in repo is going to spread everywhere. Interest rates will skyrocket. They can't pull USD out of circulation while very other CB is printing.

The only reason for them not to print is to kill the economy so a dem will get elected.

THX1138
THX1138

"Powell's words were chosen for a purpose but we really don't know what purpose!"

I think that's his purpose - to baffle those who gather every word the fed utters to be read like tea leaves. If he were clear in his communications, it would be easy for traders to front-run the Fed. It would also likely terrify traders to see how clueless he his!

Best to be obtuse.

JCT2019
JCT2019

So... Had we never done QE to begin with (ramifications aside) we would normally be around $1.2T on the balance sheet. Instead, we did it, then started to unwind it, had to stop at $3.6T, three times the liquidity you would expect us to need under normal circumstances. And for three straight days now the Fed has pumped another $200B into the market to control the overnight rate. And when you look back at economic growth, the US and World GDP for the past 10 years has been tepid. Yet Bond prices are sky high, stocks well above historical average P\E, Gold is high as well, student loan debt at all time highs, corp debt at all time highs, savings low and debt high among consumers, in a manufacturing recession, entering an earnings recession, wages stagnant for decades, the inflation metric gets changed to give the illusion it is low and not hurting consumers, yet half of the country can't cover an unexpected $400 bill. All the while Wall Street says "The S&P 500 is still you best bet", "The bull market is still intact", "If we go negative on rates and the Fed injects cash, we can keep this party going." I am reminded of the Allstate commercial where the actor who plays chaos looks into the camera and just says "Smart!"

we_will_be_Ok
we_will_be_Ok

A wsj article suggests that Federal borrowing is sucking cash out, as primary dealer banks are "forced" to buy Treasuries. Exchanging treasuries for cash, removes cash out of the money supply and burns it in the bowels of Fed. Sounds plausible. However, cash hoarding is also probably ongoing, velocity of money seems to be decades low. When money are offshore, is it still part of the circulation? I don't know. Demand from foreign investors shouldn't change much internal dollar supplies -- the money they get for foreign currency goes right into the system.

Herkie
Herkie

You have to wonder if the Fed has any good options at this point, if they go the way of the rest of the advanced economies into NIRP (we already are in NIRP if you understand that real inflation is a lot higher than the core headline inflation being reported) then it is likely to be a self fulfilling prophetic move that assures a deep and abiding depression. The banking system will be so starved for reserves the Fed will have to essentially nationalize the system. The liquidity problems are just beginning with $203 billion injected into the overnight repo market this week in just three days. The Fed's 25 basis point rate cut has just made sure they will have to inject more to maintain the now 2.0% fed funds rate.

If the fed starts to expand it's balance sheet again they will fuel inflation that they WILL lose control of. Just as they are loosing control of their interest rates.

I am curious about something, does anyone have data on the level of Chinese purchases/sales of US debt instruments over the last few weeks? If they are dumping US Treasury paper at fire sale prices that would explain why the repo market is in a liquidity trap. Is it possible that China has begun to liquidate it's US foreign reserves in a big way? That would certainly drive up interest rates beyond maybe what the Fed can control.