The Fed Won't Normalize Interest Rates, But Will Raise Them

[Smaulgld]

Podcast

50:50
The Fed isn’t ever going to “normalize” rates- they just want to get their quarter point raise in to act like they are serious. Bernanke admitted as such to hedge fund managers “rates will not normalize in my lifetime.” Rates CANNOT normalize because this would instantly implode the financial system.”


The Fed is hoping for an external event (like Greece) so they dont have to raise rates. Even if they raise rates they won’t go far. The Fed also indicated they will not sell off its balance sheet.


https://smaulgld.com/markets-can-rem...emain-solvent/

[cocrehamster]

Unless there is a huge spike in inflation why do they need to sell off their balance sheet rather than allowing the securities to mature?

[Smaulgld]

Unless there is a huge spike in inflation why do they need to sell off their balance sheet rather than allowing the securities to mature?

They won't, indeed they won't even allow them to mature they will roll them over before they mature

[timosman]

They won't, indeed they won't even allow them to mature they will roll them over before they mature

[Zippyjuan]

Unless there is a huge spike in inflation why do they need to sell off their balance sheet rather than allowing the securities to mature?

If there is a huge spike in inflation they will raise interest rates before they dump the assets on their balance sheet. As you say, when and if they do start to unwind their balance sheet they will let it happen via maturation of their securities and stop rolling them over. They change things gradually.

[Zippyjuan]

They won't, indeed they won't even allow them to mature they will roll them over before they mature

Rolling over by selling something by selling it before it matures and buying a replacement makes no sense. Unless you just want to increase the maturity dates.

[Smaulgld]

Rolling over by selling something by selling it before it matures and buying a replacement makes no sense. Unless you just want to increase the maturity dates.

That is exactly what the Fed did with Operation Twist

[Zippyjuan]

Thanks for the correction on that. I was thinking they were just using money from maturing Treasuries for Twist (which they did after it got going- initially they were selling some to buy others).

But if there is a spike in inflation, that is not something which would be helpful. Operation Twist was to target long term interest rates (mortgages more specifically which are tied to long term Treasury rates). Selling bonds and purchasing more of the same would have zero net impact on money supply. The last time the Fed fought inflation it was with very high interest rates. Trading short term bonds for long term bonds lowers the rates on the long term ones a bit.

[Smaulgld]

If there was a real inflation threat the Fed would have to raise rates and sell off its portfolio
Operation twist was designed to create inflation and push rates lower

[cocrehamster]

If there is a huge spike in inflation they will raise interest rates before they dump the assets on their balance sheet. As you say, when and if they do start to unwind their balance sheet they will let it happen via maturation of their securities and stop rolling them over. They change things gradually.

What do you think selling bonds from their balance sheet would accomplish? It would raise rates. I don't understand the point you're trying to make, I didn't say selling assets is the first thing they'll do if inflation picks up, but selling them could allow greater control across the yield curve.

[Zippyjuan]

If there was a real inflation threat the Fed would have to raise rates and sell off its portfolio
Operation twist was designed to create inflation and push rates lower

They won't engage in any massive sell-off of their portfolio- they don't do dramatic moves unless things are really bad. They would raise rates first which they did in 1980 when they raised the Fed Funds Rate as high as 20%. That has a more direct effect than selling their assets. Dumping their portfolio would destroy markets which they would want to avoid.

[Smaulgld]

They won't engage in any massive sell-off of their portfolio- they don't do dramatic moves unless things are really bad. They would raise rates first which they did in 1980 when they raised the Fed Funds Rate as high as 20%. That has a more direct effect than selling their assets. Dumping their portfolio would destroy markets which they would want to avoid.

Exactly- the Fed is not interested in selling off its portfolio and would only do so if they had to in order to combat unexpected run away higher inflation.
Indeed the Fed has already said they will continue to reinvest their current $4.3 Trillion bond portfolio by rolling it over even when they start raising rates.

[Smaulgld]

What do you think selling bonds from their balance sheet would accomplish? It would raise rates. I don't understand the point you're trying to make, I didn't say selling assets is the first thing they'll do if inflation picks up, but selling them could allow greater control across the yield curve.

Correct, the Fed would first raise rates, THEN sell assets if raising rates didn't achieve what they wanted.

[Zippyjuan]

Thank you for agreeing with what I was saying.