Fed Balance Sheet RISES By $13 Billion (Needs To Come A Little Bit Closer To Their Target)

So much for The Fed balance sheet unwind.

The SOMA report as of yesterday showed the balance had RISEN by $13 BILLION.

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This happens every quarter.

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The reason why? Agency MBS purchases rose faster than Treasury Note and Bond sales (which were small).

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But the balance sheet will likely get a little bit closer to shrinking by next week.

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Ben & Janet’s Famous Chili Recipe: Excess Reserves Still Around After 2008 And The Fed Is Paying MORE For Banks Not To Lend

In late 2008, The Federal Reserve did something that was not so widely noticed: It started to pay interest on excess reserves, effectively paying banks not to lend.

Excess reserves are cash funds held by banks over and above the Federal Reserve’s requirements. They have grown dramatically since the financial crisis. Holding excess reserves is now much more attractive to banks because the cost of doing so is lower now that the Federal Reserve pays interest on those reserves. The fact that banks are holding excess reserves in response to the risks and interest rates that they face suggests that the reserves are not likely to cause large, unexpected increases in bank loan portfolios. However, it is not clear what banks are likely to do in the future when the perceived conditions change.

In other words, The Fed is trying to control the price and quantity of risk.

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Excess reserves have actually declined slightly since 2015 when the article was written. But the question remains as to why financial institutions are continuing to park money at The Fed. And why The Fed is encouraging it.

Loan and lease growth YoY is slower following The Great Recession than at any time since 1975.

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Part of the reason of the desire of commercial banks to park money at The Fed rather than lend it out is 1) risk (and the price of risk) and 2) compliance costs. The Dodd-Frank legislation and Elizabeth Warren’s Consumer Financial Protection Bureau have greatly increased compliance costs leading some financial institutions to avoid said costs and collect interest from The Fed instead.

What happens if the economy booms? A simple answer would be for The Fed to take away the excess reserve punch bowl. But bank lending has become so regulated (CFPB, OCC, Fed, FDIC, SEC, etc) that financial instutions may decide to continue the escape valve from actual lending.

I call excess reserves and the interest paid by The Fed to FI’s that DON’T lend … Ben and Janet’s Famous Chili recipe. If the economy does boom, I am afraid of what will happen.

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Witchy Woman: Yellen’s Last FOMC Meeting (Fed Funds Rate Rises To 1.5% As Balance Sheet Begins Slow Unwind)

Yes, this was Federal Reserve Chair Janet Yellen’s last Open Market Committee (FOMC)  meeting. And the FOMC raised,  as widely expected, the Target rate (upper bound) to 1.50%.

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Over the past year, The Fed has raised their target rate from 0.50% on 12/13/16 to 1.50% on 12/13/17, a 100 basis point increase over 1 year. Meanwhile, the Fed’s holdings of Treasury notes and bonds has declined (unwind).

Even since Bernanke and Yellen (Beryellen?) launched us on the QE train, core inflation has rarely exceeded 2% YoY and wage growth has been terrible.

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Alas, Yellen and NY Fed’s Dudley, two ardent doves, will be gone.

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Yes, Janet Yellen is a witchy woman.

Raven Gray hair and ruby lips
Sparks Bubbles fly from her finger tips

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Courtesy of Jesse from Jesse’s Cafe Americain. 

Bad Case of Unaffordable Housing: Shelter CPI Rises >2x Core Inflation (“Inflation” Cools Ahead of FOMC Meeting)

The Fed’s Open Market Committee (FOMC) meeting is today.  And according to the SF Fed’s calibration of the Taylor Rule, the Fed Funds Target rate should be 6.13% (it is only 1.25%, a spread of 488 basis points TOO LOW).

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There was nothing in this morning’s inflation report that is likely to cause the FOMC not to increase the upper bound of The Fed Fund’s Target rate to 1.5%. Why? Core inflation (less food and energy YoY) declined to 1.71%.  Core PCE Prices YoY is at 1.45% YoY (well below The Fed’s Target Rate of 2%.

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Owner’s equivalent rent of residences YoY fell to 3.12%, still over twice that of core inflation. And FHFA’s house price index YoY is 2.78x hourly earnings YoY for most of the population.

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Doctor, doctor (Yellen), stop driving up house prices for average Americans.

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The Heat Is On! PPI Final Demand Hits 3.1% YoY, Highest Since Jan ’12 (But Only 2.4% YoY If You Take Out Energy)

Just when I though Producer Price Inflation (Final Demand) finally hit 3% … they pulled it back in (to 2.4% YoY).

Yes, PPI Final Demand YoY is the highest since January 2012 at 3.1% YoY.

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But if we take out energy, it is 2.4% YoY.

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Yes, PPI Final Demand less Energy is  only 2.4% YoY, but the heat is on.

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Is A Recession Looming? Low Unemployment And Declining Treasury Curve Occur Just Before Recessions (And Lousy Wage Growth)

US Real GDP is growing at 2.3% YoY.  What’s not to like?

How about the lowest unemployment rate since 2000 and the worst wage “recovery” in modern times? AND a flattening Treasury yield curve?

Yes, we are once more staring into the abyss of a recession where unemployment rates are low (as they seemingly always are just prior to the end of a business cycle). Throw in a skidding Treasury curve and … this is it?

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As we are painfully aware,  wage growth is the worst it has been in modern times after The Great Recession. Despite the staggering printing of money by The Fed (and ultra-low interest rates).

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Of course, The Fed is raising rates cautiously and unwinding their balance sheet very slowly in order not to disrupt markets (and pop the numerous asset bubbles).

 

 

Jobs Friday: NFP Increased By 228K In November, Wage Growth Cools To 2.5% YoY, Unemployment Near 17 Year Lows

Total nonfarm payroll employment increased by 228,000 in November, and the unemployment  rate was unchanged at 4.1 percent, the U.S. Bureau of Labor Statistics reported today.

Employment continued to trend up in professional and business services, manufacturing,  and health care.

Household Survey Data

The unemployment rate held at 4.1 percent in November, and the number of unemployed persons was essentially unchanged at 6.6 million. Over the year, the unemployment rate and the number of unemployed persons were down by 0.5 percentage point and 799,000, respectively. (See table A-1.)

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Among the major worker groups, the unemployment rate for teenagers increased to 15.9 percent in November. The jobless rates for adult men (3.7 percent), adult women (3.7 percent), Whites (3.6 percent), Blacks (7.3 percent), Asians (3.0 percent), and Hispanics (4.7 percent) showed little change. (See tables A-1, A-2, and A-3.)

The number of long-term unemployed (those jobless for 27 weeks or more) was essentially unchanged at 1.6 million in November and accounted for 23.8 percent of the unemployed.  Over the year, the number of long-term unemployed was down by 275,000. (See table A-12.)

The labor force participation rate remained at 62.7 percent in November and has shown no  clear trend over the past 12 months. The employment-population ratio, at 60.1 percent,  changed little in November and has shown little movement, on net, since early this year. (See table A-1.)

The number of persons employed part time for economic reasons (sometimes referred to as  involuntary part-time workers), at 4.8 million, was essentially unchanged in November but was down by 858,000 over the year. These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find full-time jobs. (See table A-8.)

In November, 1.5 million persons were marginally attached to the labor force, down by
451,000 from a year earlier. (The data are not seasonally adjusted.) These individuals
were not in the labor force, wanted and were available for work, and had looked for a job  sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. (See table A-16.)

Among the marginally attached, there were 469,000 discouraged workers in November, down by 122,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.0 million persons marginally attached to the labor force in November  had not searched for work for reasons such as school attendance or family responsibilities. (See table A-16.)

Establishment Survey Data

Total nonfarm payroll employment increased by 228,000 in November. Employment continued to trend up in professional and business services, manufacturing, and health care. Employment growth has averaged 174,000 per month thus far this year, compared with an average monthly gain of 187,000 in 2016. (See table B-1.)

Employment in professional and business services continued on an upward trend in November (+46,000). Over the past 12 months, the industry has added 548,000 jobs.

In November, manufacturing added 31,000 jobs. Within the industry, employment rose in machinery (+8,000), fabricated metal products (+7,000), computer and electronic products  (+4,000), and plastics and rubber products (+4,000). Since a recent low in November 2016,  manufacturing employment has increased by 189,000.

Health care added 30,000 jobs in November. Most of the gain occurred in ambulatory health care services (+25,000), which includes offices of physicians and outpatient care centers.  Monthly employment growth in health care has averaged 24,000 thus far in 2017, compared with an average increase of 32,000 per month in 2016.

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Within construction, employment among specialty trade contractors increased by 23,000 in  November and by 132,000 over the year.

Employment in other major industries, including mining, wholesale trade, retail trade,
transportation and warehousing, information, financial activities, leisure and hospitality,
and government, changed little over the month.

The average workweek for all employees on private nonfarm payrolls increased by 0.1 hour to 34.5 hours in November. In manufacturing, the workweek was unchanged at 40.9 hours, and overtime remained at 3.5 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls was unchanged at 33.7 hours. (See tables B-2 and B-7.)

In November, average hourly earnings for all employees on private nonfarm payrolls rose  by 5 cents to $26.55. Over the year, average hourly earnings have risen by 64 cents, or 2.5 percent. Average hourly earnings of private-sector production and nonsupervisory
employees rose by 5 cents to $22.24 in November. (See tables B-3 and B-8.)

The change in total nonfarm payroll employment for September was revised up from +18,000 to +38,000, and the change for October was revised down from +261,000 to +244,000. With these revisions, employment gains in September and October combined were 3,000 more than previously reported. (Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.)  After revisions, job gains have averaged 170,000 over the last 3 months.

Wage growth cooled to 2.5% YoY in November. Despite all the monetary stimulus, wage growth never exceeded 3% since The Great Recession ended in June 2009.

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Nothing in this jobs report will change the likely out come of the next FOMC meeting on December 13th. There is a 98.3% implied probability of a rate hike.

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