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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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 Great Fed Unwind: It’s All About Treasury Note/Bond Sales, Not Agency MBS

The Federal Reserve was supposed to start shrinking their $4.4 TRILLION balance sheet back in October, but have only recently begun actually selling the assets on their balance sheet.

As you can see, the US Treasury 10-year Note yield was just above 4% when The Fed’s asset-buying began and after now resides at around 2.4%. And you can barely see the unwinding of the balance sheet since The Fed is moving at glacial speeds to unwind.

But we have only seen a slight uptick in the 10-year Treasury Note yield with the recent unwinding of the balance sheet (pink box).

Since The Fed’s asset purchases are primarily Treasury Notes/Bonds and agency Mortgage-backed Securities (Agency MBS), we can see that it is the T-Notes/Bonds that are being sold-off, not the Agency MBS. The Fed’s strategy is to let the Agency MBS run-off (gradually mature as mortgages prepay).

But as The Fed’s Balance unwinds and Treasury/Mortgage rates rise, mortgage prepayments are likely to slow, making The Fed’s plans less effective. This is called “extension risk.”

Let’s see what The Fed of New York does tomorrow!

Trumpcoin? Bitcoin Reaches $15,600 Mark (Up From $710 On 2016 Election Day of Trump)

Crypto-currency  Bitcoin has experienced a tremendous run-up since the 2016 election (November 8th) of Donald Trump. In fact, it has risen from $710 on election day 2016 to $15,600 as of today.

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The US Treasury 10 year yield rose dramatically on election day 2016, but today’s 10-year yield is about the same as it was in late November 2016.

The US Treasury 10Y-2Y curve continues to flatten as Trump enthusiasm waines as Democrats ferociously attempt to block almost any change proposed by Trump or Republicans.

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Oddly, Bitcoin was left off the list off the Financial Systems Vulnerabilities Monitor.

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Heartache Tonight! Bank C&I Lending Falls To 1.2% YoY (Auto Loans Fall To 2.1% YoY, Real Estate Loans Fall To 5.1% YoY)

We’ve got a heartache tonight … in terms of bank lending. Particularly commercial and industrial lending (C&I) and auto loans. Particularly since bank lending is the primary transmission vehicle for Federal Reserve policies.

C&I lending growth fell to 1.2% YoY, which has historically meant that a recession is close at hand.

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Auto loans also fell to 2.1% YoY.

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The good news? Real estate lending fell too, but to 5.1% YoY.

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Have the stimulative effects of The Fed’s ZIRP and QE policies run out?

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Yes, its a heartche tonight for bank lending and Fed monetary policies.

Fed Chair Janet Yellen Testifies At Senate Hearing On Semiannual Monetary Policy Report To Congress

Fed Chair Janet Yellen Urges Congress to Monitor U.S. Debt As She Steps Down (NOW A Warning??)

Federal Reserve Chair Janet Yellen’s final speech to Congress (Joint Economic Commitee)  reminded me of the scene in the movie Death Becomes Her where Meryl Streep swallows a magic potion and  Isabella Rosselini then says “Now a warning.”

Yes, Yellen warned Congress that they should monitor the US debt load, now at $20.6 trillion, up from $9.5 trillion in Q2 2008.  She also called on Congress to adopt policies that will promote investment, education and infrastructure spending.

Yes, US public debt outstanding has more than doubled since Team Bernanke/Yellen began quantitative easing (QE) back in September 2008.

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Of course, The Fed buying US Treasuries helped fuel the enormous growth in US debt leaving The Federal Reserve as the largest owner (by far) of US Treasury debt.

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Why didn’t Yellen mention declining M2 Money Velocity (GDP/M2 Money Stock)?

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And why didn’t Yellen mention that The Fed killed-off Treasury volatility?

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Notice that Yellen issued this warning as she is being replaced as Fed Chair and a new President (Trump).

Why did Yellen wait until her last speech to issue a warning that most economists already knew? 

At least Yellen didn’t say “Bottom’s up!”

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