Don't Worry, the Fed has Belts and Suspenders

Mish

The Fed's balance sheet is approaching $7 trillion dollars. This is what Bernanke meant by suspenders.

On February 27, 2013, Ben Bernanke spoke to US Congress about how the Fed would unwind its balance sheet.

Bernanke said, We Have “Belts, Suspenders” to Unwind Balance Sheet .

Bernanke’s vague answer to Sen. Richard Shelby, R-AL, when asked how the Fed will deleverage the balance sheet, was this: “In terms of exiting from our balance sheet… a couple of years ago we put out a plan; we have a set of tools. I think we have belts, suspenders – two pairs of suspenders. I think we have the technical means to unwind at the appropriate time; of course picking the exact moment to do, of course, is always difficult.

Belts and Suspenders Detail

Belts and Suspenders Detail

Belts and Suspenders Synopsis

  • Belt tightening took the Fed's balance sheet from $4.46 trillion to $3.77 trillion. 
  • Suspenders took the Fed's balance sheet from $3.77 trillion to $6.90 Trillion in just 9 months.

Tapering, That's All You Get

Debate Over Balance Sheet Reduction 2109-09-18

Please recall the September 18, 2019 QE Debate: What Did Powell Mean by "Need to Resume Balance Sheet Growth"?

Powell's Prophecy

"And we are going to be  assessing the question when it will be appropriate to resume the organic growth of our balance sheet."

More prophetic words have seldom been heard.

Some objected to my post because of the word "organic". I commented.

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

Dot Plot September 26, 2018

Dot Plot 2018-09-26 Bullard

That's quite a hoot isn't it?

Even without Covid-19, the Fed was not remotely close to its expectations.

My Dot Plot comment at the time: "I side with those who expect more rate cuts."

Clueless Wizards 

Some people have immense faith in proven clueless wizards. Others think the Fed does nothing but follow market expectations.

However, this creates what would appear at first glance to be a major paradox: If the Fed is simply following market expectations, can the Fed be to blame for the consequences? 

More pointedly, why isn’t the market to blame if the Fed is simply following market expectations?This is a very interesting theoretical question. 

Fed Uncertainty Principle

I discuss the above paradox in If the Fed Follows the Market, Why Won't Rates Go Negative?

Corollary number one stands for the for plot example above.

Corollary Number One
The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.

In case you missed the post, please give it a look. There's lots more in play regarding what the Fed knows and doesn't.

Message From Gold

Another pair of suspenders is on deck. 

Gold has that message. Do you?

Mish

Comments (41)
No. 1-23
TimeToTest
TimeToTest

I think it’s a big expensive joke at this point.

The question is this - How many years before today’s fed balance chart is just a squiggle line at the bottom?

vanderlyn
vanderlyn

good take, mish. thanks for all your research and analysis.

vanderlyn
vanderlyn

nice analysis mish. thanks.

AWC
AWC

Considering the evidence that the Fed has no idea what interest rates should be, I have no choice but to assume that they also have no clue what the price of gold, silver or oil should be? Certainly, they didn’t think oil was going to remain at $10 forever?

Hell, the empty barrel prolly cost more than ten bucks to make. ;-)

But, to quote Douglas Adams, “thanks for all the fish!”

Webej
Webej

Belts & suspenders
Genius

Sechel
Sechel

We're seeing MMT as practiced by the Fed & Treasury. As long as all that money isn't chasing goods and services it won't be inflationary. United States pays its debts in its own currency. What bothers me most is with the Fed so blatantly controlling interest rates and a virtual suppression of return many classes of investors and savers are being harmed such as savers, the elderly , pensions and insurance companies and with no riskless rate of return mal-investment. Usually corporations respond not by investment in plant and equipment but by retiring stock and increasing dividends and the capital markets respond by loading up on risky clo's

CCR
CCR

I am more inclined to blame the politicians for not knowing what they are doing. If there was surplus funds (see Germany) the discussion would be a different one.

Germany practiced “gleichshaltung” (synchronization) in the 1930’s and now “mutualization” of European debt is discussed. EU in big trouble and Germany is the antagonist, but for a different reason now.

Worker
Worker

There's going to be a lot more money printing this year. The banks hold a lot of bad debt or soon to go bad debt that they will unload onto central bank balance sheets. There's no way the world governments will allow banks to fail or even give the appearance they might fail.

numike
numike

Prices will not spike in the United States for years, maybe decades. In fact, they are falling at record pace. So why talk about inflation? Why risk an economic depression and a painfully slow recovery over the improbable?
The obsession with inflation is here again. http://macromomblog.com/2020/05/25/why-talk-about-inflation/

Montana33
Montana33

The Fed has been very successful in driving up stock and bond prices. The Fed cannot help the average American. Only Congress can assist average Americans through direct means which is why Powell is going on 60 minutes and urging more stimulus payments.

Tony Bennett
Tony Bennett

"Some people have immense faith in proven clueless wizards."

...

More Bark than Bite.

I see quite a few people think Federal Reserve is / will "buy it all up".

As it stands now. Federal Reserve - everyone sitting down? - has bought:

$4.3 billion in commercial paper - maturity out to 90 days.

$1.8 billion in corporate debt.

That's it.

tokidoki
tokidoki

Gold's not getting the message. Down today, while the stock market roared again.

Blurtman
Blurtman

My 401k is doing quite well, thanks not only to the Fed's actions, but for the creation of the belief that they will continue to act. I haven't noticed that I am getting poorer due to a decreasing buying power of the US dollar.

Idealists can always clamor for an ideal world. Dream on.

Captain Ahab
Captain Ahab

Is it just me seeing a lot of Mish's 'Got Gold' in recent posts. Maybe he's trying to tell us something is 'imminent'?

tokidoki
tokidoki

Belt and Suspenders for the US. Belt and Road for China. Zero complains so far about the Fed turning Communist.

Yes, we want freedom, but freemoney is more important. Bunch of losers in the US.

Captain Ahab
Captain Ahab

What has been missing in bailout discussions is a focus on businesses that EXPORT PART OF THEIR PRODUCTION, either from a region, or from the nation. These companies DRIVE the entire economy. Other businesses provide support, or service the economy. Think gas stations, grocery stores, hairdressers, bars, lawn services, dry cleaners, plumbers... When these businesses fail, another business soon replaces them.

With the above in mind, all support must be directed to building American exporters. Wealth is transferred with every import. With imports exceeding exports, there is NO FUTURE.

Throwing trillions at Wall Street, suppressing interest rates, giving loans to the liquor store up the street... are a waste of resources. The US must use this time to rebuild industries, stimulate innovation, improve supply chains...

amigator
amigator

The FED knows exactly what it is doing. They are taking care of their primary shareholders. The citizens of the USA do not have a place on that board and so, in essence the FED is never wrong. They are doing exactly what they are designed to do under the laws of the United States of America (or close to it) take care of the bankers at all costs. They may be screwing all of us out here in the real world but that doesn’t matter until it does. It is up to us to bring about a change to the system.

ToInfinityandBeyond
ToInfinityandBeyond

At what point do investors wake up and smell the coffee with respect to the Fed’s sugar high? Or can the Fed just keep throwing trillions more at the problem in the hope that everything turns out rosy?

Casual_Observer
Casual_Observer

What currency is gold traded in ?

Casual_Observer
Casual_Observer

The truth it is a pension bailout. The Fed will continue to increase its balance sheet as necessary. It may deflate at times as well. As long as the Fed continues to encourage money into stocks, then people will continue to be able to retire. The Fed learned something from the deflationary spiral that occurred in 2009. There will be no asset deflation of any kind on their watch. Thank God for the Fed. Asset values and the stock market would have crashed along with more unemployment if Congress was in charge of the banking system.

CzarChasm-Reigns
CzarChasm-Reigns

Only those full of $hit would desire more suspenders when belt bound.
Assuming $hitting ones own britches is still undesirable, and not the new norm.


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