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Fed Announces QT Taper, Signals No Rate Hike In 2019

The Committee intends to conclude the reduction of its aggregate securities holdings in the SOMA at the end of September 2019.

The March Fed meeting needs no further introduction, but we’ll provide the obligatory summary just in case.

2019’s “epic” dovish pivot, first tipped by Jerome Powell on January 4 in remarks delivered while seated next to his predecessors in Atlanta and subsequently echoed by his colleagues, was enshrined in the forward guidance at the January meeting, which also produced a “special” statement on balance sheet policy and opened the door to the end of runoff, an implicit concession to markets following Q4’s dramatic selloff across risk assets.

The January “capitulation” was an effort to make up for the December hike and tone deaf press conference, which was itself viewed (rightly or wrongly) as an inexplicable doubling down on October’s egregious communications misstep. The selloff that accompanied the December meeting extended Powell’s dubious losing record when it came to S&P performance on Fed days and was made all the more perplexing considering it came just weeks after an ostensible effort to make amends for October.

The January minutes underscored the case for “patience” and the following passage from the minutes made it clear that an end to runoff is near:

Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year.

The Fed’s counterparts around the world have generally fallen in line, adopting their own dovish slants and risk assets have rallied accordingly. Meanwhile, bonds remain en vogue as worries about global growth persist – those worries, combined with still-subdued inflation, further bolster the case for “patience”.

As for the March meeting, market participants will key on the dots (Whether “catching down” to the January forward guidance means one hike is projected for 2019 or no hikes) and the balance sheet discussion (Will we get an official end date or not? Are the operational details hashed out yet?). The economic projections will likely be revised modestly lower and there are expected to be minor adjustments to the statement.

Read the full preview and a summary of analyst opinions

Everything You Need To Know About The March Fed Meeting

Here’s a snapshot of YTD local currency returns across assets (current through Monday):

Returns2019

(Goldman)

And I suppose we’ll run through the obligatory annotated charts. Really, “long way from neutral” and Powell’s comments in Atlanta are the two most pivotal moments, although clearly, you can label any number of points on these visuals (e.g., the January meeting, the December meeting, Trump’s decision to accuse Powell of not being able to “putt” on Christmas Eve, [fill in the blank with your favorite dovish soundbite]).

Here’s stocks and HY credit (volatility has obviously collapsed across assets – more here):

SPXHY

Here’s “reflation” (generally speaking):

CrudeVsBreakevens

And here’s real yields and financial conditions:

RealsVsFinCons

Finally, the dollar has been a bit of a conundrum for a lot of folks, given expectations that the dovish pivot “should” have catalyzed weakness. Instead, the concurrent dovish lean from the Fed’s global counterparts combined with the whole “cleanest dirty shirt” narrative re: the US economy has led to a kind of sideways stalemate since the January meeting.

DXY

And without further ado, here are the main points:

  • FED SIGNALS NO RATE HIKE THIS YEAR WITH ONE INCREASE IN 2020
  • FED LEAVES RATES UNCHANGED, SAYS ECONOMIC GROWTH HAS SLOWED
  • FED TO TAPER BALANCE-SHEET ROLLOFF, SEES IT HALTING END-SEPT

Obviously, the big news is that the dots now tip no hikes in 2019 and one in 2020 which, incidentally, is precisely what Goldman predicted.

Additionally, the balance sheet runoff will be tapered. Specifically, the cap on monthly redemptions of Treasury holdings will drop to $15 billion from $30 billion starting in May. Runoff will end in September.

From October, principal repayments from agency and MBS securities will be reinvested in Treasurys “subject to a maximum of $20 billion a month.” Over and above that, principal payments from agency and MBS securities will be plowed back into agency MBS.

As far as whether we’re going to get a reverse twist (in the interest of freeing up room for a sequel to the original Operation Twist later), it sounds like they’re going to demur on that – for now.

“Principal payments from agency debt and agency MBS below the $20 billion maximum will initially be invested in Treasury securities across a range of maturities to roughly match the maturity composition of Treasury securities outstanding”, the plan reads, adding that “the Committee will revisit this reinvestment plan in connection with its deliberations regarding the longer-run composition of the SOMA portfolio.”

Below find the dot plot comparison, the full SEP and the full statement followed by the balance sheet plan.

Dots

March

MarchDots

December

Dots

Projections

March

MarchSEP

December

SEP1

Statement

Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.

Balance sheet plan

In light of its discussions at previous meetings and the progress in normalizing the size of the Federal Reserve’s securities holdings and the level of reserves in the banking system, all participants agreed that it is appropriate at this time for the Committee to provide additional information regarding its plans for the size of its securities holdings and the transition to the longer-run operating regime. At its January meeting, the Committee stated that it intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve’s administered rates and in which active management of the supply of reserves is not required. The Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization released in January as well as the principles and plans listed below together revise and replace the Committee’s earlier Policy Normalization Principles and Plans.

  • To ensure a smooth transition to the longer-run level of reserves consistent with efficient and effective policy implementation, the Committee intends to slow the pace of the decline in reserves over coming quarters provided that the economy and money market conditions evolve about as expected.
    • The Committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019.
    • The Committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account (SOMA) at the end of September 2019.
    • The Committee intends to continue to allow its holdings of agency debt and agency mortgage-backed securities (MBS) to decline, consistent with the aim of holding primarily Treasury securities in the longer run.
      • Beginning in October 2019, principal payments received from agency debt and agency MBS will be reinvested in Treasury securities subject to a maximum amount of $20 billion per month; any principal payments in excess of that maximum will continue to be reinvested in agency MBS.
      • Principal payments from agency debt and agency MBS below the $20 billion maximum will initially be invested in Treasury securities across a range of maturities to roughly match the maturity composition of Treasury securities outstanding; the Committee will revisit this reinvestment plan in connection with its deliberations regarding the longer-run composition of the SOMA portfolio.
      • It continues to be the Committee’s view that limited sales of agency MBS might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public well in advance.
    • The average level of reserves after the FOMC has concluded the reduction of its aggregate securities holdings at the end of September will likely still be somewhat above the level of reserves necessary to efficiently and effectively implement monetary policy.
      • In that case, the Committee currently anticipates that it will likely hold the size of the SOMA portfolio roughly constant for a time. During such a period, persistent gradual increases in currency and other non-reserve liabilities would be accompanied by corresponding gradual declines in reserve balances to a level consistent with efficient and effective implementation of monetary policy.
    • When the Committee judges that reserve balances have declined to this level, the SOMA portfolio will hold no more securities than necessary for efficient and effective policy implementation. Once that point is reached, the Committee will begin increasing its securities holdings to keep pace with trend growth of the Federal Reserve’s non-reserve liabilities and maintain an appropriate level of reserves in the system.
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20 comments on “Fed Announces QT Taper, Signals No Rate Hike In 2019

  1. Lance Manly

    We are all Japan now.

  2. Powell: “Okay, I admit it now: we are fucked – oh, look over there! Shiny PPT object!”

  3. Harvey Darrow Cotton

    The, uh, intersection of politics and finance right? Okay, here is the non-Straw Man concern. The cost and availability of money is a political calculation that balances the needs of disparate groups. Savers vs. borrowers, creditors vs. debtors, importers vs. exporters, etc. Keeping rates low, keeping credit spreads low, and keeping risk assets high benefit some people…AT THE EXPENSE OF OTHER PEOPLE.

    Forgive me for being Gundlachian again, but there are two sides on this coin and one of them is being dismissed here. Low rates hurt savers, because it makes returns on cash savings low, and in real terms negative when inflation is taken into account. A maxim states that you save for retirement, and you invest to counter inflation. Money that could have more productive purposes is used to chase yield instead. Inflows of cheaper money keep companies afloat that would otherwise go bankrupt and liquidate valuable assets. Start ups that could have been created from accumulated savings cannot be because of too many zombie competitors. The concern is that reduces overall competitiveness and locks in first mover advantages.

    We have seen this movie before. The balance sheets of Europe and Japan are growing ever larger, while the purchasing power of ordinary people is being eroded. If capital is being misallocated to risk assets, then bubbles emerge. When those bubbles pop, in the American context of ultra-loose monetary and fiscal policies, then either there will a great deal of pain inflicted on someone (taxpayers? investors?, pensioners?) or ever more exotic policies (MMT?, The Fed buying the dip, overshoots on inflation?, default?) have to be designed to delay the ultimate reckoning.

    Whether you are a free market capitalist or a democratic Socialist, there are political reasons to not want public money printed in order to finance a stock market that cannot stand up on its own two feet in order to try to outlaw business cycles.

  4. From October, principal repayments from agency and MBS securities will be reinvested in Treasurys “subject to a maximum of $20 billion a month.”

    -I love the smell of MMT in the morning….

    • …It smells like,… bullshit.

      • Micro engineering a monstrous complex adaptive system, interconnected global economic system, is like saying you can micromange a tsunami or an earthquake. Ask Japan and California how that is going. Yes, it’s all bullshit…Hence the nod to a popular movie that references apocalypse.

  5. This was a done deal 2 months ago.. I rather had expected H……..to be witty and sarcastic on this one. Possibly we should have a collective day of mourning followed by a tag day for Powell and his Fed group so as to allow them to retire securely..

  6. Same old story folks: either you want central banks to try or you don’t. if they didn’t in 2008, all the “regular” people you guys/gals are apparently so worried about would have been in soup lines, while the rich would have been just fine, relatively speaking.

    failing to mention that when you deride post-crisis monetary policy demonstrates an acute lack of understanding with regard to what was about to happen in September 2008 had it been allowed to “work itself out” or had “misallocated capital” been allowed to be “purged”.

    the saving grace is that you folks didn’t have to suffer through that and will never know how bad it actually was there for about three weeks at the end of September/early October 2008. ignorance, in this case, really is bliss.

    • One more thing: when you read commentary from bloggers/commentators who support this demonization of post-crisis policy for the extent to which it hurt “the little guy”, maybe consider the source of that commentary. Is it really “the little guy” or “everyday Joe” writing it? Or are your reading a screed penned by someone who is themselves a millionaire masquerading as a champion for the middle class and “regular” readers?

      • Harvey Darrow Cotton

        Uh…whut? Okay, I guess we are talking about 2008 now. Fine.

        There were, in real time, multiple responses to the crisis. If you are of the libertarian or right-wing stripe, you would have advocated doing nothing and allowing the markets to reprice risk, capital, and finding ways to meet short term liquidity needs because you believe in free markets. If you hew more left, you advocate using all of that money that went to bailing out companies and re-capitalizing banks – and using the Fed as the lender of last resort: A liquidity injection to Main Street businesses, mortgage holders, and people needing quick access to cash if you will. Then you allow the unwinding of busted financial firms and break up the big banks while the government provides the necessary social safety net.

        I doubt there was a democratic clamouring for government to hoover up crap assets from overleveraged financial institutions to make them whole with printed money.

        And if, If, IF you think bailing out banks too big to fail was the only solution to prevent Mad Max scenarios, why the hell would you allow those same banks to get bigger now and provide the moral backstop to allow those firms to replay the same mistakes?!?!

        • Harvey, I like you my friend (in the same way I like and appreciate all of my long-time readers), but sometimes I think your sole purpose in commenting here is to try and agitate me with comments that all employ a similar strategy: you pop up, try to goad me into responding, use a derisive tone (ex: “Uh… whut?”), then proceed to argue both sides of an issue using what sounds like nuance, but what are usually just purposefully naive assertions.

          In this case, for instance, you’re suggesting that two options in 2008 were to i) let the financial system implode by allowing all systematically important banks to collapse at once (because according to you, that’s what those of a “libertarian or right-wing stripe advocated”, despite the fact that nobody sane of any “stripe” would have advocated that had they appreciated the gravity of the situation), or else ii) provide “a liquidity injection to Main Street businesses, mortgage holders and people needing quick access to cash”.

          On the first point, you obviously can’t just let the financial system implode because that is a criminally insane assertion, and it deserves exactly zero attention beyond calling it criminally insane.

          On the second point, how does that program work exactly? Do you poll the audience? “Hi, Joe shop owner, this is the government calling, would you be in the market for a free, one-time injection of $250,000 by any chance?”

          Or maybe “Hi, Suzy Johnson, this is the government calling. Would you say you need quick access to cash? If so, we’ll send you $100,000 tomorrow in a suitcase. And no, Suzy, it can’t be a check because all the banks are closed now, which means you won’t be able to cash it.”

          Sarcasm aside, you can send out some small checks (and they in fact did, if you remember) to try and juice consumer spending, but you can’t just mail out $700 billion to random people real fast after Wall Street is already on fire and while the plumbing of the global financial system is in the process of seizing up.

          And then on top of that silliness (which you frame as some kind of wholly realistic initiative), you very casually say the following as though you’re putting together a bookshelf with a set of instructions from Ikea or something: “Then you allow the unwinding of busted financial firms and break up the big banks while the government provides the necessary social safety net”.

          Like: “Then you simply insert screw A into hole B using the Allen wrench provided in the tool kit taped to the inside of the box.”

          With all of that said, I hope you’ll forgive me if I leave you to argue with yourself about the relative merits of these solutions you have — and when you do, make sure and add a lot of unnecessary punctuation at the end (“?!?!”) so that you can hear yourself, ok?

          • Harvey Darrow Cotton

            As a fellow university-trained political scientist, I am able to see how the basic problems of scarce resource allocation are hit at from multiple ideologies, many of whivw I do not adhere to. I am not a libertarian, I am not a Republican, I do not adhere to the Austrian School, but I am aware of it. There were a lot of people who wanted the whole thing to burn, using the Depression of 1920-1 as a template. You can dismiss that option, or handwave it away, but it does still exist. It is/was a policy option.

            If you say the Central Bank does not have the logistical capability of being, you know, a bank, fine. I’ll concede the point. But there were policy prescriptions for that too. Nationalizing banks. The government could have taken over existing banks, used those lending windows and routing numbers and credit vehicles and done the same thing through them. This was done in Iceland. The model does exist.

            Every sentence I have written above justifies a paragraph to elaborate, and each paragraph a book chapter, all annotated. I am aware, but there are space limitations in this format to consider so I am giving the TL;DR version. That cannot be helped. But I am trying to help you in the way you have helped me. You live on an island andaI don’t. You have a website and I don’t. You have made me stronger with your unforgiving jargon and squiggly lines, but you have blind spots. You are the one who introduced me to David Stockman before he put up a paywall, but you summarily dismiss his ideology. You have an Establishment center-left bias that makes you ignore the wings despite your political science training. And I am sorry, but the Establishment fucked up and continues to fuck up monetary policy. Banks are bigger, incomes are stagnant. Public, private, corporate, student, all debt is through the roof. The dollar buys less home, less education, less healthcare, and too few have savings or retirement money. It is not working, and hair of the dog is not going to cut it. Left and Right each have different solutions that come with known drawbacks and require different discipline, but each is way better than current Fed policy.

          • Harvey Darrow Cotton

            And I like you, too, H. Just like I like Wolf Richter and Doug Noland and David Stockman and Kevin Muir and Dave Collum and Robert Reich and Jim Cr…

          • Kevin has a legit claim on “most likable guy on the planet” btw. David is also super-duper nice despite his seemingly irascible style. As for Cramer… let’s just say if you ever talk to him in person when the door is closed and the cameras aren’t rolling he’s, well, not entirely likable.

          • Good debate, guys. Well worth reading. BTW, “precisely what Goldman predicted” is truly “the cart leading the horse”.

      • I don’t have clue about have bad things will turn if the CBs didn’t chose the ultra loose policy, but its like cheating – the system is not fair, thats whats bother me the most (and this said, I am pretty sure that the wealth gap this system is creating will come back to the 1% on day, one way or the other)

  7. I really wish I had a sense of whether this shit show is going to continue and I just need to blindly invest in my company’s limited selection of mutual funds for the next 20 years. Or whether I need to cash-out and sit for a while. Maybe ignorance really is bliss like yall say.

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