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Demand Destruction Or Bust
Equities and rates were a hopeless conundrum Tuesday ahead of the March Fed minutes which, if Lael Brainard's prepared remarks for a Minneapolis Fed speech were any indication, will betray a hawkish skew befitting of what many perceive to be panic inside the Committee.
Fed tightening will proceed "methodically," Brainard said, promising a "series" of rate hikes and "rapid" balance sheet runoff commencing "as soon as" next month's policy meeting.
The Vice Chair-in-waiting delved into specifics.
I’m expecting the Fed plans to target the housing market as it represents a good bang-for-the buck shot against inflation, since housing is both a critical and very broad-based component of inflation and the housing market needs a good bucket of ice right now, anyway. I’ve read that market speculation is around a $100B goal run-off rate this time around (not initially, of course), twice the rate of last time, and presumably comprising $50B treasuries and $50B MBS. What some may not have noticed is that MBS issuance has been dropping lately. SIFMA data shows agency MBS issuance falling from $400B in Feb 21 to $200B in Feb 22. Presumably this reflects the evaporation of the refi segment as much as the current inventory situation. In any case, one can look at this two ways. A 25% increase to monthly new supply might add nicely to the pressure on mortgage rates and help suppress housing demand. New issuance is a pittance compared to daily trading volumes in the MBS market, so I’m uncertain about the effect on rates, but I’m guessing it could be noticeable. On the other hand, the Fed may simply look at the drop in issuance as creating a convenient bit of room in the MBS market to fill with their own inventory. Either way, I suspect they’ll be tempted to be fairly aggressive with their MBS holdings.
Not sure how you can put all of those “fraught” factors together and NOT wind up in a bust, later this year, into next.
How can I mix eggs, flour, water and sugar in a bowl and NOT end up with cookie dough ?
Explicitly targeting housing is too dangerous for the Fed. Every small-time contractor right up through the largest firms (major political donors) would be lined up in Washington DC to demand that Congress do something about the out of control Fed.
That “something” might well be restricting or eliminating the Fed’s independence.
Yes, you’re probably right. I suppose the way to think about this is that Fed, simply following its apparent present course, and considering the current state of the housing and mortgage markets, is more likely to trigger a greater tightening effect in these markets than elsewhere in the economy, and the fact that MBS issuance is falling pretty rapidly as the Fed starts selling will simply amplify the effect of Fed policy on that market.
” the fact that MBS issuance is falling pretty rapidly as the Fed starts selling will simply amplify the effect of Fed policy on that market.” Great point Uptowner.
Demand destruction, that’s abstract as it relates to what the Fed is apparently hoping to accomplish with rate hikes and the magic show with MBS interest swaps, etc. I’d like a diagram to lay this out, as in how flooding the MBS market with supply, which should decrease price helps Make America Great Once Again?
The clever chains and links connected to the swaps essentially help someone structure CDO hedge pools that like sardine cans, can be used in other swap transactions. Obviously adding in treasury swaps into this mix creates a concoction that reduces instability in the economy and apparently helps unemployment and keeps the housing market in a Goldilocks state of euphoria while allowing both bonds and stocks to scream higher.
I get all that and realize inflation is a pain in the ass, but, while that magic show is running full blast like a furnace being fed her fuel, something else is taking place and that’s a decline in GDP.
Our wizard Powell (OWP) said something to the effect that money stopped mattering 40 years ago, correct me if I’m wrong. He claimed that financial innovation had changed to a point where economists view stuff far differently than way back when money was real.
The connection here inside this enchilada is that financial innovation has gone a long way towards making the global economy highly chaotic. That’s obvious, unless you’re totally blind and not paying attention.
In this great time of financial innovation less and less capital is going into infrastructure or the creation of stuff that makes a society stable. Instead of building physical things, society builds fantasy based derivatives that get swapped and traded for other non essential useful trash.
I have 2 Fred links, both related to velocity. In terms of demand destruction, these are the mother lode of everything rolled into the single concept that, as velocity decreases, growth is suppressed. With all the money sloshing around, it’s a simple case of, water, water everywhere and not a drop to drink. Slow money is dead money and by raising rates, I think that’s gonna slow velocity even more.
Velocity of money (M2)
https://fred.stlouisfed.org/graph/?g=NXdW
Velocity of debt
https://fred.stlouisfed.org/graph/?g=NXcw