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FED watch: What did the FRB FOMC decide, and what are the consequences?


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2018 Feb 21, 11:55am   3,040 views  3 comments

by justme   ➕follow (1)   💰tip   ignore  

This thread is intended to be an ongoing thread to analyze the FED/FOMC verbiage, and FOMC interest rate and QE and QE-unwind actions. For starters, the written minutes from the Federal Reserve FOMC meeting on 2018-01-31 were just released, as always 3 weeks after the meeting ended.

https://www.federalreserve.gov/monetarypolicy/fomcminutes20180131.htm

My personal take is that the stock market reacted to the verbiage found in the minutes as implying 3 (not 4) 0.25 point FFR increases in 2018, and concluded that further stock asset inflation is warranted. However, I think that the stock market is ignoring the fact that QE-unwind is on track and there was no change whatsoever to the QE-unwind program, which was originally adopted in Sep 2017. I also think that QE-unwind will have a much more pronounced effect on asset prices than many people think. Longer term interest rates will be rising because of QE unwind, and the impact on asset prices (stocks, bonds, housing, real-estate) should not be ignored.

For reference, here is the QE unwind plan:

2017-06 QE unwind was announced/signaled with 2017-10 start date
2017-09 QE unwind was confirmed at FRB/FOMC meeting
2017-10 QE unwind started in earnest

2017:
Q4 $30 billion runoff over 3 months (10B/month)

2018:
Q1 $60 billion runoff over 3 months (20B/month)
Q2 $90 billion runoff over 3 months (30B/month)
Q3 $120 billion runoff over 3 months (40B/month)
Q4 $150 billion runoff over 3 months (50B/month)

2019:
Q1-4: $600 billion runoff over 12 months (50B/month)

So far, the runoff has been instructed to be a split 60%/40% between USG bonds (Treasury Bonds) and a combination of GSE MBS Mortgage Backet Securities and Government
Agency Debt (GAD == Ginnie Mae debt).

"For a total of $420 billion in 2018. This is scheduled to increase to $600 billion in 2019.”

If FRB allows $420 billion to roll off in 2018, $600 billion as planned in 2019, and $600 billion in 2020, the holdings are down to $2.6 trillion. If FOMC allows the runoff to go on in 2021, holdings are down to $2.2 trillion. FOMC has not officially said where they will stop, but some members have mentioned informally amounts in that range. So if allowed to move forward as planned, it will take 3-4 years to run everything off. For comparison, QE took 7 years.

Terminology and shorthand:

FED = Federal Reserve Bank/System
FRB = Federal Reserve Bank/System
FOMC = Federal Open Market Committee (the organ that sets interest rate targets)
QE = Quantitative Easing (FRB permanently buying bonds on the open market by issuing reserve credits to the selling FRB member banks)
Policy Rate = Federal Funds Rate = FFR = rate charged to banks for overnight repo-based loans at the FRB
GA = Government Agencies (meaning: Ginnie Mae)
GSE = Governmenet Sponsored (but private) Enterprises (Fannie Mae and Freddie Mac, aka. FNM and FRE)

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1   justme   2018 Feb 21, 12:04pm  

Hmm, I posted the initial version of the above at 11:55 PST, and at 11:59 PST the stock market started reversing downward from the post-FOMC-minutes-release spike. Just coincidence ? :-) :-)
2   justme   2018 Feb 21, 12:13pm  

Whoa, look at the USG 10Y bond yield spiking right now to 2.94% (use TNX symbol to see a graph).

Clearly, the bond market got the QE-unwind-is-on-track message loud and clear, but the stock market read the FOMC minutes as promising more asset inflation. Not gonna happen?

https://www.google.com/search?q=TNX
3   HeadSet   2018 Jun 18, 5:21pm  

justme says
Hmm, I posted the initial version of the above at 11:55 PST, and at 11:59 PST the stock market started reversing downward from the post-FOMC-minutes-release spike. Just coincidence ? :-) :-)


Maybe be a Mensch and warn us next time?

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