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Does the Fed need a market crash to offload it’s balance sheet?
Posted on 5/16/22 at 6:06 pm
Posted on 5/16/22 at 6:06 pm
The Fed has stated they’re going to start drawing down its balance sheet but if they did that in this environment - without demand from Russia or China and into a normal thriving market - it could pump up yields and rates. USTs have been on a consistent decline along with other bonds since the inflation hit and the intent was to raise rates.
When the market crashes it’s deflationary and there’s always a flight to “quality”. I was wondering if an orchestrated market crash would create the demand needed to offload their USTs in a demand driven environment.
Brilliant, BS or flawed logic?
When the market crashes it’s deflationary and there’s always a flight to “quality”. I was wondering if an orchestrated market crash would create the demand needed to offload their USTs in a demand driven environment.
Brilliant, BS or flawed logic?
This post was edited on 5/16/22 at 6:21 pm
Posted on 5/16/22 at 7:16 pm to SquatchDawg
Flawed. No one is buying them, fed isn’t selling them, they’re rolling off. They’ve recently begun floating the idea of selling these but they’ve acknowledged how difficult that would be.
But an orchestrated recession would slow demand and reduce inflation. Powell commented after the meeting a couple weeks back that the runoff would be equivalent of raising interest rates. So it won’t create demand, but it would slow inflation.
But an orchestrated recession would slow demand and reduce inflation. Powell commented after the meeting a couple weeks back that the runoff would be equivalent of raising interest rates. So it won’t create demand, but it would slow inflation.
Posted on 5/16/22 at 7:52 pm to SquatchDawg
The Fed is/are terrible investors. They buy high and sell low.
Posted on 5/16/22 at 8:08 pm to UpstairsComputer
I was just talking to my controller about this today. If they sell MBS to the degree that they are signaling they are completely dysfunctional and stupid. Corporate credit quality is already deteriorating so rolling debt is going to become increasingly difficult.
Posted on 5/16/22 at 8:49 pm to wutangfinancial
quote:
If they sell MBS to the degree that they are signaling they are completely dysfunctional and stupid. Corporate credit quality is already deteriorating so rolling debt is going to become increasingly difficult.
I guess we’ll see. Issuance is down quite a bit this year, so the Fed exiting the market may not have the liquidity impact you’d otherwise think.
Posted on 5/17/22 at 5:40 am to slackster
quote:
The Fed is/are terrible investors. They buy high and sell low.
The Fed bought stocks in March 2020
Posted on 5/17/22 at 6:46 am to theRealJesseD
quote:
The Fed bought stocks in March 2020
No, they did not.
Posted on 5/17/22 at 9:43 am to slackster
quote:
so the Fed exiting the market may not have the liquidity impact you’d otherwise think.
I don’t think some of you realize just how illiquid the markets are and have been for years now. Some of it due to passive investing \ ETF’s and some due to demographics. Just go look at volumes 1-2 decades ago compared to present day. It’s all been masked by the Fed and financial engineering ie. corporate buybacks.
Posted on 5/17/22 at 10:32 am to Hussss
quote:
I don’t think some of you realize just how illiquid the markets are and have been for years now
The Fed has convinced the retail investment world that QE adds liquidity and QT extracts it, and it's the opposite. That's one hell of a psyop
Posted on 5/17/22 at 10:37 am to slackster
quote:
so the Fed exiting the market may not have the liquidity impact you’d otherwise think.
You'd be surprised at my opinon on the Feds influence in some of these markets. I actually think you would see sovereign wealth funds and pensions slobber over getting a huge discount on off the run MBS. I'm more concerned about the affect it has in funding markets. MBS is high quality collateral and a spike in rates in the short term would decrease the value of the collateral. All while counter-party risk is growing at a rapid rate due to geopolitics.
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