· The Fed has tapered QE $10bil, $5bil from treasuries, and $5bil from MBS. Now, the talk will be “taper pace”!
· Keep in mind, they’ll be adding another $75bil next month, which I believe will put their balance sheet over $4 trillion.
· Considering those numbers, $10bil doesn’t sound like so much.
· But for now, I’d like you to consider this. What time frame could we fathom for seeing the Fed “raise” short term rates?
o What needs to happen before they could be in a position to raise rates?
o First, they’ll have to taper this current QE to zero. How long will that take?
§ What if something goes wrong and they “pause”?
§ What if something goes really wrong and they take it back up?
§ FYI, as I write this, Bernanke said they do plan on a $10bil tapering pace going forward, as long as the data supports it.
o Second, we need to remember they are “reinvesting” all interest and principal cashflow off their $4tril holdings.
§ This is not an insignificant number. I believe it’s measured in tens of billions.
§ It would seem to me that this will need to come to an end before they start raising rates.
o Third, would you raise rates when you own $4+ trillion in bonds? I don’t think so.
§ If they were to raise rates BEFORE they shrank their balance sheet, they would have MASSIVE losses in their holdings.
§ That would seem to prevent them from SELLING any holdings, given they would be taking losses.
§ This alone, appears to be the most significant reason we won’t see higher fed funds rates anytime soon.
§ THUS, if they raised rates, they’ll handcuff themselves on shrinking their balance sheet to strictly principal cashflows.
· With all that said, how long do you think it will take the Fed to accomplish all that? I think a VERY LONG TIME!
· How about other metrics?
o Well, just now Bernanke said rates will remain low “well past” the time unemployment of 6.5% or less is reached.
o Remember, Bernanke and Yellen has OFTEN mentioned that there will be a “quality” consideration on the level of unemployment as well.
o They both have pointed to the participation rate. I believe they will ADD this metric to their talking points in the future.
o He’s also said in his Nov. 19th speech that even if 2% inflation is reached, it’s like they’ll allow that to go “some degree” over this level before raising rates.
o But what if we had run away inflation? Won’t happen. The only way that can happen is if the private sector ramps up credit creation at the pace they did leading up to 2007. That’s simply not going to happen. And the fact that the Fed has now started tapering, that should also mitigate runaway inflation.
Consider all these things! Especially considering my comments on the ramifications to the Fed’s balance sheet and their likely desire to shrink their balance sheet, if they were to raise rates. Given EVERYTIHING that needs to happen, it would seem to me that it’s going to take a VERY long time to see the Fed raise rates.
Several market participants I respect say rates will be zerobound for 5 to 10 years. However, I believe they only say that because saying what they’d really like, 15 to 20 years, just sounds ridiculous. But I think that’s what they believe, and it’s what I believe. And so far, we’ve been right for 5 years.
Randy
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