For anyone who maintains a bigger picture view, and ignores the noise of the crowd, Powell's dovish tilt was imminently foreseeable. In this article, I break down why, what will drive Fed policy moving forward, and where I believe that Fed policy is headed.
Some people are saying that the Fed may use QT to change interest rates instead of the fed funds rate. That is, given that inflation is cooling off there's no justification for higher rates. So they'll hold or lower it slightly. But they're still saying that they'll do QT. By selling long duration bonds, they can keep the 10-year yield higher for longer.
Why would they do this? Housing prices still has not come down that much. And that is contributing to the structural labor shortage. If inflation is low but housing is still in bubble territory, they have to try to deflate it. And the way to do it would be using QT.
I came across a twitter account that keeps track of the Fed's QT broken down by asset class and bond duration. I wished I bookmarked it because I can't find it anymore. Anybody know?
Theoretically that's true, and it would be having some level of impact, but remember that the Fed isn't outright selling bonds right now, it's just not fully re-investing the proceeds of bonds that are maturing.
Given how high housing prices went up during the COVID boom, the significant increase in rates likely means that housing prices will see significant declines. The full extent of the declines will take time to occur. Many are waiting on the sidelines, but as price declines start to increase, behaviour may start to change. Much of the decline may also come when the economy starts to weaken significantly, and more people are unfortunately placed in the position of needing to sell their homes.
That's not something that I track in such granular detail, but it would be interesting to see.
You can certainly make the argument that the Fed has been being the curve for pretty much every economic cycle for the past 30 years and probably longer. Can’t help but keep fighting the last war.
Some people are saying that the Fed may use QT to change interest rates instead of the fed funds rate. That is, given that inflation is cooling off there's no justification for higher rates. So they'll hold or lower it slightly. But they're still saying that they'll do QT. By selling long duration bonds, they can keep the 10-year yield higher for longer.
Why would they do this? Housing prices still has not come down that much. And that is contributing to the structural labor shortage. If inflation is low but housing is still in bubble territory, they have to try to deflate it. And the way to do it would be using QT.
I came across a twitter account that keeps track of the Fed's QT broken down by asset class and bond duration. I wished I bookmarked it because I can't find it anymore. Anybody know?
Theoretically that's true, and it would be having some level of impact, but remember that the Fed isn't outright selling bonds right now, it's just not fully re-investing the proceeds of bonds that are maturing.
Given how high housing prices went up during the COVID boom, the significant increase in rates likely means that housing prices will see significant declines. The full extent of the declines will take time to occur. Many are waiting on the sidelines, but as price declines start to increase, behaviour may start to change. Much of the decline may also come when the economy starts to weaken significantly, and more people are unfortunately placed in the position of needing to sell their homes.
That's not something that I track in such granular detail, but it would be interesting to see.
I found the guy who writes about QT details! He is here on substack and also on twitter. You might find this interesting.
https://johncomiskey.substack.com/
Thanks for sharing!
You can certainly make the argument that the Fed has been being the curve for pretty much every economic cycle for the past 30 years and probably longer. Can’t help but keep fighting the last war.
Good read. I like that US imports chart. I've not seen that before and it's yet another data point that is quite telling.
Thank you - yep, yet another data point to add to the list!