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Fed Hikes by 1/4 Point, but Quantitative Tightening QT is the Real News

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32 comments on Fed Hikes by 1/4 Point, but Quantitative Tightening QT is the Real News

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Dot Plot courtesy of the Fed, Annotations by Mish

Press Release 

Here is a snip from the FOMC Press Release.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.  

The release said virtually nothing that was unexpected. It was the Dot Plot of anticipated hikes in addition to QT that’s interesting.

Dot Plot 

The dot plot is out of this world. Seven hikes this year to 2.0% then three more in 2023?

A recession was already baked in the cake. I see zero chance the Fed hikes to 3% and almost no chance of 2%. 

In fact, I would be surprised by four hikes. 

And QT is supposed to start too? 

Stocks?

Watch the Live Conference

I will comment on the bond market at the close today.

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Mike Shedlock

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32 Comments
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Lisa_Hooker
Lisa_Hooker
4 years ago
Why is the FED mandate to increase equities and RE prices by 10% per year never mentioned?
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Eddie_T
Eddie_T
4 years ago
A quarter point raise is bupkis with this much inflation. Won’t touch it. Compare it to Volcker who raised rates almost 10% from a MUCH higher baseline than where we are now. A quarter point is pissing in the wind.
I don’t believe they make 4 hikes even…..and I won’t believe in QT until I actually see a line on a chart that shows the balance sheet actually noticeably shrinking. My guess is not too much and not for too long. Something will break.
Most likely outcome, Mish is right, we get a recession that eventually cools off inflation…..when a lot more people are out of work.
Biden is out-and-out attacking the oil industry, laying blame for them for things directly caused by terrible energy policy and the failures of ESG and renewables to replace FF’s.. It’s pure spin, and it looks forward only until November elections. He wants more Saudi oil. He want Venezuelan oil. He want Iranian oil…he just doesn’t want US shale oil or Canadian oil. It’s quite ironic how these terrible regimes that have been sanctioned out the wazoo are suddenly okay to negotiate with now. 
Markets are chaotic and choppy and I’ve given up some nice gains. I might decide to sit this out for a while while I’m still ahead. 
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KidHorn
KidHorn
4 years ago
Reply to  Eddie_T
The only thing raising rates will do is cool the housing market. Which should have some impact on inflation. When people buy homes, they get renovations, buy furniture, etc…
But it will also lower GDP. I don’t see how the FED can fight inflation and help the economy at the same time. We’ll soon find out their true mandate. Fight inflation or keep the S&P elevated.
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Doug78
Doug78
4 years ago
One more observation The Ukraine war seemed incidental to Fed policy and did not in any way change their decision to raise or not to raise. The Fed is not worried about the outcome. 
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Captain Ahab
Captain Ahab
4 years ago
What is the risk (and return) to the Fed, whatever it does? Are we to assume there is no risk to the Fed in modifying its balance sheet? Bigger or smaller numbers make no difference? Duration makes no difference?
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Doug78
Doug78
4 years ago
The Fed is less worried about oil and primary material inflation and very worried about wage-push inflation and will shrink the economy till it gets wage growth down to what they consider to be reasonable levels. Rates will increase till then. Not really good for the equity markets nor for real estate. Reading between the lines is that one of their principle objectives is to break the price of oil and keep it down and are not worried that they are unable to do that. Take them at their word.
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RonJ
RonJ
4 years ago
Reply to  Doug78
“The Fed is less worried about oil and primary material inflation and
very worried about wage-push inflation and will shrink the economy till
it gets wage growth down to what they consider to be reasonable levels.”
Wage growth is below reasonable levels, considering that it is falling behind price growth.
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Doug78
Doug78
4 years ago
Reply to  RonJ
I am just mirroring what the Fed said. They are worried about wage inflation for the most part feeding the inflation cycle. Wage-push inflation is dangerous I know because it is the hardest to contain because it comes from a mental state and not from goods themselves. In the ’70’s it was like that after the initial surges of oil inflation had subsided. I like wages going up but there are limits to what is healthy. The Fed by signalling that inflation is the worry also means that they don’t care about the level of the stock markets and are willing to see significant paper wealth destruction among the wealthy since they are the ones who hold stocks by a large margin. It is a big change and a needed one. 
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Lisa_Hooker
Lisa_Hooker
4 years ago
Reply to  Doug78
I like M2 going up but there are limits to what is healthy.
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Cocoa
Cocoa
4 years ago
Reply to  RonJ
Because inflation in everything is awesome…except labor cost. They have done a great job at wage deflation
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Tony Bennett
Tony Bennett
4 years ago
 “In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.”
…
Wang: “I am getting a sense there will be a very aggressive steepening of the curve engineered by the Fed by very aggressive quantitative tightening.” 
Verdict?
Post announcement major FLATTENING.  Will it hold?
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Scooot
Scooot
4 years ago
Reply to  Tony Bennett

I guess the Fed doesn’t want the curve to invert, so they only have to announce their intention to sell long bonds and that’s half the job done.

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TechLover1
TechLover1
4 years ago
Reply to  Scooot
They better be real careful to “only announce”.
If there is an exodus from the long bond holders, the Fed will have to be buying the long bond hand over fist to keep the government liquid (funded). They have really painted themselves in a difficult corner.
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Scooot
Scooot
4 years ago
Reply to  TechLover1
That’s the trouble, no one knows at what yield the natural bid is. 
As you say it’s risky, maybe I’m reading too much into it. 
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StukiMoi
StukiMoi
4 years ago
Reply to  Scooot
The real natural, as in No-Fed, bid; is an almost overnight bankrupting of all the Fed facilitated redistribution rackets. Including the one keeping the US federal government nominally solvent.
Any long long price higher than that, has nothing to do with “natural.” Just varying degrees of manipulated. And they won’t even let the degree of manipulation shrink bellow 95%, at the very lowest. IOW, the realistic question is, how close to only 95% purely manipulated, will The Fed allow things to get, before again turning around to bail out their chosen Welfare Queens.
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Scooot
Scooot
4 years ago
Reply to  StukiMoi
I think they’d be some buyers before it got to that. 🙂 
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Tony Bennett
Tony Bennett
4 years ago
Woot!
Inversions.
30yr and 20yr been inverted for a while.
10yr and 7yr inverted past couple of days,
Joining the party today
5yr and 10yr 
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Jojo
Jojo
4 years ago
1/4 point hikes (baby steps) aren’t going to do much at all.  Looking forward to largest ever SS bump come Jan 2023!
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Paul T.
Paul T.
4 years ago
Could Mish or someone answer my question, please.  How is the Fed going to lower the inflation rate by raising the rates?  Seems to me that they ran out of bullets a number of years ago.  We have a massive debt and unfunded liabilities and constant deficit spending.  The economy is floundering, the government unemployment rate is a joke, business’s have a hard time hiring and wages have been artificially increased to attract workers.  I do remember the 80’s when Volker raised the rates, but these are very different times.  Government spending was less, debt was low and unfunded liabilities were a lot lower.  If they do raise the rates higher, all I see them doing is crashing the economy.  Am I wrong?  Thank you.
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LawrenceBird
LawrenceBird
4 years ago
Reply to  Paul T.
Personally I don’t think raising rates will do much to slow inflation as much of it has nothing to do with interest rates.  Oil, natural gas are mostly geo-political and lesser extent policy.  Wheat, coffee etc are drought (which hits cattle and pork too).  Chicken is bird flu.   Other things are supply change squeezes which eventually will abate (and quite likely go well the other way in the case of semiconductors).    The only place it probably has effect is housing and to some extent tech ipos
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StukiMoi
StukiMoi
4 years ago
Reply to  Paul T.
The only money anyone currently have to demand anything with, is debt. Debt which has been taken on, on the back of ridiculous “asset” valuations serving as collateral. Bring short rates  to 25%/yr, and prices for houses and stocks and tech ipos become more realistic. Hence ditto the amount of debt which can be taken on.
That will reduce demand massively, since the only people in America who have any money, are the ones who have had money handed to them by this channel. Once their ability to demand is cut in half or better, aggregate demand drops off a cliff.Hence so does prices, since those are just the intersection of supply and demand.
Of course, shot rates won’t be taken to 25%. Not even close, since those “only people with any money”, are also “the only people The Fed looks out for.” So, in practice, the whole thing is just a dog and pony intended to, like all else in our little idiotopia,  fool the easily so into believing The Fed is suddenly concerned about “inflation” and mispricing now. Which of course they are not.
So, instead of 25%, the realistic over/under is more likely to be Mish’s 2%. When things are as nosebleed level pumped up as today, even that tiny blip may clip demand for some stuff a little bit, though. Resulting in slightly lower price growth than current. But you won’t be getting the same deals on Coastal SoCal houses, as the returning GIs did, back when America still was a country with more of a sound economy. 
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Doug78
Doug78
4 years ago
Reply to  Paul T.
Powel said they will run off the balance sheet. That means not rolling over debt and refraining from adding more. In principle if you do that your balance sheet goes down rapidly. You might have to raise taxes though.
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Lisa_Hooker
Lisa_Hooker
4 years ago
Reply to  Paul T.
It will slow the folks bidding up equity prices by buying on margin.  😉
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LawrenceBird
LawrenceBird
4 years ago
Isn’t it a bit of a misnomer to call it QT when they are in fact just returning to normal (not buying up mortgages and treasuries)?  
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Mish
Mish
4 years ago
Reply to  LawrenceBird
No – QT means balance sheet reduction 
Tapering means reduces rate of buying
One SLOW way to achieve QT is simply to let time expire as opposed to actual selling 
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LawrenceBird
LawrenceBird
4 years ago
Reply to  Mish
I guess I look at this from the balance sheet prior to any of the “quantitative” things (ie, 1T).  ‘Ease’ until they are at 0 holdings and ‘tightening’ only if they are short treasuries, etc.    Until they have removed all liquidity previously added, it still looks like easing to me.   And everybody knows they do not have the stomach to sell back more than a token amount of debt.   $100B a month and it would take about three  years and their prior effort peeked at $30B/month so…
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Scooot
Scooot
4 years ago
Reply to  Mish
Will they opt for the slow way? it sounds to me that maybe Wang is right and they’re going to attempt to stop the curve inverting by selling longer bonds.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  Scooot
Well, you can kiss off housing.
And all major household purchases.
And cash out refis … to buy vehicles and such
And mortgage (purchase + refinance) fees for lenders.
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Scooot
Scooot
4 years ago
Reply to  Tony Bennett
That’s the sledgehammer to crack a nut method of dealing with inflation. It still won’t work though in my opinion. 
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TechLover1
TechLover1
4 years ago
Reply to  Scooot
This got me thinking …
Who is a natural buyer of the long bond at 2%? At 3%? At 4%? Given current inflation at around 8%.
Buying the long bond was an easy decision for the Fed. Selling it is an entirely different ball game. Heck, just thinking about selling it is a different ball game.
If the market gets a hint that Fed is mulling selling the long bond in quantity, what will be the reaction (and action) of current holders of the long bond (other than Fed)? This can get ugly real fast as the US government really depends on issuing extremely cheap long bonds. Take that away and we will have literal riots and food fights in the streets.
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Scooot
Scooot
4 years ago
Reply to  TechLover1
It’s quite clever, they don’t need to actually sell much, just keep the market guessing and that will temper the speculative flattening trades. 
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Lisa_Hooker
Lisa_Hooker
4 years ago
Reply to  TechLover1
Purchases of long term government bonds are built into many pension funds and insurance companies.
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