Wednesday, November 28, 2018

Fed Option That Could Avoid Rate Hikes


I f-ing knew it:




Dog that didn't bark:  Fed has completely eliminated all reference to the rate of their asset reductions in ALL of their communications when they used to discuss this issue ALL THE TIME, they now only talk about the policy interest rate.... hmmmmm.....


 

8 comments:

Unknown said...

Matt - forgive my ignorance...is the assumption here that the Fed will moderate/halt rate increases in near future (Powell seemed to say as much today) and instead opt to shed more balance sheet assets?

If so, is this a positive or negative in your view? Trump seems to be against either option...

Thx

Matt Franko said...

Jay I wouldn’t think Trump would understand the Fed “balance sheet” thing... seems he is (or at least thinks he is) knowledgeable about rates...

Might be a good (to them) compromise ... iow Fed can appease Trump with the rates and then accelerate the rate of roll off which (to them) they think is bearish as banks would not have as much reserves “to lend out!” (their common Reification error) ... which imo would be bullish else equal as banks would be able to mark up the prices of risk assets as Fed removed nonrisk assets....

Matt Franko said...

Went back over this a bit today with Mike found this:

https://www.bnymellon.com/_global-assets/pdf/our-thinking/arriving-at-new-capital-ratios.pdf

For US banks (don’t know about Deutsche in EZ):

“The SLR makes products and services that use the balance sheet more expensive. The SLR has the largest impact on the banks that are “bound” by the SLR rather than the risk-based capital requirements. That is, each banking organization must hold the highest amount of capital required by any of its capital ratios, whether risk-based or the SLR. Custody and trust banks and broker-dealer banking organizations are more likely to be bound by the SLR because they have a relatively higher proportion of low risk assets. As a result, their capital requirements under the risk-insensitive SLR are likely to be higher than under the risk-based capital requirements.“

So if Fed removes Reserve Assets then the other risk based Ratio will become the control ratio again as normal... and banks can use present high excess levels of capital care risk assets to mark up in price their existing risk assets... which else equal is imo bullish...

Threat to “else equal” right now imo is Bank of China that keeps adding reserves to (to them) “lend out!” and keeps causing domestic and some global liquidation of risk assets... gotta get Bank of China to just do nothing for a while...

Unknown said...

Matt - Thanks for the reply. I wouldn't think Trump understands the Fed Balance Sheet roll-off either, but happened upon this tweet in which he seems to be alluding to it...

https://twitter.com/ktumulty/status/1067582887082504193

In any event, think I agree China is the wildcard...seems things are improving in Europe w/ ECB recent actions.

Matt Franko said...

Jay I think “pay downs” there he means paying down the debt... I think k he would like to balance the budget... seems he bought into the Laffer stuff big time... not working tho deficit going up a bit...

His tax “cut” wasn’t well thought out by his brain trust either imo ended up RAISING taxes while morons here still calling it a “tax cut!”...

Matt Franko said...

eg Trump today: “If companies don’t want to pay Tariffs, build in the U.S.A. Otherwise, lets just make our Country richer than ever before!”

sths said...

So you have two things happening here. Significant slowly down in Chinese bank asset growth from late mid 2017 onwards. Could this be because Chinese central bank keeps injecting liquidity 'creating reserves' in the banking system and constraining the banks ability to lend leading to falls in asset prices. So the second article says they've stopped for 26 days of injecting liquidity. This should mean more freedom to lend and bullish for asset prices.


https://pbs.twimg.com/media/DtNxIQYVYAAdq9W.jpg:large

https://www.bloomberg.com/news/articles/2018-11-30/pboc-s-record-liquidity-forbearance-seen-as-sign-of-credit-woe?utm_source=twitter&utm_medium=social&utm_content=markets&utm_campaign=socialflow-organic&cmpid%3D=socialflow-twitter-markets

sths said...

So you have two things happening here. Significant slowly down in Chinese bank asset growth from late mid 2017 onwards. Could this be because Chinese central bank keeps injecting liquidity 'creating reserves' in the banking system and constraining the banks ability to lend leading to falls in asset prices. So the second article says they've stopped for 26 days of injecting liquidity. This should mean more freedom to lend and bullish for asset prices.


https://pbs.twimg.com/media/DtNxIQYVYAAdq9W.jpg:large

https://www.bloomberg.com/news/articles/2018-11-30/pboc-s-record-liquidity-forbearance-seen-as-sign-of-credit-woe?utm_source=twitter&utm_medium=social&utm_content=markets&utm_campaign=socialflow-organic&cmpid%3D=socialflow-twitter-markets