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October 8, 2019 | Fed Seeks Firm Grip On Interest Rates, Supposedly Not QE

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Powell was busy yapping away about the need to control interest rates, looking more than a bit foolish in the process.

Federal Reserve Chairman Jerome Powell says the Fed Will Increase Supply of Bank Reserves, but supposedly it’s not QE.

The Federal Reserve will soon increase its purchases of short-term Treasury securities to avoid a recurrence of the unexpected strains experienced in money markets last month, Fed Chairman Jerome Powell said Tuesday.

Stresses in very-short-term funding markets last month suggested banks have grown reluctant to lend those reserves. Officials hadn’t said until Tuesday when they would allow reserves to grow again to avoid further scarcity issues from roiling funding markets.

“That time is now upon us,” Mr. Powell said in a speech to the National Association for Business Economics in Denver.

Mr. Powell emphasized that the coming moves are aimed at maintaining a firm grip on very-short-term lending rates—and not to provide economic stimulus, as the Fed did between 2008 and 2014 by purchasing longer-dated Treasury and mortgage securities in successive campaigns sometimes referred to as quantitative easing, or QE.

“This is not QE,” Mr. Powell said. “In no sense is this QE.”

Rather than purchase longer-dated securities, Mr. Powell said officials are now contemplating buying shorter-dated Treasury bills. Officials believe holding long-term securities boosts the economy and financial markets by lowering long-term rates and driving investors into stocks and bonds. They think a portfolio weighted toward shorter-term securities provides less or no stimulus.

Data Dependent

In a speech today, Jerome Powell described the Fed’s Data-Dependent Monetary Policy in an Evolving Economy.

What Powell did not say was what data the Fed was watching. I can help.

What the Fed is Monitoring

  1. Repo market
  2. Stock market
  3. Total Nonsense Including the Phillip’s Curve

Those are in order of importance.

However, I caution that until the Repo market blew up, it was not even on the list.

The stock market was the top dog, superseded by the need to get a grip on interest rates.

Questioning Not QE

It seems we have a bit of a disagreement as to what getting a firm grip on interest rates really entails.

Mike “Mish” Shedlock

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October 8th, 2019

Posted In: Mish Talk

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