Yesterday we discussed an odd dynamic – US Treasury rates went up after the Federal Reserve (the Fed) cut its target interest rate by 50 basis points two weeks ago.
That being the case… what happens next? Is the Fed going to slash rates aggressively from here?
When we left off yesterday, I mentioned that Fed Chair Jerome Powell said two things in his talk that I found telling. First, he emphasized that he remains focused on “normalization”.
When a Wall Street Journal reporter asked Powell if rate cuts were a signal that the Fed would also start buying Treasury bonds again, the answer was a clear ‘no’.
Powell told him that this isn’t even a point of discussion right now. He added that “you can have the balance sheet shrinking but also be cutting rates”.
Here’s why that’s important…
The Fed purchased over $8 trillion dollars’ worth of Treasury bonds from 2008 to 2022. They created money from nothing to buy those bonds… which pumped liquidity into the financial system and helped drive interest rates down to zero.
When they were Fed Chair, both Ben Bernanke and Janet Yellen made it a habit to buy more Treasury bonds whenever the Fed’s existing bonds matured. That kept the cheap money game going for longer than otherwise would have been possible.
Powell broke ranks and reversed course with his quantitative tightening (QT). This chart tells the story:
Continue reading “Breaking ranks…”