The Fed: QE With a (Reverse) Twist
They are doing exactly what Zoltan Pozsar said they'd do
There are two ways to slow inflation: by hiking short-term interest rates or by forcing long-term interest rates higher.- Zoltan. Pozsar
Long term rates are going higher. The Fed will have to chase inflation at the short end and [then] let the back end volatility rise along with rates. If it doesn’t there will be a real Volcker moment. That will come with the 30 year at 10% in a possible overnight fiasco. GoldFix April 2022
If you read ZeroHedge’s post: Waller Hints At QE Reverse-Twist and have questions, this may answer them. If you haven’t read it, do so or read our Summary of What Happened Friday section.
Contents:
Summary of What Happened Friday
What Did Waller Say Exactly?
The Macro Effects of This Policy Should Be…
Resteepen Yields
QE or Not QE
Buying What Yellen is Selling
Less Weaker Dollar (Maybe), Higher Rates (Definitely)
Who Will Buy Our Long Term Debt Now?
GoldFix Biggest Picture Comment
Appendix
The Situation:
Events Coming Soon:
Market Backdrop:
Geopolitical Backdrop:
Debt Backdrop:
Waller’s Fire Fighting Analogy:
Related Posts
ZeroHedge: Waller Hints At QE Reverse-Twist
Zoltan Pozsar: Cure Inflation by “Forcing Long Term Rates Higher”
GoldFix: The Broken Bond Ladder
Summary of What Happened Friday:
At 10 a.m Friday the ISM’s PMI report came out, and it was very disappointing. Fed Governor Christopher Waller almost immediately thereafter revealed significant potential policy changes during the 2024 U.S. Monetary Policy Forum in New York.
Gold rallied and gave nothing back…
Waller wants the Fed to completely divest its agency MBS holdings, citing their slow runoff thus far.
Next, he strongly advocated for a strategic shift in the Fed's Treasury holdings towards a greater allocation in shorter-dated Treasury securities, moving away from the long-dated focus that has dominated since the Global Financial Crisis.
The dollar softened and did not bounce…
This proposed realignment, aiming to mirror the federal funds rate more closely, suggests a potential 'Operation Reverse-Twist' strategy.
This approach would not only impact short-term yields (lower) and the yield curve (steeper with back end yields rising) but also (not?) coincidentally align with the Treasury's plans to increase shorter-term bill issuance. The Treasury and the Fed would match up in the marketplace.
10 Year Bond Yields dropped…
Waller's remarks signal a change in monetary policy right as the Fed's BTFP facility is scheduled to end *and* the RRP piggy bank currently being used to buy Treasuries issued goes empty. Fancy that!
Stocks reacted bearishly to the data but likely took cues from other markets and rallied…
The rest of this document describes the Fed’s logic and intentions in considering this plan of action in current context as well as longer term implications for investors. It also very briefly touches on what could go wrong and how they could respond to an Operation Reverse Twist not having its desired effect.
Bitcoin started doing its “ I’m mirroring stocks” thing again while Oil rallied and then faded…
Mast markets digested this immediately in combination with the weaker PMI (manufacturing is still shrinking despite all the Fiscal spending) as a capitulation of sorts and a resumption of QE. Or in the very least, a step towards terminating QT.