FOMC meetings remaining in 2022

Discussion in 'Markets & Economies' started by mmm....shiney!, Nov 2, 2022.

  1. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    I think it's because they want to control the quantity of money circulating in the real economy. Balance sheet reduction only reduces the amount of reserves which is money that is not able to be circulated in the real economy.
     
  2. leo25

    leo25 Well-Known Member Silver Stacker

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    But it's not really controlling money in circulation through interest rates alone (at least not in the US where people have long term fixed rates) The biggest driver of money growth is due to confidence and confidence was created due CBs entering the market (reducing risk) and therefore increasing its balance sheet. In conjunction with loose monetary policy and government spending.

    They would have killed inflation if they reduced confidence, that would mean exiting the market and reducing balance sheet.

    You can see commercial bank deposits are correlated to FEDs balance sheet.

    Untitled-1.jpg
     
    Last edited: Nov 11, 2022
  3. leo25

    leo25 Well-Known Member Silver Stacker

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    And stop listening to Snider :p Reserves are fully convertible to bank deposits. Just like how money in term deposit or bonds can't be spent in the general economy, but it's fully convertible if you want to spend it.
     
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  4. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    They are still printing in general. Not much has changed.
    Now they are "fighting inflation " at the same time they are creating it!
     
  5. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    LoL, Snider, that's funny. I can see why you needed to ask the question of why The Fed is focussed on interest rates.

    A. to begin as you know there are 2 types of money.

    1 = bank money ie reserves. This money never leaves the banking system, it can move from The Fed to a commercial bank and vice versa or between commercial banks, they can even engage in asset swaps ie buy a building from another bank but this money is not a cash injection into the real economy it can only move within the banking system.

    2 = money that is circulating in the real economy ie currency issued by the central bank, funds created by commercial banks when they deposit funds into the accounts of lenders or money that is spent by governments into existence.

    So theoretically, if a commercial bank wants to buy a building from another commercial bank it can do an asset swap ie reserves for the building, if a commercial bank wants to buy a building from a private contruction company then it can't do an asset swap because private construction companies can't hold reserves at a central bank, it must withdraw funds from its capital expenditure account and deposit them into that firm's account.

    In order to spend money in the real economy, banks have to use profits, asset sales or shareholder funds, not reserves.
     
    Last edited: Nov 11, 2022
  6. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    B. QE/QT expands/shrinks reserves, therefore it expands/shrinks the balance sheet. Increasing/declining credit growth or looser/tighter fiscal policy expands/contracts the amount of money circulating in the real economy. Reserves remain within the banking system so the Fed is more concerned with the amount of money circulating in the economy and attempts to effect changes by tweaking the cost of borrowing. More on that in a second.

    The Fed's mandate is full employment and price stability. It's main obsession is with interest rates, to quote Joseph Wang, it:

    pp 35-36 "Central banking 101"

    Basically when rates are above r* the economy is considered to be slowing, inflation is falling etc and the Fed lowers rates. When rates are below r* the economy is heating , inflation is rising so the Fed raises rates. The Fed reckon r* is rising so its lifting rates to compensate. This has an effect on the amount of money in the real economy as the cost to borrow increases. Every extra $ for example that a borrower has to pay back to the bank is an extra $ taken out of circulation and destroyed by the lender. This not only means that there is less money available to spend by the borrower on say chips or lettuce, but once paid back the amount of money (in this case credit) in the economy is lower than previously.

    This is why the Fed is attacking inflation primarily through interest rates, they want to reduce the amount of money circulating in the real economy to cool demand.
     
    Last edited: Nov 11, 2022
  7. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    That is true, it would cool spending for new loans though. Also Wang points out that when the Fed signals rate rises it:

    https://fedguy.com/quantitative-hikes/#more-3981

    That's too complicated for me to understand properly Edit to add: actually I get it. Raising rates drives the value of assets lower because investors are forced to sell.

    I guess if you're a company holding assets that are declining in value you may be less tempted to increase wages in the face of net losses??????? :confused:
     
    Last edited: Nov 11, 2022
  8. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    @leo25, this discussion has been fruitful for me, it's forced me to clarify my thinking and seek further explanations. Thank you.
     
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  9. leo25

    leo25 Well-Known Member Silver Stacker

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    My understanding is, Bank A can do a reserve swap with Bank B that the construction company is banking with, Bank B will then credit the construction company with their bank deposits. So bank A will send bank B $1000 in reserves, Bank B then uses that $1000 in reserve as a asset while creating a $1000 liability/ deposit for the construction company.

    Or bank A can convert $1000 in reserves into $1000 in physical cash. Then someone can take that cash and buy some gold or hookers. :)

    To rap up, an individual doesn't need to have the ability to hold reserves, their bank holds the reserves on their behalf and will credit the individual with bank deposits.
     
    Last edited: Nov 11, 2022
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  10. leo25

    leo25 Well-Known Member Silver Stacker

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    Yes. So increasing rates will reduce the values of all other government debt. So i would imagine in an environment where so much government debt is held and rates have gone up a lot so quick, that would be a massive wack to a lot of balance sheets.

    That's why I'm a bit confused as to why the stock market is still as high as it is... Either there is something I'm missing or we will soon seen a massive market correction.

    Maybe everyone is confident the FED will flip when things get tough and therefore they are holding on instead of selling. But they can't hold on forever.
     
    Last edited: Nov 11, 2022
  11. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    Ok thanks for clarifying that for me. Basically Bank B creates a deposit into the construction company's account, Bank A then settles with Bank B at the end of the accounting period by exchanging reserves.

    From one perspective the reserves never enter the real economy because they're now on Bank B's balance sheet, whereas the other is that the asset swap would never have occurred if Bank A hadn't used its reserves to purchase the asset. The reality is that both perspectives are correct. And buying hookers would probably be in breach of the banking regulations as they would be considered a risky asset. ;)

    Which probably leaves the r* as the explanation for why the Fed is targeting rates.

    As far as the stock market goes, there's a lot of careers that depend on trades being made and probably quite a bit of first-guessing the Fed.
     
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  12. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    Youre under the assumption there are reserves.
     
  13. leo25

    leo25 Well-Known Member Silver Stacker

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    @mmm....shiney! following up on what i was saying about bank reserves. George and Joseph recently posted a short video explaining it in more detail.

    Good video for everyone to watch so they don't get stuck thinking CB reserves have no effect in the real economy, because there are many people like Snider spreading lies.

     
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  14. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    The market's opinion around the probability of a 0.5% rate rise has decreased about 10% since the last meeting.

    Screen Shot 2022-11-23 at 9.45.54 am.png

    Points to remember, a pivot is not a pause, it is cut in rates. Some commentators are arguing that once the terminal rate is reached Powell may hold it there rather than begin reducing rates. He doesn't want to make Volcker's mistake. The next meeting will include a SEP and will follow the December unemployment and CPI releases.
     
  15. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    And from Alf ;)

    Screen Shot 2022-11-23 at 10.19.03 am.png
     
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  16. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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  17. leo25

    leo25 Well-Known Member Silver Stacker

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    Just listened to Powell's new talk. He seems over it all and now being more vague. Though he still thinks inflation mentality is still too embedded into peoples minds and he wants to crush that.

    People are still way to optimistic and spending too much. I guess people got accustom to central banks saving the day and its made people very complacent. It seems very few people assess risk anymore.

    Older people have become reliant on CB's and governments, while young people have become reliant on their parents.

    Involved tough/loving parents create good kids, disinterested lazy parents create bad kids. Most parents forgot it's their job to look after and raise their kids, and most young people forgot that when they gain employment it's their job to do what's assigned to them without complaining or quitting.

     
    Last edited: Nov 30, 2022 at 10:09 PM
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  18. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    Thanks, I'll listen to it later when I have a chance.

    Just fixed it for ya. ;)
     
  19. leo25

    leo25 Well-Known Member Silver Stacker

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    ill split it with you and say tough/loving. :) I guess tough by itself can be abusive, while just loving can be dirty hippie.
     
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  20. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    It's just the way I interpret it. I associate "tough love" with the boomer rhetoric you hear on FB rants. I'm sure you and I are both supportive parents, each with our own fair share of parenting failures and successes on the ledger. ;)
     
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