Our boilerplate introduction:
The author, Joe Carson is the former Chief Economist & Director of Global Economic Research at Alliance Bernstein. Prior to that he was Chief Economist at Chemical Bank and at Dean Witter, firms he left in such rough shape they were forced to merge with JPM and MS respectively. (Just Kidding Mr. C.)...
From The Carson Report, April 4:
Is A QE-Adjusted Yield Curve Inverted? It's Not, Confusing Investors and Complicating Policy
Is a QE-adjusted yield curve inverted? It's not. By lifting short-term rates over the past year and anchoring long rates with its new QE tool (quantitative easing), Fed policy creates an "unnatural" inverted yield curve. Nevertheless, if long-term yields remain below short-term rates, it will confuse investors and complicate monetary policy efforts to reverse inflationary pressures. But, importantly, since two conflicting monetary policy forces cause the inversion, there is reason to doubt its predicted outcome.
The Fed's primary tool is official interest rates. Since early 2022, the Fed has raised official rates by 475 basis points. That carries over point-to-point for increases in short-term Treasury rates, which measure one side of the Treasury yield curve.
After the Financial Crisis, the Fed created the quantitative easing tool enabling policymakers to continue injecting liquidity by purchasing marketable securities, mostly of longer duration. From the beginning of 2020, the Fed's balance sheet increased by nearly $5 trillion, from $ 4 trillion to a peak of $8.98 trillion in March 2022. It was reduced to around $8 trillion in March 2023, which is still twice what it was at the start of 2020.
QE creates an anchoring effect on long-term interest rates, the other side of the Treasury yield curve. Several studies have estimated that the scale of the QE is the equivalent of a 200 to 300 basis reduction in the Fed funds rate....
....MUCH MORE
The QE - basis point comparison he highlights is higher than some who scoff at anything greater than 5 - 10 basis points-equivalent per trillion on the balance sheet but personally I'm starting to think it is even higher than the high end mentioned above, maybe 400 basis points worth of effect. There is something about the effect of QT unwinding the QE that scares the bejeebers out of central bankers.
Also at the Carson Report:
Near-Record High Real Profit Margins Indicate Fed Has A Lot More Work To Do
which will serve as a nice introduction to something from Albert Edwards, coming up
