Another angle to consider is that Warsh is a "Monetarist," which means he thinks price inflation of goods and services is the result of monetary inflation (i.e., an increase in the money supply.) Therefore, his approach to lowering (price) "inflation" is to reduce the money supply - which has been growing recently. But to do that the MBS (Mortgage Backed Securities) and US Treasuries on the Fed's balance sheet (currently at about $6.6T) need to be sold on the open market, which removes fiat currency (US dollars) from the economy and sends it back to money heaven, thus reducing the money supply (aka Quantitative Tightening.) But when that happens it effectively lowers bond prices, and thus raises short term interest rates, because of the increased available bond supply. Warsh's hope is that simultaneously lowering the Fed rate will offset that dynamic, yet will raise long term rates, thus steepening the Yield curve.
What he doesn't know, however, is if the financial markets can tolerate a reduction in the money supply. All past attempts since 2008 to do so have caused stock market convulsions and been reversed. Personally speaking, I don't think he'll be able this time either, especially this time, in fact, for the reasons JR has presented.
Believe this will go down as a massive misread by the market and all who somehow believe rate hikes are coming. Highly unlikely to see any rate hikes. There is a reason one creates 5 task forces and new methods for calculating inflation - so you can control the data and control the interpretation of data in order to justify rate cuts. The number one concern is debt management and no default. The key issue for managing this massive debt - it gets significantly harder and much worse if interest rates go any higher. This is not the 70's. USA does not have a Debt/GDP ratio of 30-40%. USA currently has a Debt/GDP ratio of 120%+. The situations are night and day.
Also consider this - there has been aggressive maneuvers to move debt from long duration to short duration in the process the purchasers of debt have changed. On the short end it is predominately USA hedge funds and USA commercial banks. Foreign buyers are less and less; therefore, if domestic USA bond holders are becoming more predominate, then increasing rates might have an unintended stimulatory effect as the interest payments go into private USA markets. Similarly, decreasing rates will lower this flow. Not trying to say raising rates will some how dump large flows into the market and cause inflation, but I am insinuating that the flow could be large enough to partially or fully negate the affect of a higher rate to create contraction/deflation. Something to consider as the make up of USA debt holders continues to shift to domestic private hands.
Regardless, the elephant in the room is pretty clear. Raising rates will crush USA debt management and the Fed-Treasury complex will turn to yield control and traditional Fed quantitative easing and/or commercial bank quantitative easing (will likely be changing banking regulations shortly) combined with continued Treasury quantitative easing (shifting to short duration). They want to avoid a hard yield control policy. To thread that needle the rate hikes are unlikely. Not sure when rate cuts will start, but worse case scenario is we continue at the same rate. They will likely want to stay at the same rate for a while, see what happens with oil, produce new data (to justify the cut), etc., but a rate hike will wreck their ability to manage the debt, so hard to imagine that happening.
Additionally, to inflate the debt away (financial repression), which is the only viable choice left, they need inflation to be above interest rates. Keeping inflation around 4% (but making up some new BS calculation and saying it is 2%) and keeping interest rates at 2 to 2.5% (or something similar) will give them the spread to destroy the currency and inflate the debt away over time (likely decades). This is not 1970 it is 1946 (the last time the Debt/GDP ratio was 120%+).
The "markets" can ignore reality for a time; however, the markets cannot forever ignore the consequences of ignoring reality. In the end you have a fantasy finale where SpaceX IPOs at 100+ sales and 300+ "earnings".
"Warsh shows up to chair his first meeting of Fed governors and learns that nearly half of them want to raise the Fed Funds rate. He eventually wrangles a unanimous decision to leave the rates unchanged, but the odds of a rate increase later this year now exceed 50%" Guess what, John- Banana Republics don't get to dictate the rates paid on their bonds to anyone, and $40 trillion in debt and counting, the U.S. definitely qualifies as a Banana Republic.
25 Trillion in debt will roll over in next 12 months .
It is somewhat misleading in that much is financed in 3 and 6 month bills . If short rates go up that will dramatically impact the debt service and debt will be rolling over at ever higher rates . They may have to cut rates . But that will shoot the ten year over 5% and mortgage rates over 7% . We have gotten ourselves into a tough place .
I keep wondering why treasury didn’t issue long paper when the ten yr was less than 1%
Lets not forget about the continuous growth of historical debt......tick,tick,tick tick,tick
SpaceX goint to mine the moon and the Asteriods....?
Why not just mine the stuff here, ...??
alert...the guy is on Ketamin...what happens when he...O.D s
Thoroughly agree with Christopher
I would like share a thought about the formation of these working groups .
I believe he has given them 6 months to report back ?
If that's the case it a great reason to do nothing until the new year which takes care of the mid terms
Another angle to consider is that Warsh is a "Monetarist," which means he thinks price inflation of goods and services is the result of monetary inflation (i.e., an increase in the money supply.) Therefore, his approach to lowering (price) "inflation" is to reduce the money supply - which has been growing recently. But to do that the MBS (Mortgage Backed Securities) and US Treasuries on the Fed's balance sheet (currently at about $6.6T) need to be sold on the open market, which removes fiat currency (US dollars) from the economy and sends it back to money heaven, thus reducing the money supply (aka Quantitative Tightening.) But when that happens it effectively lowers bond prices, and thus raises short term interest rates, because of the increased available bond supply. Warsh's hope is that simultaneously lowering the Fed rate will offset that dynamic, yet will raise long term rates, thus steepening the Yield curve.
What he doesn't know, however, is if the financial markets can tolerate a reduction in the money supply. All past attempts since 2008 to do so have caused stock market convulsions and been reversed. Personally speaking, I don't think he'll be able this time either, especially this time, in fact, for the reasons JR has presented.
If I'm not entirely mistaken..... Just posted some soft Push-Back on those Hyperscalers Balance Sheets...
Believe this will go down as a massive misread by the market and all who somehow believe rate hikes are coming. Highly unlikely to see any rate hikes. There is a reason one creates 5 task forces and new methods for calculating inflation - so you can control the data and control the interpretation of data in order to justify rate cuts. The number one concern is debt management and no default. The key issue for managing this massive debt - it gets significantly harder and much worse if interest rates go any higher. This is not the 70's. USA does not have a Debt/GDP ratio of 30-40%. USA currently has a Debt/GDP ratio of 120%+. The situations are night and day.
Also consider this - there has been aggressive maneuvers to move debt from long duration to short duration in the process the purchasers of debt have changed. On the short end it is predominately USA hedge funds and USA commercial banks. Foreign buyers are less and less; therefore, if domestic USA bond holders are becoming more predominate, then increasing rates might have an unintended stimulatory effect as the interest payments go into private USA markets. Similarly, decreasing rates will lower this flow. Not trying to say raising rates will some how dump large flows into the market and cause inflation, but I am insinuating that the flow could be large enough to partially or fully negate the affect of a higher rate to create contraction/deflation. Something to consider as the make up of USA debt holders continues to shift to domestic private hands.
Regardless, the elephant in the room is pretty clear. Raising rates will crush USA debt management and the Fed-Treasury complex will turn to yield control and traditional Fed quantitative easing and/or commercial bank quantitative easing (will likely be changing banking regulations shortly) combined with continued Treasury quantitative easing (shifting to short duration). They want to avoid a hard yield control policy. To thread that needle the rate hikes are unlikely. Not sure when rate cuts will start, but worse case scenario is we continue at the same rate. They will likely want to stay at the same rate for a while, see what happens with oil, produce new data (to justify the cut), etc., but a rate hike will wreck their ability to manage the debt, so hard to imagine that happening.
Additionally, to inflate the debt away (financial repression), which is the only viable choice left, they need inflation to be above interest rates. Keeping inflation around 4% (but making up some new BS calculation and saying it is 2%) and keeping interest rates at 2 to 2.5% (or something similar) will give them the spread to destroy the currency and inflate the debt away over time (likely decades). This is not 1970 it is 1946 (the last time the Debt/GDP ratio was 120%+).
I was hearing predictions of a recession happening in 2024 .
Waiting for Godot. It is worth remembering that …Godot never shows up .
One thing I need to get off my chest .the Iran and oil narrative .
Everything we were told is a lie .
20% of world oil ?
Reserves running low ?
World wide depression . Huh ? Really ?
End of the dollar . Hummm?
Just like 2008 , everything we are told is a lie .
Oil at 70 .
Markets at highs .
That’s all I need to know …try and ignore the breathless media lies ..er I mean “ coverage “
Thank You for sharing your wisdom!
The "markets" can ignore reality for a time; however, the markets cannot forever ignore the consequences of ignoring reality. In the end you have a fantasy finale where SpaceX IPOs at 100+ sales and 300+ "earnings".
You are assuming that the markets are wrong . That’s a big assumption.
I kinda take it at face value .
Markets at all time highs .
Oil at 70 .
I bought some XOM today as it is lower now than Feb 28
I agree that the Petroleum Complex is worth a "nibble" here
"Warsh shows up to chair his first meeting of Fed governors and learns that nearly half of them want to raise the Fed Funds rate. He eventually wrangles a unanimous decision to leave the rates unchanged, but the odds of a rate increase later this year now exceed 50%" Guess what, John- Banana Republics don't get to dictate the rates paid on their bonds to anyone, and $40 trillion in debt and counting, the U.S. definitely qualifies as a Banana Republic.
The math is hard to ignore .
25 Trillion in debt will roll over in next 12 months .
It is somewhat misleading in that much is financed in 3 and 6 month bills . If short rates go up that will dramatically impact the debt service and debt will be rolling over at ever higher rates . They may have to cut rates . But that will shoot the ten year over 5% and mortgage rates over 7% . We have gotten ourselves into a tough place .
I keep wondering why treasury didn’t issue long paper when the ten yr was less than 1%
Maybe because no one thought anyone would buy them, or they tried and no one did.
Good point.