Fed can't keep the rates low

[wabuffo]

I think U.S. Bank CEO's are starting to chafe under the effects of the Federal Government's stimulus programs (both those of the Federal Reserve and the US Treasury).  PNC Bank CEO speaks some truth in the latest conference call:

https://seekingalpha.com/article/4419491-pnc-financial-services-group-inc-pnc-ceo-bill-demchak-on-q1-2021-results-earnings-call

Quote

Bill Demchak (PNC CEO):

I don't think rising short-term rates has any impact at all.  I think as a practical matter, deposit balances in the industry are driven by the size of the Fed's balance sheet and fiscal transfers, coupled with loan growth. Loan growth will actually drive more deposit balances once we see a pickup in that. And I think excess liquidity in the system is here to stay for a long period of time. Because I don't think the Fed is going to shrink their balance sheet anytime soon.

So I think we're going to be in a -- there's a structural change in banking, which is going to have more liquidity, higher security balances for an extended period of time.

 

 

Edited April 17, 2021 by wabuffo

[Cigarbutt]

^In Q1 2021, PNC's NIM was at 2.27%, 5 basis point below Q420 and 51 basis points below Q42019 (they do expect some NIM increase this year). There is some kind of implicit bargain between the Fed and large banks where the banks accept to increase the size of their balance sheet with close to zero-interesting earning assets but it will be hard to bring deposit rates lower than zero, although this is sort of happening through various fees showing up in the non-interest income.

Here's a longer term trend table of PNC's NIM (a slightly different methodology is used but trends hold):

PNC Bank Net interest margin Historical Data (usbanklocations.com)

-----

Previously, we had an exchange where i had suggested that the asset cap for WFC may have (positive) unintended consequences. JPM and a few others have been complaining (directly and indirectly through CFOs) about the relevance of all this deposit growth. JPM's last SLR: 5.5%, down from 6.3%. WFC has offered resistance to deposit growth in relation to the asset cap. Result: SLR of 6.9%. For all the big banks (and especially the big central one), a good outcome really needs to see a significant and sustainable pickup in real world loan originations (productive ones if possible). Another area of potential disagreement. At least, WFC may have a relative advantage in selecting when to grow (or at least obtaining the green light to do so).

Fiscal dominance has many definitions but one of them is to choose a path characterized by an inability to sustain higher interest rates. Who cares since this is a long term solvency question and all that matters now is 'liquidity'?

[stahleyp]

Hey Bill,

Looks like gold is having a bit of a run. Any concern there as a harbinger of inflation?

[wabuffo]

Looks like gold is having a bit of a run. Any concern there as a harbinger of inflation?

Yes - definitely a concern.  I think there's going to potentially be a blip here in late April - early May because the IRS pushed back the tax deadline.  My working assumption is that tax collections will be a bonanza (especially the last-minute non-withheld taxes) this year.   That may cause a temporary US Treasury surplus and a little bit of price suppression on gold. 

But once we clear early May - gold could take off.  Of course, my predictions on gold are no better than a coin flip.

As a technical walk on the wonky side - I've been a bit surprised at how slowly and unaggressively the US Treasury has been in getting its general account balance (TGA) down.  In addition, the Fed is doing stuff to install pressure relief valves to keep bank reserves from growing.  For example:

1) The NY Fed is doing quite a bit of reverse-repo activity now (prior to mid-March there was zero activity).  Reverse repo means banks show up with reserves and borrow a US Treasury security overnight.  

https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWMORE=TRUE&startDate=01/01/2000&enddate=01/01/2000

Its consistently running at $30b per day rolling over daily.  It hit a peak of $134b on March 31st - which seems to imply banks doing a bit of "window dressing" for quarter-end regulatory filings.  So with one hand the Fed takes Treasuries from the banks and gives them reserves but with the other hand it takes back reserves and gives banks Treasuries - talk about sucking and blowing at the same time.

2) I'm also wondering about the growth of "deposits" at the Fed's "other" deposits column.  This line item has grown from around $75b at the start of 2021 to $410b in the latest week - much of it in the last few weeks.  These are deposit accounts like that of the US Treasury and the commercial banking sector - but seem to not belong to either of these institutions.  The footnotes to the Fed's H.4.1 report say:

Quote

Includes deposits held at the Reserve Banks by international and multilateral organizations, government-sponsored enterprises, designated financial market utilities, and deposits held by depository institutions in joint accounts in connection with their participation in certain private-sector payment arrangements. Also includes certain deposit accounts other than the U.S. Treasury, General Account, for services provided by the Reserve Banks as fiscal agents of the United States.

Seems to me like the Fed is trying to hide extra reserves everywhere but behind the seat cushions as the banks scream "no mas" to the Fed.

wabuffo

Edited April 17, 2021 by wabuffo

[Cigarbutt]

19 hours ago, wabuffo said:

Looks like gold is having a bit of a run. Any concern there as a harbinger of inflation?

Yes - definitely a concern...

As a technical walk on the wonky side - I've been a bit surprised at how slowly and unaggressively the US Treasury has been in getting its general account balance (TGA) down.  In addition, the Fed is doing stuff to install pressure relief valves to keep bank reserves from growing.  For example:

...

Seems to me like the Fed is trying to hide extra reserves everywhere but behind the seat cushions as the banks scream "no mas" to the Fed.

wabuffo

Additional perspective. The Fed often only reacts to pressures in the financial plumbing and typically applies technical solutions (band-aid type of solutions). The reverse repo activity has seen unusual action since February. Contrary to during 2019 (especially September) where the reverse repo rate was shooting up, the reverse repo rate has now tried to cross the zero bound (negative yield, yes some market participants are ready to pay a borrower money in order to lend money). Note that the title of this thread is The Fed can't keep rates low and the consensus expectations seems to be for more inflation. Anyways, the Fed, at least so far and despite the Japanese and European experiences, have remained allergic to negative rates in their 'managed' instruments. i guess there is an apprehension about perception and potential distortions. Anyways, a lot of what they've been doing (offering more risk-free securities against cash, augmenting the per-counterparty limit from 30B to 80B) in the reverse repo market appears to aim to keep those rates at a minimum of zero. The underlying problem of course is too much cash in the system. Banks are showing some reluctance to accept deposits and some of the excess cash ends up in places like money market funds which may enter the reverse repo window to obtain risk-free securities. The Fed is again facing a conundrum where players in the reserves market are refusing to benefit from risk-free arbitrage opportunities. Banks get paid only 0.1% now on excess reserves and they are getting squeezed by the SLR. JPM is at 5.5%. The per-counterparty move appears to be aimed at increasing the supply of cash at the reverse repo window and explains the rise in various accounts, including the Foreign National and International Accounts. The technical answer would simply be to increase the interest paid on excess reserves and to soften the SLR requirements but this would mean another unrecognized admission that we are moving even further in uncharted waters.

-----

i guess the definition of "slow" or "unaggressive" depends on perspective.

Since mid January 2021, the TGA has gone down by more than 700B.

i wonder if we are not becoming desensitized.

 

[stahleyp]

Bill, 

Thanks for your insight as always.  Any opinion on what might cause the dollar to lose its reserve currency status?

[wabuffo]

Any opinion on what might cause the dollar to lose its reserve currency status?

Stahleyp -- you know what gives the dollar its reserve currency status?  The world's most powerful military run by a civilian-led government that isn't afraid to use it.  My view is that the day the US military is eclipsed by some other great power is the day the dollar begins to lose its reserve currency status.

I'm joking (kind of)...  But the reality is that the US military keeps the shipping lanes around the world open from harassment and preserves the world's ability to trade freely so as to obtain the resources their own countries don't possess.  All countries around the world benefit from that arrangement and don't have to spend on their own military to defend themselves and their ability to trade. 

Also, the US is still the world's largest economy and is willing to endure the huge trade deficits required for the rest of the world to acquire US dollars and US dollar assets by net exporting to us.  The rest of the world prefers to run trade surpluses - so how could they become reserve currencies? 

Everybody grumbles about the American hegemony but they all benefit from it -- including China (especially China).

wabuffo

Edited April 19, 2021 by wabuffo

[cubsfan]

^  Brilliant explanation ! We're lucky to have a guy like Wabuffo as a member.

[stahleyp]

5 hours ago, cubsfan said:

^  Brilliant explanation ! We're lucky to have a guy like Wabuffo as a member.

Agreed. He's the man. 

[wabuffo]

https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWMORE=TRUE&startDate=01/01/2000&enddate=01/01/2000

31 participants enter into $142b of reverse-repos with the Fed.  That's a new recent record since the Fed bumped up the limits.  So in reverse repo, the banks give the Fed bank reserves and receive from the Fed a one-day borrow of US Treasury securities.

Since banks are sitting on $3.7t of bank reserves - this represents almost 4% of total US commercial banks reserve balances.

BTW - this reverse repo number is growing just about every day.  Sucking and blowing, the Fed is.....

wabuffo

[muscleman]

https://www.wsj.com/articles/fed-likely-to-keep-rates-near-zero-as-recovery-picks-up-11619602202?mod=hp_lead_pos4

"Fed officials have said they would hold rates steady until the labor market is back to full strength and inflation has reached the central bank’s goal of averaging 2%. Chairman Jerome Powell has said those conditions are unlikely to materialize this year, and most Fed officials indicated last month that they expect to hold off on raising rates until 2024 at the earliest."

 

Does anyone know any historical examples of similar irresponsible actions like this? I would like to study those cases.

 

[maplevalue]

16 minutes ago, muscleman said:

Does anyone know any historical examples of similar irresponsible actions like this? I would like to study those cases.

Not an exact comparison, but there is this gem from May 17 2007

Quote

"Federal Reserve Chairman Ben Bernanke said Thursday that he didn't believe the growing number of mortgage defaults would seriously harm the economy"

https://www.cnbc.com/id/18718555

 

[wabuffo]

Dr. Gold doesn't seem worried..... FWIW

wabuffo

 

[JRM]

11 minutes ago, wabuffo said:

Dr. Gold doesn't seem worried..... FWIW

wabuffo

 

That's because we are told this inflation is 'transitory'; as if anyone could possibly know that.  Also the 10 year treasury rate has been trending up.  If inflation is not transitory and real rates are negative, then gold should perform just fine.

Either the fed is lying to us or they are lying to themselves.  It would be very scary if they think they are actually in control at this point.  

[wabuffo]

I don't know if its transitory or not....  but to play devil's advocate.

You have three things that are causing an absolutely booming economy

1) very good fiscal policy (to put it mildly - two stimulus checks in one quarter)

2) for now, terrific tax policy (low personal and corporate tax rates)

3) recovery from shutdowns

That's a policy cocktail for 6% GDP growth, if not more in 2021.   Meanwhile supply chains are trying to ramp back up while demand outstrips their initial start-up curves. 

I'm not surprised that price is being used to clear demand for the time being.   In addition, demand for US dollars and US dollar assets are through the roof.

We've got to stop thinking in terms of Phillips Curve nonsense - ie that strong economic growth is inflationary.

Now perhaps inflation is coming - but IMHO, it won't happen unless fiscal policy makes a big mistake like implementing the full suite of Biden tax increases being proposed.  That will definitely be inflationary.

Of course, I really don't know and could be wrong.

wabuffo

Edited April 28, 2021 by wabuffo

[muscleman]

1 hour ago, maplevalue said:

Not an exact comparison, but there is this gem from May 17 2007

 

I don't know how this is a comparison to the current rates situation.

[JRM]

I have done my best to hear both sides of the argument, and the deflationary argument still makes the most sense to me.  I have to admit I don't understand all of the monetary plumbing or moving pieces.  I think where the models fall apart is when confidence in the dollar is lost.  This doesn't appear to be accounted for anywhere.  

Anecdotally, I hear people (non-finance types) talking more and more about "money printing" and increasing inflation.  The observance of rising prices, for most people, has to have a psychological effect.  If confidence is lost, then MMT doesn't work (in my opinion).

There almost has to be a single basic assumption that is the lynchpin for unwinding this whole experiment.  

Edited April 28, 2021 by JRM

[stahleyp]

I'm ready to be schooled here but if economic growth really just boils down to additional stimulus/fiscal policy, why not just run virtually unlimited deficits and never have a recession or economic hardships ever again?

[wabuffo]

why not just run virtually unlimited deficits

We already do - pretty much year-in, year-out.  

We tried to run a surplus in 1998-2001 and cratered the economy from 2000-2002.   For the public sector (Fed govt) to run a surplus, the private sector has to run a deficit (i.e, borrow to maintain consumption).

To this day, I am convinced that the surpluses of '09-01 were one of the primary factors that led to the borrowing binge that was the mortgage crisis of the early aughts.

wabuffo

Edited April 29, 2021 by wabuffo

[stahleyp]

23 minutes ago, wabuffo said:

why not just run virtually unlimited deficits

We already do - pretty much year-in, year-out.  

We tried to run a surplus in 1998-2001 and cratered the economy from 2000-2002.   For the public sector (Fed govt) to run a surplus, the private sector has to run a deficit (i.e, borrow to maintain consumption).

To this day, I am convinced that the surpluses of '09-01 was one of the primary factors that led to the borrowing binge that was the mortgage crisis of the early aughts.

wabuffo

So couldn't the government just do that (assuming its willing to) and never have recessions again? I personally think we should crater the economy every once in a while because it's healthy but what do I know. 

[wabuffo]

I personally think we should crater the economy every once in a while because it's healthy ...

 

The United States used to be on a gold standard, had no central bank and no income tax.  I mean what could be better than that Ayn Randian ideal ("really low taxes, sound money")?   And yet, we would have a depression every 15-25 years.  Is that healthier?

Now we debase the currency bit-by-bit and come in with fiscal guns blazing at the first sign of economic trouble.  MMTers say that's better.  I honestly don't know if it is.  Perhaps its too early to know for sure how this new "model" will do.

Not to get political, but we like to think that as a democracy we want freedom.  As I get older, I sometimes think that's not what we actually want.  We don't want freedom, we want comfort - and we are willing to trade some freedom for it.  That's because true freedom - in the purest libertarian ideal of no government involvement - is just too wild, wild west for most people.  So we settle.

wabuffo

Edited April 28, 2021 by wabuffo

[CorpRaider]

Freedom, but with bumper rails.  Wabuffo is right as usual in my opinion.

Didn't we also have Decentralized finance "DeFi" before?  With hundreds (thousands?) of different non-sovereign currencies in the form of bank notes. floating around in all these confidence games 

My understanding (from light reading; I'm sure we have far more weighty authorities on the board) is that people were very skeptical of the new fangled "greenback" but something had to be done with all the scandals and failures and frictions imposed upon the greater commerce from all these little financial sovereigns. 

It seems like Dogecoin might equate to some sketchy Ohio frontier banknote that was kind of a joke back east.

Edited April 28, 2021 by CorpRaider

[K2SO]

5 hours ago, wabuffo said:

Dr. Gold doesn't seem worried..... FWIW

Outside of a few markets (copper, lumber), there doesn't seem to be much concern at all. See the chart below. Until the 10 year rate busts out of this channel the inflation story isn't being taken seriously. 

What does it really mean for inflation to be "transitory?" In my mind it means that we'll see a blip in inflation due to inventory restocking/supply shortages/reopening, soon after followed by a bust. Deflationary forces return, demand falls through the floor. Maybe what's going unspoken here is that "transitory" inflation means that in the longer run we are f*cked and will have a really hard time paying off the debt accumulated in the past 13 months. 

Having said that I actually think that inflation is a best case scenario for us coming out of this. Maybe not for asset markets but certainly for the economy. It's fairly easy for investors to position for this by buying value and short duration assets (which are historically cheap) and selling growth (which is stupid expensive).

[Lollapalooza]

2 hours ago, stahleyp said:

I'm ready to be schooled here but if economic growth really just boils down to additional stimulus/fiscal policy, why not just run virtually unlimited deficits and never have a recession or economic hardships ever again?

Simply because it doesn't work out. Today USD is benefiting from a now false reality that it is a safe store of value/wealth. Not many households are adding up the dots and realizing that their pensions will be way less valuable down the road, nor any CEO concerned to be challenged for holding to dollar denominated cash balances. This is pure inertia in people's thinking mixed with 'boiling frog' reaction speeds.

At some point people in US and more importantly, Worldwide, will start to loose trust in the USD and cease to want to hold it. I'm sure I'm going against the consensus here but I'd rather own Chinese RMB than USD, today and for the next decade(s) to come.

US is not the only country that experienced an hegemony position or ran an empire. Just dig a bit in the history and you will find that past empires ran into the same issue of over expanding and monetizing their debt. It all worked for a few years until it doesn't.

Until fairly recent USD had significant demand from more 'controversial countries' like Russia, Iran, China - which were hedging from the possibility that they get deprived from accessing it. Today that's no longer the case. They already have considerable reserves so the demand for future USD will need to come from within US itself. 

In my view, that's when the credibility of the a currency is at stake. When 'international entities' stop to be interested to store more of your currency.

[wabuffo]

I'm sure I'm going against the consensus here but I'd rather own Chinese RMB than USD, today and for the next decade(s) to come.

The last person I remember making such a definitive statement was Giselle Bundchen ("pay me in Euros!  I don't even get out of bed for USD!")  I think it was in Nov. 2007....

https://www.dailymail.co.uk/tvshowbiz/article-491838/Supermodel-Gisele-Bundchen-I-wont-bed-US-dollars.html

Sad trombone song for Giselle......  Good news is I hear her husband gets paid well...and in USD!

wabuffo

 

Edited April 28, 2021 by wabuffo