Could take 5-8 years to shrink Fed portfolio: Yellen

[arbitrage001]

There's no apparent need in cutting the portfolio. It will decrease naturally as bonds mature.
If there's a need in soaking up the excessive liquidity they have a range of other instruments, namely repos and manipulating rates on excess reserves.

The fed would need to reinvest the proceeds of matured bonds into new bonds or else liquidity would dry up.
When US treasury bonds mature the treasury must issue more bonds to repay the bonds that are maturing. If the Fed does not buy some of those bonds then the effect would be the same as if it had sold the bonds in the open market.

Are you saying that 80% of the Treasury bonds sold by the U.S. are bought by the Fed, and if the Fed doesn't buy them, nobody else will? That can't be true!

If the fed don't buy the bond, the interest rate will most likely go up the roof as no rational bank or institution will lend the government at near 0% rate.

Nope. The interest rates will likely adjust, but not up the roof (what is considered the roof btw?  ).

In the late 70's and early 80's, Paul Volcker had to raise interest to 20% to kill inflation and end stagflation. Zombie companies need to die to free up the labors and resources for more efficient use.

Given the huge debt Federal, states and consumers have today, the interest rate will most likely need to go higher to clean up the system and let people go bankrupt and start from fresh.

[Harley997]

There's no apparent need in cutting the portfolio. It will decrease naturally as bonds mature.
If there's a need in soaking up the excessive liquidity they have a range of other instruments, namely repos and manipulating rates on excess reserves.

The fed would need to reinvest the proceeds of matured bonds into new bonds or else liquidity would dry up.
When US treasury bonds mature the treasury must issue more bonds to repay the bonds that are maturing. If the Fed does not buy some of those bonds then the effect would be the same as if it had sold the bonds in the open market.

Are you saying that 80% of the Treasury bonds sold by the U.S. are bought by the Fed, and if the Fed doesn't buy them, nobody else will? That can't be true!

If the fed don't buy the bond, the interest rate will most likely go up the roof as no rational bank or institution will lend the government at near 0% rate.

Nope. The interest rates will likely adjust, but not up the roof (what is considered the roof btw?  ).

Interest rates would adjust upwards as if the fed was in fact selling the bods that are maturing

[RoadTrain]

There's no apparent need in cutting the portfolio. It will decrease naturally as bonds mature.
If there's a need in soaking up the excessive liquidity they have a range of other instruments, namely repos and manipulating rates on excess reserves.

The fed would need to reinvest the proceeds of matured bonds into new bonds or else liquidity would dry up.
When US treasury bonds mature the treasury must issue more bonds to repay the bonds that are maturing. If the Fed does not buy some of those bonds then the effect would be the same as if it had sold the bonds in the open market.

Are you saying that 80% of the Treasury bonds sold by the U.S. are bought by the Fed, and if the Fed doesn't buy them, nobody else will? That can't be true!

If the fed don't buy the bond, the interest rate will most likely go up the roof as no rational bank or institution will lend the government at near 0% rate.

Nope. The interest rates will likely adjust, but not up the roof (what is considered the roof btw?  ).

Interest rates would adjust upwards as if the fed was in fact selling the bods that are maturing

That's not certain. I remember the time QE2 ended... The yields tumbled despite being expected to rise.

[InwardContour]

There's no apparent need in cutting the portfolio. It will decrease naturally as bonds mature.
If there's a need in soaking up the excessive liquidity they have a range of other instruments, namely repos and manipulating rates on excess reserves.

The fed would need to reinvest the proceeds of matured bonds into new bonds or else liquidity would dry up.
When US treasury bonds mature the treasury must issue more bonds to repay the bonds that are maturing. If the Fed does not buy some of those bonds then the effect would be the same as if it had sold the bonds in the open market.

Are you saying that 80% of the Treasury bonds sold by the U.S. are bought by the Fed, and if the Fed doesn't buy them, nobody else will? That can't be true!

If the fed don't buy the bond, the interest rate will most likely go up the roof as no rational bank or institution will lend the government at near 0% rate.

Nope. The interest rates will likely adjust, but not up the roof (what is considered the roof btw?  ).

Interest rates would adjust upwards as if the fed was in fact selling the bods that are maturing

That's not certain. I remember the time QE2 ended... The yields tumbled despite being expected to rise.

Yields tumbled because it was expected that QE3 would be announced in the near future.

[RoadTrain]

Yields tumbled because it was expected that QE3 would be announced in the near future.

Yup, that's how market analysis works. Trying to find an explanation post factum.
Of these explanation the one I like most is because of expectations.

[allthingsluxury]

"Shrink"? Good luck with that.

[ShakyhandsBTCer]

They do need reserves or need to lie about it like Lehmans did.

They do need reserves at the Fed but that's not important as they can always obtain them.
What they need more is capital, and the capital requirement is far more important to lending.

The Fed does not need capital or reserves because they can simply "print" additional money to satisfy any capital needs  or when member banks withdraw money from the fed

[RoadTrain]

They do need reserves or need to lie about it like Lehmans did.

They do need reserves at the Fed but that's not important as they can always obtain them.
What they need more is capital, and the capital requirement is far more important to lending.

The Fed does not need capital or reserves because they can simply "print" additional money to satisfy any capital needs  or when member banks withdraw money from the fed

I was talking about commercial banks reserves which they are obliged to have at Fed.

[onlyu]

They do need reserves or need to lie about it like Lehmans did.

They do need reserves at the Fed but that's not important as they can always obtain them.
What they need more is capital, and the capital requirement is far more important to lending.

The Fed does not need capital or reserves because they can simply "print" additional money to satisfy any capital needs  or when member banks withdraw money from the fed

I was talking about commercial banks reserves which they are obliged to have at Fed.

Commercial banks reserve can be "raised" by having the Fed buying up all the useless securities from them.

[DannyElfman]

Yields tumbled because it was expected that QE3 would be announced in the near future.

Yup, that's how market analysis works. Trying to find an explanation post factum.
Of these explanation the one I like most is because of expectations.

If at the time QE2 was finished market participants thought that the Fed would continue to buy bonds (with a possible short break between programs) then this logic would be valid.

[kerafym]

Yields tumbled because it was expected that QE3 would be announced in the near future.

Yup, that's how market analysis works. Trying to find an explanation post factum.
Of these explanation the one I like most is because of expectations.

If at the time QE2 was finished market participants thought that the Fed would continue to buy bonds (with a possible short break between programs) then this logic would be valid.

Most people know QE will never end in the foreseeable future.

[ShakyhandsBTCer]

Yields tumbled because it was expected that QE3 would be announced in the near future.

Yup, that's how market analysis works. Trying to find an explanation post factum.
Of these explanation the one I like most is because of expectations.

If at the time QE2 was finished market participants thought that the Fed would continue to buy bonds (with a possible short break between programs) then this logic would be valid.

Most people know QE will never end in the foreseeable future.

The Fed is actually winding down additional purchases of bonds at a rate of $10 billion per month. Once the additional purchases are complete they will likely have a larger then usual balance sheet for decades. 

[RoadTrain]

They do need reserves or need to lie about it like Lehmans did.

They do need reserves at the Fed but that's not important as they can always obtain them.
What they need more is capital, and the capital requirement is far more important to lending.

The Fed does not need capital or reserves because they can simply "print" additional money to satisfy any capital needs  or when member banks withdraw money from the fed

I was talking about commercial banks reserves which they are obliged to have at Fed.

Commercial banks reserve can be "raised" by having the Fed buying up all the useless securities from them.

Yep, the Fed doesn't even have to buy anything from them. There's a mechanism that has been used for ages - repo operations. It's a part of normal central bank functioning.

[hodap]

They do need reserves or need to lie about it like Lehmans did.

They do need reserves at the Fed but that's not important as they can always obtain them.
What they need more is capital, and the capital requirement is far more important to lending.

The Fed does not need capital or reserves because they can simply "print" additional money to satisfy any capital needs  or when member banks withdraw money from the fed

I was talking about commercial banks reserves which they are obliged to have at Fed.

Commercial banks reserve can be "raised" by having the Fed buying up all the useless securities from them.

Yep, the Fed doesn't even have to buy anything from them. There's a mechanism that has been used for ages - repo operations. It's a part of normal central bank functioning.

An average person do not know what tool bank have that allow them manipulate price and control interest rate. If they do, most banks won't exist today.

[ShakyhandsBTCer]

They do need reserves or need to lie about it like Lehmans did.

They do need reserves at the Fed but that's not important as they can always obtain them.
What they need more is capital, and the capital requirement is far more important to lending.

The Fed does not need capital or reserves because they can simply "print" additional money to satisfy any capital needs  or when member banks withdraw money from the fed

I was talking about commercial banks reserves which they are obliged to have at Fed.

Commercial banks reserve can be "raised" by having the Fed buying up all the useless securities from them.

Yep, the Fed doesn't even have to buy anything from them. There's a mechanism that has been used for ages - repo operations. It's a part of normal central bank functioning.

An average person do not know what tool bank have that allow them manipulate price and control interest rate. If they do, most banks won't exist today.

interest rates are manipulated to try to keep inflation low

[odolvlobo]

interest rates are manipulated to try to keep inflation low

In theory, but not in practice. For the last 25 years, interest rates have been kept low to benefit the wealthy, and the result has been inflation that has destroyed the wealth of the poor and middle class.

[Leina]

interest rates are manipulated to try to keep inflation low

In theory, but not in practice. For the last 25 years, interest rates have been kept low to benefit the wealthy, and the result has been inflation that has destroyed the wealth of the poor and middle class.

To manipulate interest rate to keep inflation low, you will need to raise the rate to market rate.


In practice, inflation is exported to export countries. While the inflation is reasonable low in the US, the inflation rate is extremely high in export countries in Asia/middle east.


In export countries, cost of a "small/average" home has doubled in 2-3 years. Food price also double compare to 2-3 years ago. And hence you aww a lot of internal/external conflict going on and a lot of political instability going on in Asia/middle eastern countries.

[ffe]

interest rates are manipulated to try to keep inflation low

In theory, but not in practice. For the last 25 years, interest rates have been kept low to benefit the wealthy, and the result has been inflation that has destroyed the wealth of the poor and middle class.

What inflation??

[Kluge]

interest rates are manipulated to try to keep inflation low

In theory, but not in practice. For the last 25 years, interest rates have been kept low to benefit the wealthy, and the result has been inflation that has destroyed the wealth of the poor and middle class.

What inflation??

Just so no question of graph bias for ending where it did, 2009-2014 adj. CPI-U still avg 2.08% annually. Over ten years, would be ~23% inflation, which is pretty reasonable looking at the past. I'm sure I'm not understanding how inflation works after seeing lack of effect on CPI from QE. I always figured CPI was tied to M2 and that CPI growth lagged a bit behind M2, but doesn't seem to be the case or we're on the verge of hyperinflation, but I'm not sure how long I can buy "we're on the verge of hyperinflation" without seeing it.

At the grocery store, beef & pork's prohibitively expensive, but it doesn't really translate elsewhere from my unscientific observations. Looks in line with BLS CPI-U numbers. Milk, grain, and soy products are all still reasonably priced. Chicken a bit high, but reasonable. Rice and potatoes still about as cheap as topsoil. Fruits haven't exploded in price, but are somewhat expensive-seeming. Packaged foods and restaurants have become terribly expensive, but "real food" hasn't exploded in price even though rented acreage out for farming here at near-record prices. High prices for pre-made food maybe a result of skyrocketing minimum wages throughout the states, where farms don't necessarily need to pay it.

[ShakyhandsBTCer]

interest rates are manipulated to try to keep inflation low

In theory, but not in practice. For the last 25 years, interest rates have been kept low to benefit the wealthy, and the result has been inflation that has destroyed the wealth of the poor and middle class.

that is debatable

the standard of living of the middle class has risen significantly over the last 25 years. Even the pool can buy things today that could not even be purchased by the most wealthy 25 years ago.