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n. Illinois | John:
If the new Fed wants to shrink the Fed's Balance sheet he has to find new buyers of the 8 trillion the Fed currently owns and the 11-12 Trillion that the Treasury needs to issue every year to fund the deficit and to roll over the bonds coming due all of time (it didn't help that Yellen went heavy on the short end of the Yield curve and therefore even more than normal has to be rolled over into new bonds with higher rates) The Chinese and Japanese the historical large buyers of the T-bills have been shrinking the amount that they are willing to hold so he has a big problem to deal with. Who's going to buy the bonds while keeping rates low while at the same time Trump with his Iran war just light a fire under energy prices which will percolate throughout the whole worlds economy because everything is tied back to energy costs.
He can't just stop the Faux money printing because Wall Street will revolt against him with the Yields they demand to buy them, The folks at Goldman Sachs want more and more faux money not less and they are not going to be the ones stuck holding the hot potato if the Fed quits being the buyer of last resort of T-bills.
The Fed has control over one thing and that is short term over night rates which in turns drives variable rate loans in the commercial world. The real money is in long term rates which is driven 100% by the 10 year T-bill all fixed rate home loans (Fannie Mae and Feddie Mac) price all of their loans against the 10 year T-bill. They are all funded short IE they have to refinance their entire bond portfolio like every 3-5 years while giving everyone a fixed mortgage rate for 30 years. Guess who can't handle a massive spike in interest rates. Oh they will tell you that they took at a swap to protect themselves. But the reality is those swaps have a limited life span IE 2-10 years not 30 years and who is the entity who would have to payout to Fannie and Freddie? Who is big enough that they could actually have the liquidity to meet their obligations? In Ag Farm Credit is just a Tiny Fannie and Freddie all of the Fixed rates Farm Credit has on its books are funded with short term bonds. Just look sometime how often they have to roll their bond portfolio over. When the first Farm Credit entity suspends the dividend payout that they have sold the heck out of you know the **** is hitting the fan.
Back in the 1980's the borrower took almost all interest rate risks. The savings and loans that did offer fixed rates and who did all of the home lending back then all went broke because they had to fund those 7% home loans mom and dad had with 12% DDA's or 14% CD's when they deregulated the interest rate markets. Remember the 5.25% passbook savings account at the banks Everyone paid the same because Uncle Sam said that is all they could pay. But the banks were bleeding deposits to wall street who came up with Money Market funds where you could earn 12% and even write checks against it. So the short sided Federal regulators allowed the banks and savings and loans to compete to keep their depositor base and they sort of forgot that Savings and Loans assets were almost 100% fixed rate home loans that could not reprice unlike the banks that rewrote that operating note every year and therefore could raise the rate. That's why there are no savings and loans anymore and that is where the rise of Fannie and Freddie came from before the 1980's they were bit players in the mortgage world.
No one knows what will happen if there is a massive interest rate spike where now all the interest rate risk is on the banks books not the borrowers. We got a taste in 2022 when Powell modestly raised rates off of 0 and Several Large Regional banks failed (Silicon Valley etc).
The New Fed is in the proverbial rock and a hard place. Talk is cheap when you don't actually have the power to act. Now its put up time for him. Is he a Volcker ? willing to trash Trump's economy or is he a Yellen who does whatever the big boss tells him?
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Fighting inflation