Hi Erik, Thanks for your thoughts on Warsh & the Fed - I can totally appreciate your perspective but it raises a question on Treasury vs Fed and the relationship there. My understanding (and please correct me if I am wrong) is that Bessent is signalling buying the long end funded by bill issuance at the very short end. Would a 50bps hike in Fed Funds somewhat undermine this or atleast raise its cost. Would be interested in your view on the Fed / Treasury dynamic and how you expect this to play out?
Yes, here is the announcement. https://home.treasury.gov/news/press-releases/sb0607. It looks like a facility to be able to step in and buy the longer duration bonds if there are liquidity problems. I guess we can make into a bigger deal, but the sizes aren't huge ($2-4bn). I don't think this plays into Warsh's thinking much. Warsh has said the primary tool of the Fed should be the short-term policy rate and so that is what I expect him to move (if he does). He hasn't said anything about the Treasury, and the Fed usually doesn't comment on the Treasury, although that can always change. I've checked the market probabilities and traders think there is a 50% chance he moves 25bps. So the market view is he may move, but only 25bps. But you might be right that this is the start of a bigger trend down the road.
Thanks for your insight. My sense was that Bessent was signalling rather than setting out the full armoury. I was trying to think through the implications of the Treasury and the Fed being at cross-purposes. Or maybe the thinking is a 50bps hike at the short end would give the market the confidence to make the longer end rally (Fed finally getting ahead of the curve etc.) - flattening the curve, in effect. Once we get past the the first days of sticker shock, I guess that would be bullish?
Though getting the deficit under some sort of control would probably be the most bullish of all - though don't see the path to that at present.
Great content as always Erik. My 2c, is that Warsh missed his opportunity to raise rates in July. Maybe he could raise 25bps in September but October is off the table due to the midterm election. I do think if he did 50bps in September, the market would puke, long end may rally though. I don’t have a BBG but I don’t think 50bps is on anyone’s Bingo card - though I was walking and listening to the podcast so maybe I misheard that amount.
Hi Erik, Thanks for your thoughts on Warsh & the Fed - I can totally appreciate your perspective but it raises a question on Treasury vs Fed and the relationship there. My understanding (and please correct me if I am wrong) is that Bessent is signalling buying the long end funded by bill issuance at the very short end. Would a 50bps hike in Fed Funds somewhat undermine this or atleast raise its cost. Would be interested in your view on the Fed / Treasury dynamic and how you expect this to play out?
Yes, here is the announcement. https://home.treasury.gov/news/press-releases/sb0607. It looks like a facility to be able to step in and buy the longer duration bonds if there are liquidity problems. I guess we can make into a bigger deal, but the sizes aren't huge ($2-4bn). I don't think this plays into Warsh's thinking much. Warsh has said the primary tool of the Fed should be the short-term policy rate and so that is what I expect him to move (if he does). He hasn't said anything about the Treasury, and the Fed usually doesn't comment on the Treasury, although that can always change. I've checked the market probabilities and traders think there is a 50% chance he moves 25bps. So the market view is he may move, but only 25bps. But you might be right that this is the start of a bigger trend down the road.
Thanks for your insight. My sense was that Bessent was signalling rather than setting out the full armoury. I was trying to think through the implications of the Treasury and the Fed being at cross-purposes. Or maybe the thinking is a 50bps hike at the short end would give the market the confidence to make the longer end rally (Fed finally getting ahead of the curve etc.) - flattening the curve, in effect. Once we get past the the first days of sticker shock, I guess that would be bullish?
Though getting the deficit under some sort of control would probably be the most bullish of all - though don't see the path to that at present.
Great content as always Erik. My 2c, is that Warsh missed his opportunity to raise rates in July. Maybe he could raise 25bps in September but October is off the table due to the midterm election. I do think if he did 50bps in September, the market would puke, long end may rally though. I don’t have a BBG but I don’t think 50bps is on anyone’s Bingo card - though I was walking and listening to the podcast so maybe I misheard that amount.
Yes, I guess 50bps in September is not on the bingo card. Maybe that is too extreme and he does 25bps.
It looks like the probabilities are 50% of a 25bps hike.
Some form of YCC is coming!