You could have knocked me over with a feather! (read “surprise comments” article here)
The Committee intends to gradually reduce the Federal Reserve’s securities holdings by decreasing its reinvestment of the principal payments it receives from the securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps. Initially, these caps will be set at relatively low levels to limit the volume of securities that private investors will have to absorb. — Janet Yellen
TRANSLATION & comment: The unwinding of Quantitative Easing (QE) is to be very gradual, so as to not roil the markets (bond or stock). This is a continuation of the cautious, data-dependent Fed policy that has been in place for years.
Once we start to reduce our reinvestments, our securities holdings will gradually decline, as will the supply of reserve balances in the banking system. The longer-run normal level of reserve balances will depend on a number of as-yet-unknown factors, including the banking system’s future demand for reserves and the Committee’s future decisions about how to implement monetary policy most efficiently and effectively. The Committee currently anticipates reducing the quantity of reserve balances to a level that is appreciably below recent levels but larger than before the financial crisis. — Janet Yellen
TRANSLATION & comment: Again, the operative word is “gradually” and there is a new, but not surprising element, “reducing … the quantity of reserve balances to a level that is appreciably below recent levels but larger than before the financial crisis.” The economy has grown appreciably over the past 8 years, simply making it necessary for the Fed to keep a larger balance sheet.
Complete Text of Janet Yellen’s Remarks
How bad was it in bond land yesterday?
The United States Treasury 10-year note closed the day before (7/11/17) at 2.3945%. Today the 10-year closed at 2.3124%, down .009% in yield as traders rushed to buy (or cover shorts) in light of the not-so-new revelations by Janet Yellen. Those notes traded as low in yield as 2.14%, June 26, 2017. Who got hurt today? The bears, those who were short the 10-year… people anticipating that chairman Yellen would strike a more hawkish tone (i.e. saying policy was to remove excess reserves at a more rapid rate and that the Fed was to be more aggressive on raising the fed Funds rate).
More negative spin from CNBC …
Fed Chair Yellen: Central bank likely to unwind stimulus despite low inflation
Bottom Line: None of the above represented a “surprise” or new policy thrust except for the bond bears and financial journalists at CNBC who wrote this headline and the title for my post. My opinion is that fear of future Fed action in the removal of QE and tweaking the Fed funds rate higher will continue to be no-news news that the media will present as news and use to scare you to keep your attention. Betting on the media’s/pundit’s infinite wisdom on this topic has not been a high return strategy.
What’s your take?
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4 thoughts on ““Yellen’s surprise comments jolt bond market””
Very informative, thank you. There is talk that Trump will not reappoint Yellen next year, but will make Gary Cohn head of the Fed. Cohn is not an economist. What effect do you think that appointment may have, positive or negative?
Mark, you are correct. Cohn is not an economist (neither am I). Years as a key executive at Goldman Sachs would indicate he is probably not stupid. Assuming the Trump administration makes it four years, the last thing he would want to do would be tighten policy going into the run-up to the 2020 election. Ergo, he would probably not not veer much from the slow and steady removal of QE Ms. Yellen is about to embark upon. You cannot be around the markets and the economy as long as Cohn and not be acutely aware of the impact of monetary policy levers on the market and the economy. The media would have a field day with the nomination, but it would be “a lot of sound and fury, signifying nothing” (as usual).
Hurray for janet ! A very sensible leader of the Fed. She does not want a drought or a flood.Just enough water to keep the garden growing.
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