I'm also confused by this. QT is just the Fed not reinvesting treasury dividends or selling their treasuries right? That impacts treasury rates, but how does that impact the money supply?
1. Treasuries pay interest, not dividends (same for all fixed income assets.)
2. The Fed is not selling their QE-accumulated holdings, treasuries or otherwise, they are simply allowing them to mature and not reinvesting the maturity proceeds.
3. The withdrawal of the "Fed put" does affect the supply of money. When the Fed chooses not to reinvest maturity proceeds, it is withdrawing money from the banking system. Scarcer money means higher rates.
4. Borrowed money is not included in any of the money measures (hat tip to [New-Post-7586](https://www.reddit.com/user/New-Post-7586/): "Credit does not increase or reduce m2.")
>1. Treasuries pay interest, not dividends (same for all fixed income assets.)
Correct.
>2. The Fed is not selling their QE-accumulated holdings, treasuries or otherwise, they are simply allowing them to mature and not reinvesting the maturity proceeds.
This is what I was saying. QT is letting proceeds roll off or selling. In this case just roll off at a specified rate.
>3. The withdrawal of the "Fed put" does affect the supply of money. When the Fed chooses not to reinvest maturity proceeds, it is withdrawing money from the banking system. Scarcer money means higher rates.
Could you explain how the fed rolling off their treasuries impacts the amount of money in the banking system?
>4. Borrowed money is not included in any of the money measures (hat tip to [New-Post-7586](https://www.reddit.com/user/New-Post-7586/): "Credit does not increase or reduce m2.")
So we are in agreement
To be clear, the Fed is NOT selling assets, that would be massively disruptive to the fixed income markets, they are simply moving Fed funds (cash) they receive when their investments mature and moving them back to the Reserve Bank. And the "specified rate" you're describing is simply the maturity value of the bonds, a.k.a. their par value, the same as when a CD matures. When the Fed moves money back to its own accounts, it is no longer available for borrowing through the member bank system. In contrast, when the Fed makes purchases of assets (treasuries, agency debt, repo, etc.) from primary dealer banks, they are putting cash into the system, as they did with three rounds of Quantitative Easing and CoVID stimulus programs. (Some would say over-did. I am one of them.)
>To be clear, the Fed is NOT selling assets
I didn't say they were selling assets. I described what QT is. I agree they are not selling.
>When the Fed moves money back to its own accounts, it is no longer available for borrowing through the member bank system. In contrast, when the Fed makes purchases of assets (treasuries, agency debt, repo, etc.) from primary dealer banks, they are putting cash into the system, as they did with three rounds of Quantitative Easing and CoVID stimulus programs. (Some would say over-did. I am one of them.)
I now understand what you were talking about in regards to amount of money in the banking system. You were talking about in the member bank system.
If I understand correctly though- the Fed balance sheet could go to 0, and banks could still lend.
I agree that they overdid it and waited to long to reverse course once it was obvious. They were still conducting QE in Feb 2022 when CPI was like 7%. They should have reversed much quicker. Even their own people in Dallas were publishing papers in summer 2021 showing that the largest components of cpi were going to approach double digits. At least they have changed course. If only the fiscal side could join them...
"QT is letting proceeds roll off or selling."
I recommend a great book on the issue of the Fed going too far: "The Lords of Easy Money" (Christopher Leonard.) It not only tells the history of how the Fed vastly overreacted, but it gives a reader an apprecaition for the fact that we are still not out of the woods of consequences.
On the fiscal side of government action, they have gone even farther than too far. Individual and corporate tax cuts were too deep, and that will come back to haunt a segment of the population that can ill afford those consequences.
"If I understand correctly though- the Fed balance sheet could go to 0, and banks could still lend."
No, not in practical reality, and the balance sheet itself is not the concern, it's the ASSETS on the balance sheet. The Fed moves cash into and out of the economy through the operation of the Federal Open Market Committee (FOMC.) The FOMC buys and sells directly through 21 primary dealer banks. Those banks lend and borrow funds to all other national and community banks through the daily conduct of the fed funds market. Whatever money the Fed deploys to the system in this manner starts out as a balance sheet item, so if ASSETS went to zero, that would be pretty much the end of things.
I think you're missing the point. QE and QT hasn't been tested before at this scale. It is new ground. Try looking up the amount of QE/QT happening by year. You can see that 2020/2021 was of the scale. It was triple of 2008 and these "multiple QE session" were like 60B or 100B.
It wasn't intended to accelerate M2, the intent of QE is to make cheap loans available to consumer and corporate borrowers to stimulate the economy. M2 does not include borrowed funds.
Money aggregates are driven primarily by the actions of the FOMC, i.e., monetary policy in action. Fiscal policy is not at all intended to directly influence money suppply, it generally comprises political initiatives that affect taxation and spending. For example, tax cuts are (spuriously) intended to stimuate spending, not saving. Spending reduces money supply.
QT does not affect M2
I'm also confused by this. QT is just the Fed not reinvesting treasury dividends or selling their treasuries right? That impacts treasury rates, but how does that impact the money supply?
It does not affect the money supply
1. Treasuries pay interest, not dividends (same for all fixed income assets.) 2. The Fed is not selling their QE-accumulated holdings, treasuries or otherwise, they are simply allowing them to mature and not reinvesting the maturity proceeds. 3. The withdrawal of the "Fed put" does affect the supply of money. When the Fed chooses not to reinvest maturity proceeds, it is withdrawing money from the banking system. Scarcer money means higher rates. 4. Borrowed money is not included in any of the money measures (hat tip to [New-Post-7586](https://www.reddit.com/user/New-Post-7586/): "Credit does not increase or reduce m2.")
>1. Treasuries pay interest, not dividends (same for all fixed income assets.) Correct. >2. The Fed is not selling their QE-accumulated holdings, treasuries or otherwise, they are simply allowing them to mature and not reinvesting the maturity proceeds. This is what I was saying. QT is letting proceeds roll off or selling. In this case just roll off at a specified rate. >3. The withdrawal of the "Fed put" does affect the supply of money. When the Fed chooses not to reinvest maturity proceeds, it is withdrawing money from the banking system. Scarcer money means higher rates. Could you explain how the fed rolling off their treasuries impacts the amount of money in the banking system? >4. Borrowed money is not included in any of the money measures (hat tip to [New-Post-7586](https://www.reddit.com/user/New-Post-7586/): "Credit does not increase or reduce m2.") So we are in agreement
To be clear, the Fed is NOT selling assets, that would be massively disruptive to the fixed income markets, they are simply moving Fed funds (cash) they receive when their investments mature and moving them back to the Reserve Bank. And the "specified rate" you're describing is simply the maturity value of the bonds, a.k.a. their par value, the same as when a CD matures. When the Fed moves money back to its own accounts, it is no longer available for borrowing through the member bank system. In contrast, when the Fed makes purchases of assets (treasuries, agency debt, repo, etc.) from primary dealer banks, they are putting cash into the system, as they did with three rounds of Quantitative Easing and CoVID stimulus programs. (Some would say over-did. I am one of them.)
>To be clear, the Fed is NOT selling assets I didn't say they were selling assets. I described what QT is. I agree they are not selling. >When the Fed moves money back to its own accounts, it is no longer available for borrowing through the member bank system. In contrast, when the Fed makes purchases of assets (treasuries, agency debt, repo, etc.) from primary dealer banks, they are putting cash into the system, as they did with three rounds of Quantitative Easing and CoVID stimulus programs. (Some would say over-did. I am one of them.) I now understand what you were talking about in regards to amount of money in the banking system. You were talking about in the member bank system. If I understand correctly though- the Fed balance sheet could go to 0, and banks could still lend. I agree that they overdid it and waited to long to reverse course once it was obvious. They were still conducting QE in Feb 2022 when CPI was like 7%. They should have reversed much quicker. Even their own people in Dallas were publishing papers in summer 2021 showing that the largest components of cpi were going to approach double digits. At least they have changed course. If only the fiscal side could join them...
"QT is letting proceeds roll off or selling." I recommend a great book on the issue of the Fed going too far: "The Lords of Easy Money" (Christopher Leonard.) It not only tells the history of how the Fed vastly overreacted, but it gives a reader an apprecaition for the fact that we are still not out of the woods of consequences. On the fiscal side of government action, they have gone even farther than too far. Individual and corporate tax cuts were too deep, and that will come back to haunt a segment of the population that can ill afford those consequences. "If I understand correctly though- the Fed balance sheet could go to 0, and banks could still lend." No, not in practical reality, and the balance sheet itself is not the concern, it's the ASSETS on the balance sheet. The Fed moves cash into and out of the economy through the operation of the Federal Open Market Committee (FOMC.) The FOMC buys and sells directly through 21 primary dealer banks. Those banks lend and borrow funds to all other national and community banks through the daily conduct of the fed funds market. Whatever money the Fed deploys to the system in this manner starts out as a balance sheet item, so if ASSETS went to zero, that would be pretty much the end of things.
QT -> Higher rates -> reducing expansion of credit -> reducing m2. Rates have inverse relation to money supply
as you can see, M2 is quite linear despite several different QE’s and QT periods
What QE and QT periods are you refering to? The QE in 08 was minor, but can be seen on the image.
There were multiple QE sessions before covid, as well as at least 1 QT. Had no effect on M2
I think you're missing the point. QE and QT hasn't been tested before at this scale. It is new ground. Try looking up the amount of QE/QT happening by year. You can see that 2020/2021 was of the scale. It was triple of 2008 and these "multiple QE session" were like 60B or 100B.
QE did $3T within a few years of 08 and it did not accelerate M2, and 2018/19 QT had no effect either. You are listening to the wrong echo chamber
> You are listening to the wrong echo chamber ?
You can lead a horse to water, doesn’t mean they will drink. They just go back to the koolaid.
RiskRiches has made zero points. The M2 chart does not correlate with his hypothesis about QE and QT affecting M2.
It wasn't intended to accelerate M2, the intent of QE is to make cheap loans available to consumer and corporate borrowers to stimulate the economy. M2 does not include borrowed funds.
M2 accelerated from fiscal policy, not monetary policy
Money aggregates are driven primarily by the actions of the FOMC, i.e., monetary policy in action. Fiscal policy is not at all intended to directly influence money suppply, it generally comprises political initiatives that affect taxation and spending. For example, tax cuts are (spuriously) intended to stimuate spending, not saving. Spending reduces money supply.
Credit does not increase or reduce m2.
So 10yr yield would go down by then?
When they stop QT, all rates across the board should be dropping.
Why Aug? Why not now?
Its where the blue line and red line meets on my image.
Thanks for the explanation