E Fed Will Crush Trumponomics And MMT - Bond Yields Capped

The Fed deals with Trump spending mania on the right (Trumponomics), and will do so if necessary, with Modern Monetary Theory (MMT) wanting to spend to oblivion on the far left. Trump wants to bust the new normal of slow growth and low long bond rates. MMT wants to bust the new normal of slow growth as well.

In one very real sense, you cannot blame those who feel the current economic system is denying opportunity to too many people. Yet their far right and far left solutions are potentially worse than the disease.

But the Fed has hinted that it is not interested in inflation, or big growth or massive increases in the money supply. It is interested in increasing the money supply, but by a measured increase. Now the Fed has paused, saying there is a slowdown in the world economy. It will buy some treasury bonds when selling mortgage bonds. That is not yet QE, but it is a way to increase the money supply at a measured rate within the framework of the new normal.

What the Fed Is About

Chairman Jerome Powell said Trump can't fire him. The Fed is a powerful institution. We all should read Fed watcher Jeffrey P. Snider. It isn't necessary to agree with everything, and I show an area of minor disagreement below. But his research is brilliant, invaluable, and enjoyable.

Here is the newest astonishing hint about what the Fed is, well, about. It was found in an article on Talkmarkets by Jeffrey P. Snider. It is interesting that we are already talking about the Fed being unable to distance itself from the Zero Lower Bound as it has paused raising rates due to the weak economic reality:

 

In addition to assessing the efficacy of these existing tools, we will consider additional tools to ease policy when the ELB is binding. For example, as is presently Bank of Japan policy, the FOMC could, when the ELB is binding, establish a temporary ceiling for Treasury yields at longer maturities by standing ready to purchase them at a preannounced floor price. [Emphasis mine]

Say what? What? A temporary ceiling is needed for treasury yields? Effective Lower Bound (ELB) is nominal interest rates at zero. The Fed fears people won't buy as many bonds as yields settle at zero, and therefore yields will rise. But, the Fed will protect the bonds so yields don't rise at ELB.

This pretty much proves that the Fed believes in the price of bonds, 1. as collateral, and 2. as attractive investment for sovereign purchasers, and 3. as providing liquidity to domestic mortgages and auto lending, is more important than an explosion of long bond (10 year) high yields, say much above 3 percent. I have been saying this for a while. Most don't understand but it is how the Fed thinks.

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Disclosure: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment ...

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