EDITOR NOTE: The Federal Reserve’s optimism with the U.S. economy and the reality of the current situation just isn’t adding up. The Fed points to dropping jobless claims and steady restaurant reservations as signs that show why they are comfortable enough to start asset purchase tapering in September. However, the reverse repos facility keeps rising as well along with the Fed’s balance sheet. It is a confounding move that shows how the U.S. central bank is telling Americans to “look over here!” while dealing with the reality of rising inflation and economic turmoil on the horizon away from the public gaze. The analogy made here is that the Fed’s sleight of hand and misdirection is like the light-flashing stick in the movie ‘Men in Black’ that allows people to live in blissful ignorance while the galaxy is in chaos.
To quote Tommy Lee Jones from the film Men In Black “There’s always an Arquillian Battle Cruiser, or a Corillian Death Ray, or an intergalactic plague that is about to wipe out all life on this miserable little planet, and the only way these people can get on with their happy lives is that they DO NOT KNOW ABOUT IT!”
That is what The Fed essentially said in their minutes, but not in so many words.
The minutes of the July Fed meeting suggest officials may signal an impending start to asset purchase tapering at the September gathering — provided jobs numbers remain on track in the interim — and make an announcement in November.
Rising infections counts have not spurred an uptick in new jobless claims. High-frequency data show some customers are shying away from eating out, but the overall impact on restaurant reservations is limited. The bigger challenge for many companies is retaining and hiring enough workers to meet strong demand, evident in low layoff counts and persistent mention of labor shortages.
In other words, IFF Covid doesn’t cause further economic damage (or governments don’t shut down economies), then The Fed will consider a mild taper of their balance sheet.
But as of this morning, The Fed’s reverse repo facility keeps on rising along with The Fed’s balance sheet. At least M2 Money Supply growth has leveled off.
That should result in an increase in Treasury yields and mortgage rates, all things being equal. And assuming the Biden Administration and governors don’t panic and go into economic lockdown … again.
The US Treasury curves since the Covid recession of 2020 have shown optimism in recovery … then reality dawned.
The Federal Reserve Board of Governors meeting
Original post from Confounded Interest