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The US Has Already Tightened — Which Explains A Lot

Next week we’ll find out if the longest-ever will-they-or-won’t-they drama involving a virtually insignificant quarter-point interest rate change will amount to anything. But either way, US monetary policy is already a lot tighter than it was a year ago.

The Fed’s balance sheet, for instance, is a measure of how much new currency it is pumping into the banking system. And it’s up only $79 billion, or 1.8%, in the past year. In real terms, that’s flat to slightly negative.

Much bigger in the scheme of things is the dollar, which is up by about 20% versus most other major currencies (and a lot more versus emerging market currencies like the Brazilian real). A stronger currency makes loans harder to pay back (just as would a higher interest rate), exports harder to sell (because they’re priced in a more expensive currency) and imports correspondingly cheaper.

Bearing this out is the latest reading for US import prices, which was down a shocking 11% year-over-year in August. Part of this was the falling price of oil, but not all of it. A lot is stuff coming in from weak-currency trading partners.

Goldman Sachs calculates that the above, along with the recent volatility in stock prices, works out to three 25 basis point increases in the Fed Funds rate.

Which makes those equity market gyrations look a lot like the taper tantrums that accompanied the end of the first couple of QE programs — and led to more easing in short order. So the question becomes, can the Fed — or any other major central bank — ever again overtly tighten monetary policy, since just the hint of it seems to send the now-wildly-overleveraged speculating community into an epileptic seizure? The answer might be no, in which case 2016 will see some truly epic volatility as this notion percolates through the global financial psyche.

15 thoughts on "The US Has Already Tightened — Which Explains A Lot"

  1. One of the great pleasures of my life is witnessing the “smart money” lose money. (Hopefully, someday I’ll see them lose their heads too, but I digress…)

    That said, I think the Fed will raise rates, regardless of all the noise, because that’s what they do – screw up. That may be how/why they still have credibility. How can you “fire” one with such earnest efforts and good intentions? Who – other than the fringe crowd – could have known better?

    1. If the Fed raises rates now they’re screwed. If they don’t raise rates, they’re screwed. We’re screwed too, regardless. The right thing would have been never to accumulate the debt we have in the first place. The banks learned from Volcker. You have to control the entire political system to really screw people.

      1. The Fed *IS* going to raise rates.

        Know why? Because, at this point, it’s what would damage the middle-class the most and the top 1% the least.

        To chase earnings most of the middle-class, who did have savings, have been coerced off into higher risk “investments” and will lose their principal.

        All the folks who’ve borrowed and borrowed assuming low or ZIRP interest rates are hooked and will be bleed servicing rising cost of student loans and in housing rentals.

        If you have money or access to it, you’ll be able to acquire assets for less.

    2. Yep, you can always count on the government to do exactly what it shouldn’t do at the precise moment it shouldn’t do it.

  2. don’t these rate rises from FED Typically always come in a series, like a 1/4 every quarter, 1% a year, yr on yr, til we tighten a couple of percent…..in other words this signals a fin de cycle, a change from bull to bear, from loose to tight……Oh crap, now we have to PAY for all this fun we’ve had. In investors minds this is the inflection point in the chart where it all changes from up to down

    1. we can never pay 4 trillion back !! gdp now is covering the interest on our loans from japan and china etc !! not good !! bob

      1. I don’t think “borrow” “bond” mean the same thing in financial terms(as they do in plain english) …”repayment” simply means “rolling it over”…you never repay the principal, simply reborrow it at your new rate. and its the interest rate that has all the significance because that’s the rate you get to roll into. On a sovereign scale of finance I think your interest rate has something to do with having 21 aircraft carriers and 2000 foreign military bases and the world’s largest nuclear arsenal….if you are greece, you don’t get the same rate even though you are indebted about the same percentage GDP….USA is a consumptive economy, not productive, we eat more than we produce, and then trend continues towards less production….why can we borrow so cheaply? why can we print USD and use it to buy barrels of oil? why do the oil sellers use those USD’s to buy US Treasury bonds? The biggest mystery/joke of this whole mess is the new concept of : NEGATIVE INTEREST. What? you mean I pay you to be able to loan you my money? and you PROFIT from borrowing? If the bankers/sovereigns can get that to catch on….we have a whole new level to this absurd Da Da Economics. The basis of money is hypnosis, mass hypnosis…..if the world goes along with the suggestion…that’s what realty is, no matter how absurd.

      2. yes you can….pay back the 4 trillion just reverse what they did to create it…
        who would bitch if they electronically wiped it off their books

    1. I’m looking forward to that too. Somebody’s gotta go “helicopter”. The crazy thing is, the CB’s think that if they do that then “everyone” will figure out the scam, but I don’t think they will. I don’t have a pulse on other mainstream consumers/retailers/people but if they’re as addicted to social media and “reality” TV as here in the US then there’s not a chance. Things could go totally epic and I say let them be pounded.

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