First ... when the Fed did QE, it bought bonds. When they started QT last spring, they let bonds mature (not sold).
This activity make changes the Fed's balance sheet.
On Dec 28 the Fed balance sheet was $8.55T. Of this, $8.04T was bonds, detailed below.
3/9
This $8.04T of bonds all pay a coupon. The Fed uses this income to pay RRP and interest on reserves. What is left over is returned to the the Treasury as a "remittance."
Here is the official amount they have remitted back to Treasury, over $1 trillion since 2011.
4/9
By the way, the Fed has an official annual audit done by KPMG.
Here is the 2021 version that includes lots of detail about the remittances, if anyone wants to nerd out on this topic.
Yesterday, Jim appeared on Bloomberg TV, warning that if the Fed cuts rates and the market thinks this is wrong, 10-year yields could surge through 5%.
(Perspective ... 10-year yields were last above 5% in October 2023 and as high as 4.85% in January).
🧵
2/8
President Trump disagrees with this thinking and believes the federal funds rate should be 1% right now.
From a "truth" posted on June 30.
3/8
If (or should I say when) Trump gets a Fed Chair to make 1% happen, how will the 10-year react?
Reminder of what happened last year to long rates when the Fed cuts rates (peach arrow) and the market does not think it's a good idea (cyan arrow).
I would argue that if the Fed cuts rates and you assume mortgage rates follow the federal funds rate lower (they may NOT be the case), home prices would rise, putting the monthly payment right back at $2,860.
Polymarket recession odds peaked at 65% on May 1st, the April ISM release date, suggesting Liberation Day and the 20% stock market correction did not damage the economy, as the "soft data" warned.
Subsequent April data confirmed this.
Will May see more of the same?
🧵
2/12
The prevailing narrative in the market for months has been that the labor market is going to fall apart, forcing the Fed to cut rates.
This has not happened, and so far, the "soft" (survey) data have been wildly off in predicting the economy.
3/12
ISM Employment upticked in May from April. The first monthly "May" data point suggests the labor market is still not weakening.
See the red line on the right. With increased tariffs (red line to the left), the prices of goods originating from China are increasing rapidly.
Also note that the Chinese-originated price rise (red line to the right) began around May 1st, the same time truflation started its upward march.
3/5
From the FT:
The Yale Budget Lab says the average US family would pay $2,800 more for the same basket of products purchased last year, should tariffs remain at their current level, with lower-income homes more exposed.
Chinese products being sold in the US have already seen marked increases in retail prices, according to analysis of high-frequency data from PriceStats by Alberto Cavallo of Harvard Business School.