The Fed Needs to Focus on the 10-Year

[Deltavega]

The attached paper outlines why the Federal Funds rate has lost its relevance as an indicator of monetary stance and why the 10-year Treasury yield now provides a far clearer reading of financial conditions.
After decades in markets and academia, I have watched the mechanics of monetary policy shift from a system driven by short-term lending to one dominated by long-term asset accumulation, balance-sheet distortions, and a Fed that now functions as a leveraged short-term borrower. The result is a structural break that most commentators still fail to recognize.
My paper is a data-driven explanation of how this transition occurred, why it matters, and why any serious analysis of the economy must begin with the 10-year yield rather than the policy rate announced after each FOMC meeting.

 

[Marty McFly]

@Deltavega Which adjustment in the Fed’s balance sheet strategy would most quickly restore the link between short term policy actions and long term rates?

 

[JohnnyDoe]

@Deltavega Which adjustment in the Fed’s balance sheet strategy would most quickly restore the link between short term policy actions and long term rates?

Fed should stop fooling around and build a real war chest of Tbills. That would give them direct leverage over the front end again.

But they won't because they're trapped. Their balance sheet is a mess, full of long dated bonds from all their QE adventures.

So, until they seriously reload on short term paper, forget the Fed Funds rate. The long end of the yield curve is the market’s call, not the FOMC’s.

 

[Deltavega]

The attached paper outlines why the Federal Funds rate has lost its relevance as an indicator of monetary stance and why the 10-year Treasury yield now provides a far clearer reading of financial conditions. After decades in markets and academia, I have watched the mechanics of monetary policy shift from a system driven by short-term lending to one dominated by long-term asset accumulation, balance-sheet distortions, and a Fed that now functions as a leveraged short-term borrower. The result is a structural break that most commentators still fail to recognize. My paper is a data-driven explanation of how this transition occurred, why it matters, and why any serious analysis of the economy must begin with the 10-year yield rather than the policy rate announced after each FOMC meeting.

Fed should stop fooling around and build a real war chest of Tbills. That would give them direct leverage over the front end again.

But they won't because they're trapped. Their balance sheet is a mess, full of long dated bonds from all their QE adventures.

So, until they seriously reload on short term paper, forget the Fed Funds rate. The long end of the yield curve is the market’s call, not the FOMC’s.

Eliminate interest on reserves
and cut the balance sheet in half. get rid of all MBS and have 50-60% of asset mature in less than a year

 

[JohnnyDoe]

Eliminate interest on reserves
and cut the balance sheet in half. get rid of all MBS and have 50-60% of asset mature in less than a year

sure but they can't sell the MBS and admit trillions in losses. It would mean admitting their mismanagement.

 

[Deltavega]

The Federal Reserve have accountants and accounting techniques that would make any fast out and his buddies at Enron Green With Envy. They have an entire block of losses booked as negative assets. I wrote a piece of a while back on how to clean up the balance sheet I'll probably post it in the next day or so

 

[JohnnyDoe]

The Federal Reserve have accountants and accounting techniques that would make any fast out and his buddies at Enron Green With Envy.

Who audits the fed?

https://www.federalreserve.gov/aboutthefed/files/combinedfinstmt2024.pdf

Any conflict of interests?

https://www.usaspending.gov/search?hash=3a657edd2c44a1d7f638ed9e7373c3a7

For the lazy ones: KPMG audits the Fed financial statements and has hundreds of active contracts with the U.S. government, totaling hundreds of millions per year.
Everyone who owns a company knows what an “audit” means, in certain cases…

 

[Deltavega]

@Deltavega Which adjustment in the Fed’s balance sheet strategy would most quickly restore the link between short term policy actions and long term rates?

They need to sell their MKBS and long dated treasuries and by Tbills