Economist: The Fed was right to raise rates when it did

Bill Nelson, chief economist at the Bank Policy Institute, sits down with the "Squawk Box" crew to discuss the Fed's decision to reduce its balance sheet. Also joining are CNBC senior economics reporter Steve Liesman and Joe Terranova of Virtus Investment Partners.

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[jfausset]

Finally, someone tells it like it is: “...a riskless environment...”. It is disgusting what the financial sector, in conjunction with central banks and congress, have done to the savers and workers in the global economy. Money has been magically created for the benefit of the few at the expense of the many.

[wiyxgyo]

You absolute financial smack heads. Maybe if they had done this sooner, like 4 years earlier, we’d be in a better position, with higher long term rates, and a smaller balance sheet. So now they are raising short term rates so much faster than long rates, that the yield curve is way to flat with short-term rates being under 3 percent. And everybody knows that the Fed monetized 1.6 trillion and still holds 1.4 trillion in treasuries. So what could the Fed possibly do if there were another recession? Nothing more than buying 200-400 million in short-term treasuries and taking the short term rate back under 0.25.

Also, it just doesn’t look good for the U.S. government and economy to be dependent on the Fed buying its debt and not selling it unless we have no recessions for 10 years. And the banks have nobody lend money to and they’re not lending if they did. The Fed’s purchases of treasury bills, Treasuries bonds and Mortgage-backed securities have almost exactly matched the 19-year old collapse in the money multiplier.

Not to say they did anything wrong, initially, except perhaps holding those mortgage backed securities for more than a couple of years and keeping up the fiction that those had the same value. But WR4 was rear view mirror driving. It was the exact opposite of what should’ve been done. In general, this treasury monetization should have been much more significantly unwound by now.

Now the Fed can’t raise rates to deal with inflation without inverting the yield curve, unless it accelerates the unloading of bonds, and they said, unwisely, that they wouldn’t do that. And if they want to inject liquidity, they need to suspend bond sales. But these bond sales need to happen before people can really stop looking at the economy like “oh its doing pretty well for a change, considering, the monetary life support, budget deficits, zero wage growth, anemic job creation decade over decade, etc.”.

I’m seriously thinking “can the u.s. government tighten it’s belt in the face of s generation leaving the workforce and going on social security, with long term interest rates withstanding a 2 trillion increase new long treasury bonds?” These dark shadows are going to continue hanging over the U.S economy until we stops perpetually running budget deficits of 2-3 percent of FDP or more, and until the Fed gets out of the business of being the treasury’s perpetual active lender.

And the large cap equity market is not necessarily a good gauge. For one, a lot of that revenue is foreign operations. Also, most equity fundamental value is 0-20 year term earnings. And that’s assuming the market stays relatively rational. The valuations are fair here, with this sell off. So while I’d bet on it going higher, I’d say there is almost an equal chance of a 1/3 loss. All you need is a series bad macro forward indicator numbers to make that happen. And that would just be normal. The Fed isn’t going to save the day. The government isn’t going to save the day.