Bonds!

[Blake Hampton]

I'm thinking of writing a longer post about Kevin Warsh and the interesting things I see ahead concerning the Federal Reserve, credit markets, and the dollar. I'm hoping for a strong rebuttal from you @gfp. The simple idea in my mind is that Warsh is fundamentally different than Powell. And I'll also add that I think they're both brilliant, just in different ways. It's interesting how great minds can disagree on important, complex topics.

 

I've honestly been surprised that the topic of Warsh becoming Fed Chair hasn't really been touched on here at COBF. It's part of the reason I wanted to come back a little; I wanted to write some about it.

 

I'm think I'm going to try and be a bit nicer as well. There's zero reason for me to be an asshole when I'm talking to people on here.

 

Edited February 27 by Blake Hampton

[wabuffo]

I think much of what the Fed does is:

 

1) structurally-driven in terms of its balance sheet, and

2) market following in terms of setting interest rates.   

 

So I don't expect much difference in policy from Warsh vs past recent Fed Chairs.  But we'll see, I could be wrong.  

 

FWIW.

 

Bill

Edited February 27 by wabuffo

[gfp]

Looking forward to your writing Blake!  And if I disagree with you I will certainly point it out 

 

In the meantime, spend some time at the university of wabuffo and don't forget to get out there and make some money!

[tede02]

My 5% treasuries that were purchased in 2022 & 2023 are maturing. I've been re-directing cash into some of these AAA CLO ETFs which are currently yielding around 5%.

 

Interesting that yields came down today despite the higher than expected inflation report. It is peculiar that the truflation stats tell one story while the BLS figures tell something different. The off again on again tariffs are probably going to keep the picture murky for the foreseeable future. 

 

I met with a guy this week that runs a $1 billion division of a manufacturing company with global operations. Asked him how tariffs have affected his business. He sighed and said it has been a major pain in the ass. Impossible to plan around. 

[Spooky]

Latest daily spark for Apollo claims markets are starting to believe the techno-optimists’ view of the world, rather than the more measured Fed and economist view and rates investors are now pricing in rapid AI adoption that will push the unemployment rate higher and warrant many more Fed cuts by December 2026.

 

Torsten doesn't agree with this view and thinks AI adoption will take much longer than 12-18 months though.

 

 

https://www.apolloacademy.com/fed-pricing-reveals-market-expectations-about-the-ai-adoption-pace/

[gfp]

52 minutes ago, Spooky said:

many more Fed cuts by December 2026

 

"many more" is two 25 basis point cuts?  

[Blake Hampton]

On 2/27/2026 at 9:53 AM, wabuffo said:

I think much of what the Fed does is:

 

1) structurally-driven in terms of its balance sheet, and

2) market following in terms of setting interest rates.   

 

So I don't expect much difference in policy from Warsh vs past recent Fed Chairs.  But we'll see, I could be wrong.  

 

FWIW.

 

Bill

 

I agree that the majority of what the Fed does is mostly structural during times of stability. It actually seemed to be a relatively boring institution that few people thought about prior to 2008. However, it is during a crisis that a Chairman's ideology can truly define an outcome. I think it's an interesting idea to ponder what might have happened differently if Warsh had been in charge during the Pandemic instead of Powell. I think it could have been very different. It seems to me Warsh is a lot less forgiving.

 

The Federal Reserve was initially created in response to the Panic of 1907, which nearly took down our economy. One of the Fed's primary purposes is stabilizing the banking system during crisis. But they are not mandated to backstop corporate credit, which is exactly what J. Powell did in 2020.

[Blake Hampton]

And if the United States refuses to get its fiscal account in order, a crisis will eventually become inevitable: https://www.crfb.org/papers/what-would-fiscal-crisis-look

 

At that point, the Fed Chairman will quickly become the most important man in the world.

[Blake Hampton]

 

Edited March 1 by Blake Hampton

[gfp]

As always, I think you care way too much about the Federal Reserve and it is far less consequential than you think it is.

 

If Warsh thinks persistent inflation is always a monetary phenomenon as Friedman said, then the responsibility is with deficit spending by congress / US treasury / POTUS.  Saying the Federal reserve is responsible is missing Milton Friedman's point.

 

Saying the Federal Reserve "encouraged" massive reckless deficit spending by Congress over the last decade is wrong.  The government does what it is going to do and the Federal Reserve doesn't have a say in it.  The argument again lays blame at the wrong institution.

 

Warsh will get into the chairmanship with plans and promises to shrink the Fed's balance sheet and then bank reserves in the system will deplete until there is a hiccup and he will immediately stop shrinking the balance sheet and never mention how principled he was right up until he realized what the reality of ample reserves was.

 

Just to reiterate:  QE and QT do not cause inflation, stimulate or slow the economy.

 

Shrinking the Federal Reserve's balance sheet will have no impact on inflation.  If not abandoned in the early innings it will probably cause a crisis in the banking sector, which could spread and cause problems that would happen to be deflationary.  But if you break the financial system that is going to cause deflation - it isn't the QT that caused deflation it is the recession.

 

Basically people say stupid shit when they are applying for the job and trying to get confirmed and then they get into the job and do what everyone else does.

Edited March 1 by gfp

[wabuffo]

Warsh will get into the chairmanship with plans and promises to shrink the Fed's balance sheet and then bank reserves in the system will deplete until there is a hiccup and he will immediately stop shrinking the balance sheet.

 

gfp is the student who has become the master when it comes to describing the US monetary plumbing!

 

Warsh can't do a thing about shrinking the Fed balance sheet despite his proclaimed goals to do so (to pick one example).

 

The reason as I said is for structural reasons.   Currently the Federal Reserve liabilities are $6.6T.  Pre - GFC, these liabilities stood at $900B.

 

These liabilities are basically made up of three major components (only one of which the Federal Reserve directly controls):

1) currency in circulation,

2) US Treasury general account,

3) Reserve balances.

 

Currency in circulation grows organically and went from $800B pre-GFC (when it made up almost the entire Fed b/s) to $2.4T today.  Nothing the Fed can do here as banks call for vault cash to meet the transactional needs of both the US and global economy for banknotes & coin.

 

US Treasury general account went from $5B to almost $1T today.  Again this is not controlled by the Fed.  The US Treasury used to hold some of its balances in the US banking sector via its TT&L accounts but no longer does that.  In addition, the institution has learned that it must hoard large reserve balances in order to continue operating during the frequent Congressional budget battles over raising the debt ceiling.  During these times, the US Treasury has to deficit spend without net security issuance and relies on running down its TGA balance.

 

Finally, reserves went from $5-$6B to almost $3T today.  But again here regulatory changes for banks have played a large role.  Pre-GFC banks could run large daylight overdraft balances (ie, negative reserve balances) during payment clearing at Fedwire so long as they got back to positive at the end of the day.   Those regulations changed post-GFC and US banks must keep positive balances  throughout the day and must even forecast keeping a certain amount of excess reserve balances for peak stress days.  If one multiplies that single requirement by several thousand banks, the total reserve balances in the system have to be very large.  No one knows if $3T is enough today - but in Sept 2019, the Fed found out the hard way that $1.4T wasn't enough (and the US economy is much larger today in terms of Fedwire transactional volumes).  Going to a 'corridor system' won't help much in terms of shrinking total system reserves.

 

Personally, I think the Fed balance sheet is kinda stuck right where it is and can't be shrunk much further.  It amazes me that Warsh says he's going to shrink it.  He either knows better and is just posturing or he really doesn't understand any of this and will have to learn a painful lesson like Powell did in his rookie year.

 

Bill

Edited March 1 by wabuffo

[cubsfan]

I love these lessons in the mysterious ways the Fed operates. You guys are incredible.

[Spooky]

23 hours ago, gfp said:

 

"many more" is two 25 basis point cuts?  

 

Ya I find Torsten Slok and Apollo to be interesting to listen to but not the best... even the chart they posted is hard to gather signal from it. Guess it is hard to come up with meaningful insights each day. Thought it was worth flagging that bond markets may be starting to move more towards the AI recession / deflationary scenario... something to watch.

[Blake Hampton]

On 2/28/2026 at 7:21 PM, gfp said:

As always, I think you care way too much about the Federal Reserve and it is far less consequential than you think it is.

 

If Warsh thinks persistent inflation is always a monetary phenomenon as Friedman said, then the responsibility is with deficit spending by congress / US treasury / POTUS.  Saying the Federal reserve is responsible is missing Milton Friedman's point.

 

Saying the Federal Reserve "encouraged" massive reckless deficit spending by Congress over the last decade is wrong.  The government does what it is going to do and the Federal Reserve doesn't have a say in it.  The argument again lays blame at the wrong institution.

 

Warsh will get into the chairmanship with plans and promises to shrink the Fed's balance sheet and then bank reserves in the system will deplete until there is a hiccup and he will immediately stop shrinking the balance sheet and never mention how principled he was right up until he realized what the reality of ample reserves was.

 

Just to reiterate:  QE and QT do not cause inflation, stimulate or slow the economy.

 

Shrinking the Federal Reserve's balance sheet will have no impact on inflation.  If not abandoned in the early innings it will probably cause a crisis in the banking sector, which could spread and cause problems that would happen to be deflationary.  But if you break the financial system that is going to cause deflation - it isn't the QT that caused deflation it is the recession.

 

Basically people say stupid shit when they are applying for the job and trying to get confirmed and then they get into the job and do what everyone else does.

It's funny because I think the absolute opposite. I think you and @wabuffo underestimate the importance of the Federal Reserve. Like I said previously, I agree that they are unimportant 99.99% of the time, but during that 0.01% of the time that they are, they become all-important. They are the only source of liquidity during a panic. People generally have this view that the Fed will always be there for them when the economy seizes up. I disagree. While I don't think Warsh would let our economy collapse under the weight of bank failures, I don't know if he would support stabilizing corporate credit the way Powell did. The Pandemic would've been far more devastating if Powell and the Fed hadn't acted towards the end of March. Buffett has said this himself many times. And maybe it would've been better for us to get hurt. Maybe a lot of this speculative bullshit we're currently seeing wouldn't have happened to the degree that it has. I don't know.

 

I also think Warsh is more inclined for letting our country feel the heat concerning this stuff. That's part of how he views inducing change. I think Powell's fixation is with keeping the economy running as smooth as possible all the time, while Warsh's is ultimately protecting the future value of the currency. I like Warsh a lot and I think he's brilliant. I also think he's a little bit dangerous.

[wabuffo]

They [federal reservee] are the only source of liquidity during a panic.

 

The US Treasury is the ONLY source of liquidity during a panic.   

 

The US Treasury quickly ran up >10% deficit-to-GDP ratios during the GFC crisis and during the pandemic.   The Fed is louder but its fairly impotent without the actions of the US Treasury.

 

Contrast this with the 2000-2002 period where the deflation dragged on despite the Fed's rate cuts because the US Treasury stood on the sidelines and continued to run a surplus - until, finally, the economic contraction tipped it back into a deficit position by late 2002, early 2003.

 

Bill

Edited March 2 by wabuffo

[Blake Hampton]

3 minutes ago, wabuffo said:

They [federal reservee] are the only source of liquidity during a panic.

 

The US Treasury is the ONLY source of liquidity during a panic.   

 

The US Treasury quickly ran up >10% deficit-to-GDP ratios during the GFC crisis and during the pandemic.   The Fed is louder but its fairly impotent without the actions of the US Treasury.

 

Contrast this with the 2000-2002 period where the deflation dragged on despite the Fed's rate cuts because the US Treasury stood on the sidelines and continued to run a surplus - until, finally, the economic contraction tipped it back into a deficit position by late 2002, early 2003.

 

Bill

It wasn't the Treasury that saved the bond market in March 2020; it was the Fed buying Treasuries in order to ensure people could actually trade their bonds for cash.

 

How does a country like the United States, a country whose debt is denominated in its own currency, go broke? It prints the money needed to repay its liabilities when it can no longer do so through traditional methods, or in our case, printing endless amounts of new debt. Given that our government debt markets form the foundation of the global financial system, that our central bank is technically "independent," and that Trump just nominated a man whose most-important goal is to protect the value of our currency, this situation can get very complex, very fast.

In a crisis, the Treasury is primarily there for stimulus, once Congress pulls their head out of their own ass that is.

 

The Federal Reserve is there to make sure that the plumbing doesn't completely seize up. Given that most people don't know what an emergency fund is anymore, and I'm talking about both people and businesses here, this is an interesting role to have.

[gfp]

Remember, young man, that my advice was to attend the university of wabuffo (read: listen and learn), not "lecture wabuffo on monetary plumbing"

 

I know old habits die hard but listening and learning (and even - gasp! - occasionally changing your mind!) is still a financially valuable skill to pick up

[Blake Hampton]

Just now, gfp said:

Remember, young man, that my advice was to attend the university of wabuffo (read: listen and learn), not "lecture wabuffo on monetary plumbing"

 

I know old habits die hard but listening and learning (and even - gasp! - occasionally changing your mind!) is still a financially valuable skill to pick up

 

I think @wabuffo is brilliant. I've learned a lot from reading his previous posts.

 

Please give me a list of the ideas that you believe I need to change my mind on here. I would appreciate it if @wabuffo might do the same.

[rogermunibond]

@wabuffo I think your point about liquidity provider of last resort needs some caveat though no?

 

in the GFC the banks themselves were hoarding liquidity because they were overlevered.

 

in more traditional panics of the past, the Fed acted through banks as the channel.

 

but your point is well taken that fiscal surplus is a more useful form of liquidity provision than monetary surplus (bank reserves etc), especially if the lending channels are frozen.

[gfp]

6 minutes ago, Blake Hampton said:

give me a list of the ideas that you believe I need to change my mind on

 

I'll give one important one:  spending your time thinking about Kevin Warsh and the Federal Reserve is a waste of time and youth.  Get out there and dig around for actual good investments to make some actual money so you have a capital base to compound so you aren't completely dependent on the job market prospects for a new graduate with a computer science degree!

 

Don't waste your youth!  Time is precious

[Blake Hampton]

9 minutes ago, gfp said:

 

I'll give one important one:  spending your time thinking about Kevin Warsh and the Federal Reserve is a waste of time and youth.  Get out there and dig around for actual good investments to make some actual money so you have a capital base to compound so you aren't completely dependent on the job market prospects for a new graduate with a computer science degree!

 

Don't waste your youth!  Time is precious

 

I believe the Federal Reserve is an extremely important aspect of our nation's financial future.

 

But you're right. There is more to life besides understanding the Federal Reserve lol.

 

I'm doing pretty good for myself, though I'm sure I could always be doing better. I'm getting married here in a couple months actually. Been with my now fiance for about five years.

[wabuffo]

I think @wabuffo is brilliant. I've learned a lot from reading his previous posts.

 

I appreciate that - but honestly, I am not here to lecture.  I really enjoy the free flow of ideas and discussion and just want to participate in that idea flow.  

 

Not to sound like an old fart, but it took me a long time to understand how the monetary plumbing of the US works.  There are many good authors to seek out who can do a great job of explaining key concepts.  

 

Yes - many of them fly the MMT banner!  Don't let that be a turn-off.

 

If you ignore their policy prescriptions (I know I do) and just try to follow their explanation of monetary system transactions as one would look at a general ledger of debits and credits, it starts to make much more sense than 99% of the stuff out there from so-called "mainstream" economists.

 

Folks like Warren Mosler, L. Randall Wray, and Scott Fulwiler are where I would start.  (if you are interested.  If not, no problem).

 

While macro shouldn't be necessary in selecting high quality securities, I have to acknowledge its been a confidence booster for me that I can see through the fog of Fed and Treasury activities in relation to the US economy that keeps me from following the inevitable bearish (and often misplaced) commentary about the outlook for the US economy.

 

Bill

 

Edited March 2 by wabuffo

[rogermunibond]

Interesting talk from Scott Bessent on a reset to bank liquidity regulation.  After effects of the GFC.

 

https://content.govdelivery.com/accounts/USTREAS/bulletins/40c6d87?reqfrom=share/

 

"Now, the conversation is about reducing discount window stigma, incentivizing collateral prepositioning, and normalizing routine testing of central bank facilities."

 

 

Edited March 3 by rogermunibond

[gfp]

5 minutes ago, rogermunibond said:

Interesting talk from Scott Bessent on a reset to bank liquidity regulation.  After effects of the GFC.

 

https://content.govdelivery.com/accounts/USTREAS/bulletins/40c6d87?reqfrom=share/

 

"Now, the conversation is about reducing discount window stigma, incentivizing collateral prepositioning, and normalizing routine testing of central bank facilities."

 

 

 

Thanks for posting.  Dimon and others have been asking for this for quite some time.  This is probably more important for @Blake Hampton to read and understand than all those Warsh dreams and promises

[rogermunibond]

Looks like financials are up modestly, maybe on this release.

 

Lowering CET1 capital ratio requirements at the same time a Fed balance sheet runoff?