• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Financial Services

Dear Fed: Don't Hike Rates, Fix Your Balance Sheet

The only sensible thing is for the Fed to sell bonds into the market now, while it is still very strong.
By MATT HORWEEN
Jun 22, 2017 | 12:00 PM EDT

The Fed has it all wrong.

The lowest risk to the economy -- and to the Fed's wish to reduce its balance sheet -- is for it to sell bonds now and not raise rates. The Fed cannot take back last week's mistake of raising the Fed Funds Rate, but it could wise up and say that it will not raise rates again until it has stopped reinvesting interest and matured bonds, as it is still doing, and has gotten its balance sheet down to its new normal level. This would be a market-based method -- and a reversal of the quantitative easing (QE) and "Twist" (selling short-term Treasuries and buying long-term Treasuries to push down long-term rates) that brought market rates down to the low levels they attained.

The Fed is really off its game by raising rates before starting to reduce its balance sheet -- and in actuality, the Fed raised rates Wednesday while continuing to buy additional bonds for its balance sheet. How can this make any sense?

It does not make sense, if the Fed governors want to reduce the balance sheet to have ammunition for the next economic crisis.

QE and Twist got mortgage rates down to very low levels so that housing could recover -- which was a good thing. So why would the Fed not reverse the process now and sell bonds to take advantage of a market that wants the bonds very badly for many reasons?

I think the answer is that the Fed does not understand or trust markets. The banks all raised their prime rates alongside the Fed rate increase. This acts like a tax on all borrowers, with rates based on the prime rate. Had the Fed just stopped buying more bonds and said that they would be selling bonds soon, the market would decide if rates needed to go up -- and not the Fed, which has had a very bad record at predicting economic growth over the years.

The profit on the sale of the Fed's bonds will most likely be much lower if the Fed waits until they raise rates a few more time before they start selling bonds, unless the economy tanks and market rates go back down. But the Fed will most likely not sell bonds if that happens.

The Fed's plan is fraught with uncertainty over the possibility that no bonds will be sold or that reinvestments will be stopped if the economy tanks. The only sensible thing is for the Fed to sell bonds into the bond market now, while the market is still very strong and pension plans and insurance companies are in need of the Fed's bonds to fulfill their obligations.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.
TAGS: Regulation | Markets | Rates and Bonds | Treasury Bonds | Financial Services | Investing | Economic Data | Economy | Interest Rates | Fixed income

More from Financial Services

American Express Tells Tale of 2 Trends Ahead of Earnings

Bruce Kamich
Jan 26, 2023 9:24 AM EST

The credit card giant's charts present a mixed picture in advance of its fourth-quarter results on Friday.

Glimmers of Hope, Debt Limit Farce, Netflix Narrative, Strapped Consumers?

Stephen Guilfoyle
Jan 20, 2023 7:53 AM EST

Plus, a bird's-eye view of which direction the S&P 500 Index could take from here.

There's Nothing Pretty About Volatile Goldman Sachs: Here's What to Watch For

Stephen Guilfoyle
Jan 17, 2023 10:25 AM EST

We have thought GS cheap for years. While the stock rallied significantly into mid-year 2021, it has done little since.

How to Trade Goldman Sachs as Shares Sell Off After Earnings

Bruce Kamich
Jan 17, 2023 9:22 AM EST

Let's see how deep this downward reaction may extend.

Bank of America: Why I'm Buying the Dip 'Ahead of the Storm'

Stephen Guilfoyle
Jan 13, 2023 10:45 AM EST

The size of provisions are scaring Wall Street a little right now.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:48 AM EST REAL MONEY

    Watch Doug Kass on the Daily Rundown!

    In today's Action Alerts PLUS Daily Rundown, Doug ...
  • 11:03 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend On Real Money

    It's time to start using this power to build great...
  • 03:06 PM EST BOB LANG

    LEAPS Webinar

    This week, I offered a free webinar session talkin...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login