Powell Warns Of "Rising Leverage & Elevated Valuations"; Dudley, Rosengren: QE (Or More) Will Be Back

Ahead of Fed Chair Powell's first semi-annual monetary policy report to Congress next week (brought forward to 2/27), The Fed has released his prepared remarks warning that "valuations are still elevated across a range of asset classes" and fears "signs of rising non-financial leverage." To wit:

Looking at the key topic of inflation, and the labor market, the Fed found that U.S. labor market is "near or a little beyond" full employment in early 2018, and that while the pace of wage growth has been modest, "serious labor shortages'' would probably give it an upward push.

Ironically, and paradoxically for an "economy beyond full employment", the Fed observes that "the pace of wage gains has been moderate; while wage gains have likely been held down by the sluggish pace of productivity growth in recent years."

Regardless, the Fed clearly is concerned about labor supply-demand imbalances, and has even added a new word: serious, as in "serious labor shortages would probably bring about larger increases than have been observed thus far."

In a separate special section on financial stability, the Fed notes that overall vulnerabilities in the U.S. financial system remain moderate, while noting some spots where things are warming up. These include signs of increased leverage to the nonbank sector, noting greater provision of margin credit to equity investors such as hedge funds.

Looking at financial imbalances, the Fed warns that "leverage in the nonfinancial business sector has remained high, and net issuance of risky debt has climbed in recent months. In contrast, leverage in the household sector has remained at a relatively low level, and household debt in recent years has expanded only about in line with nominal income."

The Fed also cautions about the record leverage we recently noted in the hedge fund world, as follows: "There are signs that nonbank financial leverage has been increasing in some areas --for example, in the provision of margin credit to equity investors such as hedge funds. Vulnerabilities from nonfinancial leverage are judged to be moderate."

A close look at low inflation worldwide finds a lot of it is explained by resource slack and commodity prices, while for the U.S., movements in the dollar also play a role.

Among the other highlights from the report, via BBG:

  • Fed Says Some Major Emerging Economies Harbor Pronounced Risks
  • Fed: Valuations Still Elevated Across A Range of Asset Classes
  • Fed Says U.S. Banks Well-Capitalized With Significant Liquidity
  • Fed Sees Increased Margin Credit to Equity Hedge Funds
  • Fed: Hard to See Much Evidence of Emerging Supply Constraints

Commenting on the report, Bloomberg's chief economist Carl Ricadonna had this to note:

"The economic assessments in the Fed report are largely consistent with the tone of recent public comments and the minutes from the last meeting. Policy makers have an eye on financial stability risks, but do not view them to be substantial at the moment, instead characterizing them as "moderate." As we noted in response to the January FOMC meeting minutes, Fed members are hewing to a Phillips-Curve type of framework in thinking about inflation. So a key driver of the Fed reaction function will be the tenor of wage pressures, which appear to be mounting in an extremely gradual fashion at the moment."

* * *

Curiously, before Powell's remarks were dropped, both Dudley and Rosengren were on the tape this morning talking super dovish about QE as "useful to have in the toolkit for those times when the short-term interest rate tool may not be available," adding that The Fed is “quite likely” to require large-scale asset purchases again because real rates will remain low due to slow productivity and labor-force growth.

And adding that "if LSAPs are indeed not effective, then the Fed may need to take other measures."


So 'whatever it takes'?

Furthermore, they attempted to calm market fears by claiming that balance-sheet normalization “has been non-disruptive” unlike the 2013 bond market taper tantrum.

The 55-page report, released days before Chairman Jerome Powell delivers his first semi-annual testimony before House and Senate committees, reprised recent economic data and the Fed’s policy actions. Powell will preside over his first meeting of the Federal Open Market Committee as chairman on March 20-21.

Below are selected excerpts from the Federal Reserve Board’s semiannual monetary policy report to the Congress on Feb. 23:

  • "How tight is the labor market? Although there is no way to know with precision, the labor market appears to be near or a little beyond full employment at present. The unemployment rate is somewhat below most estimates of its longer-run normal rate, and the labor force participation rate is relatively close to many estimates of its trend."
    • "Job growth remains consistent with further strengthening in the labor market ... the pace of wage gains has been moderate; while wage gains have likely been held down by the sluggish pace of productivity growth in recent years, serious labor shortages would probably bring about larger increases than have been observed thus far."
    • "Although employers report having more difficulties finding qualified workers, hiring continues apace, and serious labor shortages would likely have brought about larger wage increases than have been evident to date."
    • "It is possible that labor shortages have arisen in certain pockets of the economy, which could be an early indication of bottlenecks that are not yet readily apparent in the aggregate labor market. However, even at the industry level it is difficult to see much evidence of emerging supply constraints."
  • "Vulnerabilities in the U.S. financial system are judged to be moderate on balance. Valuation pressures continue to be elevated across a range of asset classes even after taking into account the current level of Treasury yields and the expectation that the reduction in corporate tax rates should generate an increase in after-tax earnings."
    • "There are signs that nonbank financial leverage has been increasing in some areas --for example, in the provision of margin credit to equity investors such as hedge funds. Vulnerabilities from nonfinancial leverage are judged to be moderate."
    • "Leverage in the nonfinancial business sector remains high, with net issuance of risky debt climbing in recent months. However, the share of the lowest-quality debt in total issuance declined, and relatively low interest expenses mitigated some of the vulnerabilities associated with elevated leverage."
  • "U.S. banks are well capitalized and have significant liquidity buffers."
  • "In a sign of increasing valuation pressures in commercial real estate markets, net operating income relative to property values (referred to as capitalization rates) have been declining relative to Treasury yields of comparable maturity for multifamily and industrial properties."
  • "Some major emerging market economies harbor more pronounced vulnerabilities, reflecting one or more of the following: substantial corporate leverage, fiscal concerns, or excessive reliance on foreign funding."
  • "Inflation has generally come in below central banks’ targets in the advanced economies for several years now. Resource slack and commodity prices -- as well as, for the United States, movements in the U.S. dollar -- appear to explain inflation’s behavior fairly well. But our understanding is imperfect, and other, possibly more persistent, factors may be at work."

Full Prepared Remarks (pdf):



Sir Edge Stuck on Zero Fri, 02/23/2018 - 11:28 Permalink


The US Constitution requires BY LAW that the US Gov issue all coin (money)... With No Debt

The (((FED))) a Private Banking Company with anonymous (((shareholders))) makes 6% off total debt as compensation for (((their))) issuing fiat money to the USA as debt for (((their))) printing 'work'.

In other words... The Private Company (((Owners))) of the FED make Billions of dollars a year running their high end laser printers creating never to be paid Debt.

By creating Debt that will never be repaid the USA Deep State Mafia has the means to start wars and bully nations around the world to do its economic bidding... including Global Drug Pushing... Cocaine in South Seas/SAmer... Opium AfPak... etc.

As Bush Sr. said.. "The World Will Do As We Say"

As Bush Jr. said.. "Either You Are With The USA or Against us"

As Obama said... "We (fill in this blank) a lot of folks"

All this evil is now blowing back into the US with a gale force wind.


In reply to by Stuck on Zero

eclectic syncretist Stuck on Zero Fri, 02/23/2018 - 11:33 Permalink

Fed chairman powell says: "Implications for next recession, in my view (The Fed) Should avoid hitting effective lower bound with short-term rates."

on slide 13.

Holy Shit!!!!! The fed doesn't plan on lowering rates when the next recession hits! WTF!!! Interest rates as a policy tool are now exhausted????!!!!!!

edit: makes me wonder who had to buy all those bonds sold earlier in the week.

In reply to by Stuck on Zero

eclectic syncretist skbull44 Fri, 02/23/2018 - 11:21 Permalink

The Fed already holds 2.4 trillion plus in US treasury bonds, and has only been able to sell 0.004 trillion of those bonds IN THE PAST YEAR


Now they say they're going to monetize huge quantities of treasuries while saying the economy is doing great? That, my friends, is straight-forward lies to the public that will produce inflation as pure and simple as it gets. Goodbye dollar!!!!!!

In reply to by skbull44

LawsofPhysics Fri, 02/23/2018 - 11:12 Permalink

So long as real producers continue to accept the Federal reserve promissory note in exchange for the products of their labor this bullshit "good cop/bad cop" routine will continue.  The greatest fraud in the history of the planet!

"Full Faith and credit"

same as it ever was!

Consuelo Ouagadoudou Fri, 02/23/2018 - 14:06 Permalink

I think it has been suggested before on this forum, that if pressured to do so, the Fed could 'absorb' China's $1T+ worth of U.S. paper - and they probably could, but it would be the cascading run on confidence which would ignite the firestorm, especially if the all important lynchpin ($tax revenue) were to drop off steeply as a result of economic downturn.   

Vicious cycle 'tis thee.

In reply to by Ouagadoudou

JibjeResearch Number 9 Fri, 02/23/2018 - 12:41 Permalink

It's not that bad if you diversify your shits.


Stocks: Nokia and/or other 5G/IoT Corps.  Cheap with dividend

Property: some for investment

Cash: for daily use ...


Just enjoy (life) the show ... you won't get hurt badly.... You might not get harm at all.

If you hit a crypto(s) jackpot, you'll be super rich!

In reply to by Number 9

JibjeResearch ktown Fri, 02/23/2018 - 14:26 Permalink

There's an article above talking about 50 hedge funds doing this and that ..

Nokia is not part of the top stock...

Get Nokia now because the next 5 years will be about 5G and IoTs, and Nokia is leading the way!

Nokia is the best bet, I'm expect $12-$25 by the end of the year if the next 4 quarters show increase sale and profit.  The profit looks 90% good because of the phone IPs, but the increase in revenue depends on telecom companies (ATT,T-Mo, Verizon, Sprints... other world wide teams).

I expect a stampede to try to get the term *first 5G ...  ATT will be the winner if it launches 5G in the 2nd haft of this year as it says it will ...  It will be a domino effect of launching 5G network.

Best wishes :)

In reply to by ktown

Dickguzinya FreeShitter Fri, 02/23/2018 - 11:41 Permalink

Speaking of losing and losers, you corner the market on both.  You are a scumbag, loser, who loses bigly like the shithead lowlife you've always been.  Expound upon how a born loser, like yourself, corners the market on adding nothing to the economy, let alone the world, except spewing your venomous, scathing, acrimonious drivel, in order to detract from the truth:  That being you always were, and always will be a scumbag loser.  Drop dead.

In reply to by FreeShitter

hongdo Uchtdorf Fri, 02/23/2018 - 13:19 Permalink

Ha ha!  Right.  The ultimate.  Creating fiat to swap for the flip of a coin.  Then the Fed becomes an habitual gambler.  Hey Fed, call 1-800-GAMBLER.  Pit boss - hurry and give that player another drink.

God, I hope I live long enough to see this go down.  Unfortunately no one will live long afterward.  Sorry young people.

In reply to by Uchtdorf

JibjeResearch ktown Fri, 02/23/2018 - 14:40 Permalink

I'm more sure about Nokia and the 5G/IoT, but

This one is anyone's guess...; however, I see interest to rise to a point that will not crash the market, and I believe that point to be about 3 to 4 percents, 4.5% is pushing it.  I also see this slow push for the next 3 to 5 years...  so it's good for home buyers ...

I see the Fed keeping the stock market side way to slow grow for the next 3 to 5 years because the USD will return home when PretroYuan pushes out PetroDollar.  The USD returning home is a given, but the size is debatable.  Interest rate depends on how much the USD returns home..

The Fed is a sitting duck, its best choice is to make policy to 1. Not crash the market, 2. Keep growth , 3. and with full/ full fake employment.

That's how I hedge for the next 3 to 5 years...

And, I hope to get lucky with crypto (s) ... I'll take luck over skill set anytime and all the time..

Best wishes :)

In reply to by ktown

ktown 24Richie Fri, 02/23/2018 - 13:16 Permalink

50 billion came out of the economy last year to pay interest on excess reserves and not reinvested back into the economy! Banks have 2 trillion dollars right off the top parked at the fed. The banks can adjust its "loan" at will? Stockholm syndrome is pervasive? The Federal reserve never had a "create inflation problem" its more about accountability? Tax cut not big enough? What if the tax cuts have already been spent and you got the old bait and switch?


In reply to by 24Richie

bobert727 Fri, 02/23/2018 - 11:37 Permalink

Another Fed official winging it.  They are between a rock and a hard place and the only thing they have left is talk.


Eventually, the market will realize that fact and the Fed will be punished.


First the banks were reckless.  Then the Fed took over and became the reckless one.