N/A Federal Reserve has concluded their October meeting and they have cut rates again. But that is not the important part. They announced that in one month, not only are they going to be stopping quantitative tightening, in other words, their balance sheet is going to remain at the same level, but they also announced how they are going to do a little bit of a backdoor QE for the government by sacrificing the housing market. Let me show you what I mean. So, N/A first let's talk about interest rates. The Federal Reserve is cutting rates, which means the new range for the federal funds rate will be 3.75% through 4%. The Federal Funds rate is the rate that the Fed wants banks to borrow cash from each other in overnight markets. They intervene in these markets so that the federal funds effective rate is somewhere within that range. Last month, they lowered this range so that it would be between 4 and 4.25%. And going forward from here, it will be between 3.75% and 4%. But Trump's new appointment to N/A the Fed, Steven Moran, dissented, saying that he thinks that Fed should have moved more quickly and done a half a point cut. In other words, a half a percent, 50 basis points. We also had dissent from President Jeffrey Schmid in the opposite direction, preferring that the Fed not cut at all, but hold rates steady. The market had largely priced in this rate cut, expecting the Federal Reserve to do so. And the market has priced in another cut coming from the Fed in December of this year. But in his statement, Powell threw a wet towel on that sentiment just a tad bit. He said, "A further reduction in interest rates at the December meeting is not a foregone conclusion. Far from it. But way more important than what is happening with interest rates is what the Fed is doing with their balance sheet. I've been telling you for a long time the Fed would stop its quantitative tightening and then eventually resume QE. And they just announced at this meeting that they are finally putting an end to QT starting on December 1st. So N/A in just one month from now. Quantitative tightening and quantitative easing are when the Federal Reserve's balance sheet is changing. So when the Fed's balance sheet is growing, it means they're printing money to buy assets off the open market. When the balance sheet is declining, it means they're letting some of those assets get paid off. And that liquidity is disappearing from the financial markets. And then also when their balance sheet is moving sideways on net, they are neither adding nor withdrawing liquidity from financial markets. They're simply keeping their balance sheet at the exact same level. And anytime any assets get paid back to them, they take that money and roll it back over and purchase the same number of assets from the market again. So just N/A to recap, QE balance sheet goes up, liquidity increases, easy money environment. QT balance sheet goes down, tightening, less liquidity in financial markets. Balance sheet stays the same. Neither QE nor QT, no net change to liquidity in the overall financial markets. There is some nuance there, though. You can see from April of 2022 until now, the Fed's balance sheet has been declining, apart from the brief pop when they build out Silicon Valley Bank. They've reduced their balance sheet from approximately $9 trillion down to its current level of about $6.5 trillion, which means the Fed has withdrawn about $2.5 trillion of liquidity from the financial system. But it is now getting to a point with the reverse repo market N/A being drained, bank reserves starting to show some signs of stress because banks are increasingly using the regular repo window at the Fed that the Fed doesn't want to put any more stress on liquidity because if they do, they could have a repeat of September of 2019 with the repo market madness and risk banks blowing up and they don't want to go that far again and risk too little liquidity. So they have decided that 6.5 trillion is the proper size of their balance sheet for now so that they don't withdraw or add any liquidity to financial markets. But like I said at the beginning, there is something else that they are doing here that basically nobody is paying attention to. And this is stealth QE for the government and they are doing so by somewhat sacrificing the housing market. Let me show you what I mean. This is the press N/A release you can find on the Fed's website about what they are doing with monetary policy as of October 29th. They talk about interest rates and inflation and that's about it. But if you scroll down and you click the implementation note which was issued the same day. It brings you to this page where they talk about their implementation of this new monetary policy. And if you scroll down, you will see that because their balance sheet is not declining anymore, starting December 1st, they're going to be rolling over at auction all principal payments from the Federal Reserve's holdings of Treasury securities. Meaning, if the US government pays back a 10-year Treasury or 20-year Treasury, 30-year Treasury that has matured, that the Fed is holding on to, the Fed is just going to take that money, go out into the open marketplace, and purchase another identical security, another identical Treasury bond. That part makes sense. balance sheet is staying the same. So, new money gets paid back to N/A them. They just go out and buy the same thing again. Staying the same. No net change to overall liquidity. But here's the interesting part. Beginning on December 1st, the same date, the Fed is going to reinvest all principal payments from the Federal Reserve holdings of agency securities into Treasury bills. Agency securities are agency debt and agency mortgagebacked securities. If you don't know what that means, the Federal Reserve's balance sheet is primarily made up of two different asset classes. mortgagebacked securities and US N/A treasuries. US treasuries are debt that the US government owes to the bond holder, in this case the Fed. Mortgage backed securities are those packages of mortgages that as people pay their mortgage payments and pay those mortgages off as they refinance or sell their house. Those get paid back to the Fed as long as the Fed is the one holding them. But they are not just continuing to roll over those mortgage back securities. In other words, if money gets paid back to them for those mortgage back securities, they're not going to go out onto the open marketplace and just replace that with a new mortgage back security. They're actually going to let that get paid off. Instead, what they're going to do with that money is buy more treasuries. In this case, treasury bills. That's short-term, anything under two years. N/A Instead, instead, they're going to be taking that money and buying treasuries. In this case, treasury bills. That's short-term debt. Anything with a maturity of one year or less. And so even though the balance sheet itself will be moving sideways, there will be no net changes to liquidity conditions for the financial markets overall. The composition of their balance sheet is going to continue to change. Mortgage back securities will make up a smaller and smaller amount of their portfolio and treasuries will make up a larger and larger portion of their portfolio. Now with bonds, interest rates and the price of those bonds are inversely correlated. They are tied together. Meaning, if the price of a bond goes up, that means the yield it pays goes down. If the price of a bond goes down, the yield that it pays N/A goes up. And that's just because debt gets paid back the principal plus a predetermined dollar amount of interest. And so, if somebody pays more for that bond to be paid to them instead, if they buy that for a higher price, that means that the total dollars they're going to receive when that debt gets paid back to them is a smaller percentage. And vice versa, if a bond started off, let's say at 5% and somebody who loaned $100 at 5% is going to get $105 back. If they have to sell that bond and let's say they can only sell it for $50, the person who buys it is still going to get $15 back when the loan matures. And so for them, the rate or the yield went way high, over 100%, because they only paid $50 and they get the exact same principle plus interest back. So bond prices and interest rates and yields are inversely correlated. That means when you have N/A extra buying pressure for bonds, if that lifts the price up, then that pushes rates down. And vice versa, if you have less buying pressure for bonds, then that's going to lift interest rates higher as the price of the bond falls. So, back to the Federal Reserve. If the Federal Reserve is keeping their balance sheet steady, but they are just going to continue to let those mortgage back securities roll off their balance sheet. They're going to take that extra money and roll that over into buying Treasury bills. That means the mortgage market is going to have the same downward pressure on those bonds, which is upward pressure on mortgage rates that it has had this entire time. The Fed is not going to stop that bleeding whatsoever. And instead, they are taking that and they are going to be going out there and buying extra treasuries, in this case, treasury bills, which means higher N/A demand for treasury bills than there would be otherwise, which means lower interest rates for Treasury bills than there would be otherwise. Now, don't get me wrong, the amounts that this is happening in are not enough to massively move the markets. So, don't go out there thinking, "Hey, if I buy a a T bill ETF or even like TLT or something, even though that's long-term bonds, or if you look at a mortgage back securities ETF, don't don't be looking at this as a way to make a trade on this, expecting the Fed's actions to overall move the markets especially significantly. That's not going to happen here. But what is happening is picking winners and losers and in this case bailing out the US government, helping interest rates stay lower than they would be otherwise for N/A the US government, paying for it with higher mortgage rates than there would be otherwise. Now, if you've been around for any length of time, you know that I think we don't need the Fed at all. In fact, everything they do just makes things worse long term. These things should all be handled just by the free market. There's nothing the Fed does that the free market cannot handle itself. And this is a perfect example because you end up choosing winners and losers. And the winner that they choose 99 times out of a 100red is going to be the US government. Which is why I've said that we are in a new phase of this long-term debt cycle started in 2020. For 40 years, interest rates just went down. We had disinflation and the government levered up. We are in a new period of time now where the US government has to finance more and more N/A of its spending through inflation through printing and it taps the Fed to do that for them. And even though there's not actual QE that's going to be happening starting on December 1st for the government, the effect is the same. They get cheaper borrowing costs as a result of the Fed printing money into existence or at the very least keeping money in existence that they printed in the first place. All that new money entering the economy drives asset prices higher, drives the price of goods and services higher, which means interest rates for regular people are going to continue to stay elevated because the Fed's not bailing us out. They're bailing the government out. Higher inflation, higher interest rates for much longer than people expect. And that's why asset prices and valuations seem so extreme to so many people right now when in fact they are justified because at least you're escaping debasement. As always, thank you so much for watching. Have a great day.