Baltimore – We’re drifting in fog. Have been for years.

And what’s this?

A vague silhouette… the outline of something… coming into focus.

Yes… it’s the strange Isle of Peculiarities and Impossibilities.

When it rains on this island, the water comes up from the ground. When the sun shines, you have to put on your galoshes. The plants growl… and the rocks weep.

We threatened to explore the Fed’s fabulous monetary policy today. So, let’s cast off… and row to the shore and see what we can find.

Oddball Creature

When the Fed announced its QE program almost eight years ago, we didn’t know quite what to make of it.

Animal? Vegetable? Mineral?

“Money printing,” we called it.

“No, it’s not money printing at all,” said a number of voices, including some on the Bonner & Partners research team. It was an entirely new species, they said…

They were right. It wasn’t “money.” And central banks weren’t “printing” it.

Instead, the Fed was simply replacing long-term debt (Treasurys and government-backed mortgage bonds) with short-term debt (“cash” reserve balances).

The idea was that the extra demand would push up bond prices and push down yields. (Bond yields and prices move in opposite directions.)

Because the banks couldn’t spend their reserve balances. And they didn’t need them to make loans. Plus, it’s up to central banks what rate of interest they pay banks on those reserves.

Then it got weirder.

Central banks began talking about… and later experimenting with… paying a negative rate of interest on those reserves.

What was this oddball creature?

Like the platypus or the pink fairy armadillo, we first thought it was a joke. It couldn’t exist. And yet, there it was.

Nobody knew what these strange beasts would do, either. Were they dangerous? Poisonous? Nobody had ever seen one before.