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Anti-Deflationists Win The Day At The Fed
From The Daily Capitalist
Major Policy Shift
The Fed Open Market Committee voted today to roll its holdings of maturing Fannie and Freddie debt into longer term Treasurys. This represents a significant change in Fed policy and it appears that the anti-deflationist wing of the Fed, led by James Bullard, president of the St. Louis Fed, won over the anti-inflationists led by Thomas Hoenig, president of the Kansas City Fed.
As I reported last week, there is a significant movement in the Fed, led by James Bullard, to increase its Open Market Operations purchases of Treasurys in order to prevent deflation. They see that money supply is decreasing and that zero interest rate policy (ZIRP) has been ineffective. In a groundbreaking paper just published by Bullard, he advocates the purchase of Treasury debt which is, in effect, a monetization of U.S. debt. They believe that such purchases, called "quantitative easing" is the only effective tool the Fed presently has to increase money supply.
This reveals that the Fed is very worried about deflation.
The Fed noted in its press release that:
Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.
They announced their policy change as follows:
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.
Presently (as of August 4) the Fed holds a total of $2.054 trillion of debt. Commencing last year and continuing through April of this year, the Fed bought $1.25 trillion of GSE debt (MBS of the government sponsored entities, Fannie Mae and Freddie Mac) and the balance consists of Treasury paper. They intend to keep their holdings at this level. According to a subsequent release today by the NY Fed, which carries out the Fed's Open Market Operations, Treasury paper purchases will be "in the 2- to 10-year sectors of the nominal Treasury curve, although purchases will occur across the nominal Treasury and TIPS yield curves."
They voted to keep the present ZIRP, something Bullard advocated against since he felt it was ineffective and actually contributes to deflationary expectations.
The impact of this new policy on the MBS market is not known, but it would seem that it would weaken the market for GSE debt. Another factor is the rollover rate of the GSE paper was not revealed in this statement, so it is not known how long the markets would take to be impacted by this policy. I can imagine that Treasurys will continue to rise.
While the initial impact of this new policy on the economy will be modest, it sets a precedent for the Fed to substantially increase its attempts to inflate the money supply as the economy declines. Like everyone else they will be watching unemployment numbers and money supply. If unemployment fails to improve, and especially if it grows, then the Fed will pull out the monetary stops through more quantitative easing.
This policy is exactly what I anticipated in my article last week:
Bullard released this paper for a reason and that is to frame the debate about what they are all really concerned about: a sinking economy that will keep unemployment high. Continued high unemployment is not politically acceptable to Congress and the Administration, and the Fed will face tremendous pressure in the next several months as negative data continues to come in.
Most Fed presidents fear unemployment more than they do deflation. I believe they will keep ZIRP for the foreseeable future and that they will also engage in more “quantitative easing.”
Monetizing debt has been a taboo among central bankers because it is a one-way ticket to high inflation. But, Dr. Bullard thinks that is what the Fed should do. That is why I believe we are eventually headed for stagflation.
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Seems mainstream media is picking up on whats going on, finally!!
http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-ev...
Fed is forcing the treasury yield curve down on both ends taking all the pressure off Obama administration for the rest of the year, in essence a "get out of jail free" card for summers and timmie.
Bottom line here is, the Fed has run out of ideas and is punting. Fed shifts to auto-pilot and will buy all excess treasury debt ad infinitum.
Path immediately ahead: dollar collapse (underway), rolling global currency crisis, leg two down in the unfolding economic depression leading to social and civil disruption. It appears the end game has arrived.
At this stage, not sure there is anything anyone can do to stop the virtuous cycle of this credit collapse.
FED is playing a waiting game (stealth QE 1.5)...And JB is the substitute joker in King,s court. Mid-term election? Or, something they know and we sheeple don,t.
FED is playing a waiting game (stealth QE 1.5)...And JB is the substitute joker in King,s court. Mid-term election? Or, something they know and we sheeple don,t.
Commodities aren't jumping right now, but it is probably too early to tell what they are going to do. However, how far will they jump if there is little or no increase in demand? Despite the low interest rates I don't see how commodities could sustain a very long rally.
Bought all the dog, qid, sh I could find.. 100% short position, how much faith I have in this fed. When all are convinced asset prices will rise, Virg C moves to other side of the vessel.
"The Fed Open Market Committee voted today to roll its holdings of maturing Fannie and Freddie debt into longer term Treasurys."
What else were they going to do? These MBS & other toilet papers were never going to amortise. These inventories are unsaleable, the Fed is illiquid.
Quite frankly, it astounds me that gold is not in backwardation yet.
I agree with Peter Schiff, all this is just showing how ignorant people are. Though I suppose a UST bubble, raging for decades, backstopped by the rest of the world, is not easily popped.
This is not a major shift. This is a minor very predictable shift to look proactive until after the elections.
What is the goal? An increase in bank credit? Added to the already massive amounts of bank credit and liquidity.
Just how will it work I wonder? Keeping the balance sheet stable is not the same of reinvesting proceeds. So what about defaults? Portions of the portfolio which are not performing or even written off. So we mark these as a loss, but then what amount do you reinvest into Treasuries? A stable balance sheet assumes 100% MBS redemption at face value. Which we know is crap. The losses may be as severe as 60% overall.
So this is more stealth QE, but it was the only card they had to play.
Next up another asset buy, but what? and in what amounts? To what end? But this will only happen if equity markets lose 20% or more.
The FED is done until crisis.
Mark Beck
Is there any way to verify the comment that "bank lending has continued to contract?"
My gut feeling tells me that excluding real estate/new construction lending, which continues in the toilet, overall supply of credit is likely rising, rather than contracting. Is there any place that breaks out these numbers?
If my suspicion is correct, the corresponding impact down the line could be quite significant.
Cheers.
They only care about themselves,fuck the peasants.Peasants however have more sense and there are more of them,they realise when they have been shafted and have long memories,lip service is all authority will get until its too late.Society is giving up on its leadships and new forces are being unleashed.Payback will arrive and the systems that have failed will be replaced for the better.
Maybe the interest has been going to pay UI benefits? Just sayin.
so they are buying about 50 billion a year with the interest payments and now another 200 billion with the principal payments ?
Lovejoy poses the question "but where are they"? This is the $60,000.00 question that Uncle Ben can't even answer. The corporate world is however borrowing money hand over fist at extremely low rates. It seems to me the FED is moving their chips from the consumer sector to the business sector in anticipation that business can jump start the economy.
My question is; "What business out there is going to roll the dice and invest in this environment"? Technology? Maybe. But your smoking dope if you think computers, i-phones, chips and google are going to lead our economy out of this mess. Cap and Trade and green terds. No, let's not even think that!
We will not grow until:
(A) Trillions more in debt is paid off or defaulted on.
or
(B) The economy begins to invest in and create a new business sector that is in it's infancy and I don't know that this exists.
or
(A) & (B)
A couple of questions:
1) If their balance sheet remains the same how are they increasing the money supply appreciably by taking principal payments from MBS and buying treasuries? Are they not just funding the government deficits as a sort of pass-through?
2) If they own MBS have they not been receiving interest payments as well? What have they been doing with that cash. Does it accumulate on their balance sheet and if it does is that not reducing the money supply?
I know you guys hate krugman, but he has a good point here:
Essentially what Krugman says is- Do the wrong thing to do now because the world is letting you to do it again
Like the one last heist for a robber to come out and be clean
But that is where historians like Ferguson come in and say
'Govs Ponzis and Madoff's never come clean'
This is when we need 'Great Leaders' The ones who can lead us truly in what we believe in, not just sneaky ones who just want to get out of the box we are in.
Hey deliciousirony the FED was never supposed to monetize the debt and SWORE they WOULDN'T! 'Pace of recovery' MY ASS and Krugman is a total fuktard with NO valid point!
This bullshit has been going on forever in all kinds of different ways. People are all freaked out now because it's transparent. People need to face up to the human social condition. It's never really been any different.
There is no increase in the Fed balance sheet. It essentially rolling over debt but increasing duration.
Fed member bank reserve balances are functionally one day tsy secs, so all the fed is doing by buying longer term tsys is to change the duration of the outstanding balances created by the deficit spending. We go from holding tsy secs to holding reserve balances when the fed buys our tsy's and from holding reserve balances to tsy's when the Treasury sells them.
The final result will be that it will remove interest income from the economy and lower rates for both savers and borrowers. So I would say good for borrowers, but where are they (credit is tight), and bad for savers as they don't get much.
Encore: savers punished; borrowers can re-fi (at deliciously low rates) on the shitty loans they couldn't afford in the first place.
Significant shift in policy... my ass...
'Significant shift in policy' yea my ass, like its all supposed to mean something other than a huge shit sandwich? Zerohedge losing its grip big time.
welcome ! ZH is paradise for lunatics!
They keep doing same thing ,ranting against TPTB and expect something different to happen next time
How do you stay above the fray? Please advise.
This almost sounds like check kiting between two accounts you own. We are so fucked. Anyone have any good suggestions on getting assets out of the country?
To where? Mars?????????
Cash up then buy the biggest , best quality flawless diamond (certified) that you can afford and bobs your aunty's brother.
Though the comparison between Japan and what we are experiencing right now may be different, are we still tracking the Japanese playbook here? Did they continue / ever unleash multiple rounds of monetizing distressed assets or JGB? Just curious if we have done anything differently.
The US financial system is cleaning up its book and letting residential and commercial real estate reflect reality much more aggressively than Japan ever did. They spent a decade denying there was a problem.
Also the United States has closed 311 (?) banks since late 2008. That kind of colon cleanse only happens in America.
The states will be next. Bondholders will get screwed and get revenge in future coupons. Then munis will live within their means. Last will be the Federal government debt overhang, which is of course, where inflation comes in.
Cheer up, be objective, and be glad you are in America. We have a big set of problems as initial conditions, but we'll be through it before the rest of the world even gets started dealing with their fuck-ups.
+10 for the optimism
5 years of it, at least:
http://www.clevelandfed.org/research/trends/2008/1208/01intmar.cfm
We also know they openly bought stocks.
The US did 1 stimulus package of roughly 7% of GDP. Japan did 10 of the same size on average, after 2000 alone.
Accomplished nothing useful.
Why don't they call it what it is? Anti-deflation = Inflation.
The immediate effects on the Au/Ag spot prices and the DX (value of the dollar against a basket of currencies) portends what is going on.
what effects??
Don't you get it?
PM markets are easily rigged- naked shorts in all futures
Forex- please!!!!!Everybody in the world wants more money
Every central bank wants to print money and paper over their losses and asses
Bet all the currency indices will be at the same level a year from now
That proves that everybody is printing to maintain same exchange rates and hide inflation as they have been doing for decades
Buying worthless debt with e-dollars...this is all they can come up with?!
The Fed sickens me...
Raise asset prices when its citizens wages don't keep pace is NOT economic recovery, is immoral and anti-constitutional period. This WAS a nation by the people for the people not by the banks for the banks
think of what's going to happen to the millions of seniors on fixed incomes.....this is a nightmare.
But we knew they would all along. It was just a matter of enough stall signs accumulating until they had no choice.
I think it's even scarier considering I'm watching some cnBS right now and everyone who is a guest(not everyone but just the people I saw) are saying things like "This will make commodities rise, period" or "The Fed scares me" on national television.Even that one asian chick used the term "QE 2.0". Of course the "hosts" immediately try to cast doubt on the situation but they didn't have shit to say, they kept on getting smacked down.
Funny!
Nobody seemed to care about 'Price stability' when asset prices, RE prices were going ballistic in 2003-6
And everybody must sell their souls to maintain asset prices now??!
Because, obviously, the problem is that treasury yields and mortgage interest rates are just *too darn high*.
Where, in the Fed's statement, is a *single* example in all of history where debt monetization has *worked*?
Infinite leverage is possible as long as interest rates are low enough. They would never utter such a statement publicly, but I'm convinced that the Fed believes such a strategy would be the antidote to all of our eonomic problems.