This page has been archived and commenting is disabled.
The Definitive Cliff Note Summary Of Tomorrow's QE2 Decision
The one best thing about tomorrow, is that 29 hours from now, there will be no more speculation about what QE2 may look like, how big it will be, what the impact on stocks will be, why it will even take place considering the ISM and other economic metrics have turned up recently (and the Fed is an independent, objective force after all) and all the other topics that have clogged the pages of mainstream and alternative media for months. So as we all prepare to relegate this topic to the dustbin of history where it belongs (soon, alongside the current reserve currency), here is the definitive walkthru of what to expect tomorrow from Goldman's Ed McKelvey.
FOMC Preview—What We Expect on November 3
In this comment, we summarize our key expectations for Wednesday’s FOMC statement. The most prominent one: an announcement of about $500bn in purchases of longer-term Treasury securities over roughly the next six months or an equivalent program expressed at a rate of about $100bn per month, with a clear indication in either case that more will be coming if conditions warrant. This is in addition to the reinvestment program for repayments of agency and MBS principal, which will continue to be directed to the Treasury market. The purchases are apt to tilt toward somewhat longer durations than have been done so far, though information on any such detail may come through a separate New York Fed communication.
We also would not be surprised to see the committee alter the “extended period” language in an effort to push expectations of rate increases out even farther. In the paragraphs describing recent economic and inflation developments, only a couple of tweaks appear likely—to make it clear that inflation is more than “somewhat” below the “mandate-consistent” range and to recognize that growth has not slowed further since the last FOMC meeting. President Hoenig is apt to remain the lone dissenter among the 11 members who can cast a vote at this meeting.
NOTE: In this morning’s “skinny” regarding the ISM manufacturing index, we debated whether to add a judgmental adjustment to the US-MAP reading for the strong composition of that report but ultimately decided not to. In retrospect, we should have. In our records, we will show this report as having a US-MAP reading of +15 (5, +3) rather than +10 (5, +2).
The financial markets are widely expecting—indeed assuming—that the Federal Open Market Committee (FOMC) will announce a program of quantitative easing at the conclusion of its two-day meeting on November 2-3. (The statement comes out around 2:15pm, EDT, on November 3.) Although we have written extensively on this subject in recent weeks (some might say ad nauseam), it may be worth summarizing our expectations for the FOMC statement, especially as some confusion has developed regarding what we think the FOMC will say on Wednesday versus what we ultimately expect will occur in the program that has come to be called “QE2.”
In our view, the key features of Wednesday’s policy statement will be:
1. An announcement of about $500bn in purchases of longer-term US Treasury securities over roughly the next six months. This announcement could come either as a $500bn announcement or as a purchase rate of $100bn per month for 5-6 months; between the two, we think the former is slightly more likely than the latter. In either case, the FOMC would make it clear that it stands ready to extend these purchases (which they typically call LSAPs, for longer-term securities purchases) if conditions warrant. We expect that to be the case and ultimately think LSAPs could reach $2trn over the next 18-24 months. However, as explained more fully in the October 22 US Economics Analyst this figure is based on our forecasts for inflation and unemployment as well as on several other factors, including the stance of fiscal policy. We do not expect the FOMC to embrace a figure this large in its announcement on Wednesday.
Some have asked whether the unexpected strength of the ISM report on manufacturing conditions in October (to which we have belatedly assigned a +1 judgmental adjustment in the US-MAP reading as noted above), will temper the FOMC’s decision. We do not think it will affect the final result, though voting members and other participants who harbor some concerns about QE2 may be more vocal at the meeting than they otherwise would have been. However, the fact remains that Fed officials need US economic growth to rise above its potential rate for an “extended period” (to borrow a phrase, and we don’t mean just six months) to push the unemployment and inflation rates closer to their “mandate-consistent” levels. Under these circumstances, the decision is not very data dependent, a point which was driven home by the fact that officials began talking openly about QE2 a month ago, ahead of many key reports on the economy.
2. This amount is in addition to the MBS/agency reinvestment program, which we expect to remain unchanged. Consistent with the FOMC’s directive at the August 10 meeting, the Open Market Desk is currently reinvesting $20bn to $30bn per month in repayments of principal on the agency securities and MBS that it bought over the past two years. This reinvestment is being done in Treasury securities and is highly likely to stay that way, at least for the time being. At a later date, it is conceivable that this reinvestment could be redirected back to the MBS market, but market sources suggest that this would not be a viable option for the next 3-6 months because servicers are not yet ready to issue new securities in sufficient quantity. Moreover, most FOMC members prefer the liquidity of the Treasury purchases. Hence, in total the Open Market Desk would be acquiring $120-$130bn in Treasury securities each month plus whatever additional reinvestment might be forthcoming if lower rates induce even faster mortgage prepayments. We estimate that net acquisitions of this magnitude would reduce the amount of coupon securities held by private institutions and investors slightly over the next six months. From November through April, we currently project net issuance of coupons at about $640bn, or just over $100bn per month.
3. Some indication that the new LSAPs will tilt toward purchases of longer duration Treasuries, including some 30-year bonds. Thus far, in QE1 and the recent reinvestment program, the Open Market Desk has concentrated its purchases in the 2- to 10-year sector. While we think purchases at all maturity points will continue in order to keep some self-liquidating element to the Fed’s Treasury portfolio, at the margin we expect the Open Market Desk to increase the duration of its purchases. If this is their intent, it is unlikely to be fleshed out in the statement itself, other than perhaps to refer to “long-term” Treasury securities rather than “longer-term” securities, which historically has meant from 2 years on up. Details would be left to the New York Fed to communicate, possibly in a supplementary statement on Wednesday or Thursday.
4. The FOMC may try to strengthen the rate commitment language. For some time, its policy statement has included the following sentence: “The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” This commitment was widely read to mean that rate increases were off the table for six months—but not necessarily more—during the time when market participants and many Fed officials were focused on developing the exit strategy from the extraordinary measures taken in 2009 and early 2010. More recently, the slowing in growth and the Fed’s consideration and imminent adoption of more easing measures has convinced many observers that the “extended period” is currently a lot longer than six months. As a result, the OIS curve has flattened out over the 1-year horizon, beyond which it appears that some expectations of rate increases persist. This still seems unreasonably soon given: (a) the committee’s overt statement in September that “[m]easures of underlying inflation are somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and inflation,” which we interpret as a backdoor strengthening of the commitment to keep rates low, and (b) the fact that the FOMC is about to embark on a significant QE2 program. Accordingly, the committee may alter this language in an attempt to make it clear that such expectations are still unrealistic, as part of a general strategy to reduce longer-term rate expectations. We are uncertain exactly how they would do this, but Fed officials have proven to be clever in the past in matters linguistic. One possibility that has occurred to us is to tie the “extended period” to the maintenance of both an exceptionally low funds rate and a large balance sheet. This would make it clear that a “normal”[could talk about maintaining exceptionally low rates and an unusually large balance sheet for an extended period]
5. Virtually no changes in the paragraphs covering recent economic and inflation developments. As we read these paragraphs, we see only two spots that need changing. One is to remove the word “somewhat” from the foregoing sentence on underlying inflation. Chairman Bernanke pointedly did so in his speech at the Boston Fed on October 15, and it would seem odd for the statement to backtrack on this in light of recent very low readings on core inflation. Second, in the opening sentence of the entire statement, the committee observes that “the pace of recovery in output and employment has slowed in recent months.” This should be rephrased to indicate that there has been no further incremental slowing. In line with this, we do not think the staff would have reduced its forecast materially since the September meeting, though that will not be evident until the minutes are released on November 24. At that time, we will surely find that the committee itself has become more pessimistic since its last forecast round in late June.
6. And only one dissent, most likely. While the upcoming session is apt to involve intense debate within the committee, only three regional bank presidents are known or strongly suspected of harboring strong objections—Messrs. Hoenig of Kansas City, Plosser of Philadelphia, and Lacker of Richmond, though Richard Fisher of Dallas might also be on this list. Mr. Hoenig is the only one of this group on the current voting rotation, and he is sure to lodge his seventh consecutive dissent.
Ed McKelvey
»
- 9376 reads
- Printer-friendly version
- Send to friend
- advertisements -
But what's the T-stat Ed?
Whats this about boring bond purchases? CNBC gals have been gushing for 2 months about how QE2 was to be a $4 trillion at least diamond encrusted extravaganza Wall St party.
Markets weren't pumped from DOW 9,900 to 11,300 based upon $500 billion Q/E2 bond purchases.
Who is supposed to be fooled by the FED becoming by far the biggest owner of its own Bonds? Has everyone lost their fuckin minds?
No, it was based on HFT and 10x leverage but the trick is getting old. QE2 is extra on top of all that.
that was the ppt's doing.
'Twas the PPT's doing', OK based upon what fuel? $4 trillion Super Sweet 16 party money drop on Wall St.
Where is it?
Hey you guys can be fooled by the bait and switch BS Im not and I dont think anyone else will be either, everyone is sick of Bernankes bullshit.
SheepDog...
No one is supposed to be fooled by the FED or anyone else.
- Are the equity markets built upon a corrupt foundation? Yes
DoubleSpeak: "The Equity markets are poised to go up up up." -- a la Jim Cramer
- Are the top 5 banks holding assets on their balance sheets at 100 cents on the dollar that aren't worth half that? Yes
DoubleSpeak: Banks have a liquidity issue solely based upon time. Given a "reasonable" amount of time these banks are in great shape.
- Is the Fed balance sheet just as toxic? Yes
DoubleSpeak: The Fed is the only thing that brought us back from the brink.
- Is the Treasury making loans backed by electronic nothing? Yes
DoubleSpeak: We have no intention of debasing the US dollar - Timothy Franz Geithner
- Is the legislative branch creating more trillion dollar entitlements (social and corporate)? Yes
DoubleSpeak: Saving the automobile industry is the number one issue...Healthcare is the number 1 issue...Saving the financial industry is the number one issue.
- Is the judicial and executive branch turning a blind eye to corruption?Yes
DoubleSpeak: Silence
Does any of this matter to the power elite? Hell yes, but they have to practice DoubleThink - the act of simultaneously accepting as correct two mutually contradictory beliefs.
The second DoubleThink stops, they know the financial system stops a la GLOBAL RESET.
They've started on a path that has eliminated all other options. It's completely binary now.
Nice post, I think all the suppositions that 'Well, looks like this just goes on forever now, the 'new normal'...dead market -0- retail, economy only based on money printing Q after Q from the FED'..I rather think it ends quickly. This is for an endgame, to get past some point 'todays elections?) not to be the new USA economic model of printing to buy our own bonds.
Thats all I mean.
The ability to predict precisely what will show the nudity of the emperor is both fascinating and terrifying. I'm as frustrated as you are about watching the slow motion train wreck.
It's also difficult to feel abstracted from this mess when your savings and children's future are on the line. I wish I could believe the elections will matter but (although I voted) I have no hope that they will make a difference.
In the end I think this is a math problem. An unlike those that can make a difference, I know that 2+2=4 not 5.
Good thoughts!
The Fed isn't becoming the biggest owner of its own bonds. It is becoming the biggest owner of US Treasury bonds. The Fed isn't part of the Treasury. It's not even part of the US government. It is privately owned and mostly european owned. It can create UNLIMITED amounts of dollars to buy these treasuries with. Any politician that tries to take the money creation power back away from the Fed and put it back to the Treasury where it belongs will be taken care of by a "rogue gunman".
Battleaxe I refer you to http://www.presidency.ucsb.edu/ws/index.php?pid=59049
Presidential Order 11110 - Kennedy, June 4 1963. He was gone by Nov.
From http://coyoteprime-runningcauseicantfly.blogspot.com/2010/09/jfks-execut...
The treasury also began printing its own money under Lincoln in 1861, with the same result.
You need to put a countdown to QE2 clock up on the home page in juxtaposition to http://www.usdebtclock.org .
2nd
While we are on the topic. I would like ZH to consider an updated design. The portal concept is a very nice layout option. Let's discuss.
http://www.markit.com/cds/cds-page.html
QE2 tomorrow may disappoint - why announce number when you can give a small number and a strong probability of a future unknown -- this whole market runs on these "maybes" from a few people...so broken
edit: announce (a big) number
We may know nothing tomorrow, they may just defer again.
Oh if THAT happens, its definitely over, end of markets see ya at DOW 6,500.
I agree.
... 6,500... that's so 2009!
The dates may change, but bullshit always remains smelling the same.
So, I wonder how many financial institutions can survive once the 10 yr hits zero? Or how many insurers once the 30 yr follows? Oh wait, that's where the corporate world steps in, borrowing against their assets until they have none.
Printing Money Bitchez!
Must save banker bonuses at all costs. Self-serving bastards.
If the FED is buying long term treasuries with QE2 then the FED is betting deflation will win out and they will make a killing on those treasuries.
Who will they sell them to though? Same as the trillions in MBS and stocks the FED has bought. WTF who will they ever sell them to? And isn't Bernanke in his laboratory desperately trying to get inflation alive? Personally, I think this all gets thrown upside down quick.
If Bill Gross isn't going bullish on margin why would anyone else?
BIS, IMF, Worldbank or some other yet to be determined global entity. These "assets" may not have a cash-out value, but are the receipts for the IOUs that have enslaved the world. I'm guessing they will become some sort of reserve to form the basis of the next round of fiat fun.
Since POMO and "other" financial "means" did not stop deflation, this, my fellow poster, might just happen! No wonder Pim(p)co's Gross is buying himself to the hilt in bonds!!! To me it always was a deflationary problem since all that air-dough went to the banks not the "system" nothing trickled down anywhere but the Hamptons and Teterboro Airport!
The fed can only cover their costs. The remainder of any profits are returned to the
US Treasury.
So....they can not profit, and it cost them nothing to buy. (No cost basis.)
This is not a statement in support of the fed however.
Free up the interest rate market! Step aside Ben.
FED keeps 6% of all profits.
Your source?
If they do that's not a bad cost plus deal.
Where do you and I get 6% guaranteed?
http://www.globalresearch.ca/index.php?context=va&aid=10489
paragraph 3
Good link. Thanks.
what is the over/under on the number of days before the Fed talks about QE3? 60? 90?
I have no idea why QE2 is even necessary with so many key stocks making new highs.
Especially deep cyclicals like Air Products.
TPTB are using the "real economy isn't getting better" media blitz excuse to hold off public anger so they can continue to pump as much money as they can get away with into their pockets before the rabble realize they're getting stuck with the bill and getting NOTHING for it and get pissed enough to try to do anything about it.
agreed, short term turbo charging does not produce long term structual benfits
although pushing the 30 year rates down may help re-fi rates, the risky underwater mortgages will not get re-fi even if rates are negative.
financial games will not renew the US economy, there needs to be investment in innovation. Not just software, gadgets and internet
The market is acting like a typical POMO day. Maybe POMO hasn't been the reason for the rally.
Au contraire mon frere, monsieur Durden. The Fed most likely be vague about the extent of QE2, at least to public perception. The amount of "assets" it will purchase, and therefore the leakage (spewing) of printed money will be difficult to quantify, and delibrately so. That is why people will have to read your blog to get an idea of how much this is really going to cost us.
PS: please try to keep it simple. What chance do we naive, financially unsophisticated people ever have of learning what in hell the FED is doing to us.
I think every opinion should be qualified with a "good until date" - especially mine.
Did they just say QE decision is data point independent? WTF?
Why do people think that 500billion in six months is a small amount? That equates to 2 trillion in two years, thats an increase in the rate of monetization, no?
Yeah, they have everyone numb to the numbers.
"Gee, how much money should we print up and hand out to ourselves and our buddies? $4 TRILLION, or only $500 billion?"
This still seems unreasonably soon given: (a) the committee’s overt statement in September that “[m]easures of underlying inflation are somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and inflation”
I think in this "maximum inflation" must have a freudian lapsus.
This still seems unreasonably soon given: (a) the committee’s overt statement in September that “[m]easures of underlying inflation are somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and inflation”
I think in this "maximum inflation" must have a freudian lapsus.
The bucket has... a few holes. QE2 might stem the loss from one, but there are fiscal imbalances which, unknown till now, simple size cannot correct. QE2 blows the global trade agreements out of the water- no nation is going to be able to plan its budget without knowing what the state of its current account will be..We think of QE2 as being an injection- I don't think that's helpful- because it isn't going to displace any 'pain' if you like. Things will move around it, but the real equilbrium isn't going to change anywhere where its visible; bank balance sheets- not relevant, not for a year. ..QE2 will be the opposite, it's like a hole being made - it's going to suck activity through it. Chairman Bernanke understands this, that's why it's a rolling system..he knows this is going to rock a fairly fragile boat. The Chairmen of the Banks know this - the real problem we have is that they don't care! Power on that scale should never be in the hands of one who has insufficient Compassion, we have highly educated people throughout the elite, many of whom are in open revolt, yet..the simple issue of having the right man for the job has not occurred to them. !?!
The numbers are clear on the consequences: that employment will be destroyed globally. There will be uprisings, there will be blood and it will be proportional these soul-destroying policies. The worse these get, the greater will be the reset: the greater the enforcement of minimal inequality. And it is close...
Robot, we are barely at the 1998 SPX high with a shrunk divisor. We are barely Dow 10,000 basis the 2000 index and quite likely lower basis 1998, 3 stocks having basically gone to zero. Earnings have been inflated and dividend yields are pre mania record lows. I suspect the street knows the pension funds are married to a model that they either attempt to live with in constant discontent or they have to admit they are broke. The bag held is going to be a light one a few years from now, but a costly one while the sellers are going to laugh all the way to the bank. The funds will realize their error on the bottom and sell out.
Bernanke will be overthrown by the next election. People can't retire with the hammer of overvalued stocks, low dividends, excessive debt and no interest on their savings. He will be lucky to avoid prison or even execution for treason. There are lies, damn lies and statistics and Bernanke seems to be the master of all of them. He must have read Aesop s fable about the Great Depression, but I suspect he is merely cover for debt crimes committed against the United States people.
The whole thing is nothing but phrenology.
Three points.
1. Fed will not announce specific numbers. They may announce intentions, direction, but no specifics, in magnitude, time or mechanics.
2. Beware the lame-duck Congressional session. Woe be to taxpayers when ousted lawmakers are permitted to take their frustrations out on revised tax legislation. And with impunity, I might add.
3. Genius of Republicans to throw McCain to wolves, without a credible running mate, and to (implicitly) support Obama. Now Obama is the fall-guy, the economy really tanked on his watch, as he exploded government spending, and a frustrated and angry electorate votes Republicans in (net: 112 loss for Dems in House; 14 in Senate; 16 in Gubernatorial statehouses). Just in time for reapportionment; weight of demographic trends and Republican control may exile Democrats for another decade.
Blaise
We have all cheap uggs for sale in our website http://www.salesuggs.org ! You can meet all your needs for UGG hot sale here and will certainly be satisfied with the top quality at low price. All UGGs on sale are made with the 100% genuine sheepskin from Australia and are hand-made in our own factory completely. So you need no to worry about the quality and the cheap UGGs for sale are all to be delivered in free shipping. Enjoy the large discount!
1.
UGG Amberlee
|UGG Kensington
|UGG Elsey
|UGG Langley
|UGG Roxy Short
|UGG Roseberry
|UGG Oliviya
|UGG Raya
UGG Brookfield Short
Welcome to our website-- http://www.ugghots.com , we are making the promotion for many uggs now.Here is a chance for you that you want to buy good ugg classic boots by cheap price.At present our hot sale snow boots has :
| UGG Delaine Boots
| UGG Gaviota Boots
| UGG Gissella Boots
| UGG Evera Shoes
| UGG Upside Boots
Find ugg and Australian sheepskinAuthentic Ugg boots, learn the history behind the Cheap ugg boots, and when and what to wear with Ugg boot, as well as cleaning and caring for ....we sell new style Ugg boots on sale,You can find the wholesale discount Ugg boots here.