FOMC Minutes: More MBS Purchases Coming

Tyler Durden's picture

Gold jumps, dollar drops on FOMC minutes. The market now believes gold is a better inflation hedge than the dollar.

More MBS purchases coming:

The Committee emphasized that it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. A few members noted that resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the Committee’s large-scale asset purchases and continuing them beyond the first quarter, especially if the outlook for economic growth were to weaken or if mortgagemarket functioning were to deteriorate.

Fed thoughts on Reverse Repos:

The staff presented another update on the continuing development of several tools that could be used to support a smooth withdrawal of policy accommodation at the appropriate time; these tools include executing reverse repurchase agreements (RRPs) on a large scale and implementing a term deposit facility (TDF). To further test its RRP capabilities, in early December, the Desk executed a few small RRPs with primary dealers, using both Treasury and agency debt as collateral. These transactions confirmed the operational capability to execute triparty RRPs on a larger scale if so directed by the Committee. The Desk was continuing to develop the capacity to conduct RRPs using agency MBS collateral and anticipated that this work would be completed by the spring. In addition, the Desk reported that it was exploring the operational issues associated with expanding potential counterparties for RRPs beyond the primary dealers. Staff also reported significant progress in developing and implementing a TDF. The staff noted that it planned to ask the Board to approve a Federal Register notice requesting public comments on a TDF and summarized the contents of the draft notice.

Financial situation review:

Market participants largely anticipated the decisions by the Federal Open Market Committee (FOMC) at the November meeting to keep the target range for the federal funds rate unchanged and to retain the “extended period” language in the accompanying statement. However, market participants took note of the Committee’s explicit enumeration of the factors that were expected to continue to warrant this policy stance, and Eurodollar futures rates fell a bit on the release. In contrast, the announcement that the Federal Reserve would purchase only about $175 billion of agency debt securities had not been generally anticipated. Spreads on those securities widened a few basis points follow-ing the release, but declined, on net, over the intermeeting period. Incoming economic data, while somewhat better than expected, seemed to have little net effect on interest rate expectations. Indeed, the expected path of the federal funds rate shifted down somewhat over the intermeeting period. Consistent with the decrease in short-term interest rates, yields on 2-year nominal off the-run Treasury securities declined slightly, on net, over the intermeeting period. In contrast, yields on nominal 10-year Treasury securities edged higher on balance. Inflation compensation based on 5-year Treasury inflation-protected securities (TIPS) increased, apparently owing in part to an announcement by the Treasury of a smaller-than-expected amount of issuance of TIPS next year. Five-year inflation compensation five years ahead also rose, and was near the upper end of its range in recent years.

View on inflation:

The staff forecast for inflation was nearly unchanged. The staff interpreted the increases in prices of energy and nonmarket services that recently boosted consumer price inflation as largely transitory. Although the projected degree of slack in resource utilization over the next two years was a little lower than shown in the previous staff forecast, it was still quite substantial. Thus, the staff continued to project that core inflation would slow somewhat from its current pace over the next two years. Moreover, the staff expected that headline consumer price inflation would decline to about the same rate as core inflation in 2010 and 2011...Some noted the risk that, over the next couple of years, inflation could edge further below the rates they judged most consistent with the Federal Reserve’s dual mandate for maximum employment and price stability; others saw inflation risks as tilted toward the upside in the medium term...Participants noted that any tendency for dollar depreciation to put significant upward pressure on inflation would bear close watching.


Most participants anticipated that substantial slack in labor and product markets, along with well-anchored inflation expectations, would keep inflation subdued in the near term, although they had differing views as to the relative importance of those two factors. The decelerations in wages and unit labor costs this year, and the accompanying deceleration in marginal costs, were cited as factors putting downward pressure on inflation. Moreover, anecdotal evidence suggested that most firms had little ability to raise their prices in the current economic environment. Some participants  noted, however, that rising prices of oil and other commodities, along with increases in import prices, could boost inflation pressures going forward. Overall, many participants viewed the risks to their inflation outlooks as being roughly balanced. Some saw inflation risks as tilted to the downside, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. But others felt that inflation risks were tilted to the upside, particularly in the medium term, because of the possibility that inflation expectations could rise as a result of the public’s concerns about extraordinary monetary policy stimulus and large federal budget deficits. Moreover, a few participants noted that banks might seek, as the economy improves, to reduce their excess reserves quickly and substantially by purchasing securities or by easing credit standards and expanding their lending. A rapid shift, if not offset by Federal Reserve actions, could give excessive impetus to spending and potentially result in expected and actual inflation higher than would be consistent with price stability. To keep inflation expectations anchored, all participants agreed that monetary policy would need to be responsive to any significant improvement or worsening in the economic outlook and that the Federal Reserve would need to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace.

Full FOMC report:


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Hondo's picture

I believe the fools have driven us over the cliff already.

Shameful's picture

We are living in a Looney Tunes everyone, no matter what do not look down!  After my study of Wile E. Coyote (super genuis) you only fall when you look down.

cougar_w's picture

"you only fall when you look down"

This will the the title of a book someday.

Anonymous's picture

You've got it wrong, they're selling the USD because the Fed isn't worried about inflation. Rates are staying low.

lsbumblebee's picture

The staff intrepreted high unemployment to be the result of so many jobs that people simply can't decide. The staff forecast for inflation was unchanged, stating that rising prices were an illusion. The staff noted hair growing on our palms.

NoBull1994's picture

Rosie not looking so good....  again.

Scooby Dooby Doo's picture

I attend a play last year called "Confidence". As I sat in the audience the actor came out on the stage and sat in a King Edward chair. After about 5 minutes the curtain went down, and 1 minute later it came up.

Mountains of neatly stacked bundles of currency surrounded the actor as he sat in the King Edward chair. He stood and cried out(in a very regal tone) "I have 700 billion dollars, it was just given to me by the Fed".

The audience gave him a standing ovation. Then they sat and watch him sit in his chair for the next 2 hours.

Question, will inflation affect the members of the audience?

trav7777's picture

Answer: yes.

There is more of them and they will demand it. 

People do not understand what will happen if the deflation proceeds into second gear.  That is what happened in GD1 and the response was brute force inflationary devaluation, by 60%.

The electoral dynamics make the election of someone who will print money and actually heli-drop it inevitable.  The mechanisms of this are already in place through UE benefits and rising gov't employment.

When the productive economy has been destroyed, and everyone is a gov't worker, ONLY printing will provide nominal revenue.  There will be no tax base.  We're kind of already there in a way.

The government will avoid de jure default by any means necessary.

Oso's picture

Fed has lost control.  QE 2.0 coming up.  What are the goddamn senators and congressman doing as oil lurches upwards, blaming A-rabs???

Bam_Man's picture

The ongoing purchase of Agency MBS IS QE 2.0.

See my comment below.

Assetman's picture

Senators, you say?  Look at Christopher Dodd as an example... they are planning their exit strategies.

Do you really think the Fed is going to wait for "significant economic deterioration" to see more MBS purchases.  They see what they want to see, so even 4% GDP growth may translated into "economic detrioration".  Of course, Uncle Ben will still see no inflation when oil is at $125/bll and gasoline is a $4/gal.  Putz. 

If the Fed is intent on continuting to subsidize losses through overpaying for MBS, there is going to be significant political damage before we get to November.  The Dems are going to lose their seats and a few incumbent members of the Red Pill Party will get theirs as well.

We'll look back at this and discover that Dodd was pretty smart for getting the heck out of Dodge and getting a nice ranchero next to GWB in Paraguay.

And yeah, I think it will be $ denomiated oil prices that will be the breaking point from a J6P perspective.  They may not understand the intricacies of the massive bailout, but they do understand filling up their truck with $4 a gallon gas.

berlinjames02's picture

Actually Dodd will probably move to Ireland. He already owns property there, which he bought for roughly half the market value from a 'friend'. Dodd negotiated the 'friend's' pardon pardon from President Clinton in 2001.

I am unsure of the extradition agreements between the US and Ireland. I wanted to post this for Marla's poll, but I was in transit at the time.


Brett in Manhattan's picture

Buying MBSs? I thought the housing market has already bottomed and the future is so bright Bernanke has to wear shades?

Those MBSs should be selling like acid at Woodstock.


Anonymous's picture

"The Desk was continuing to develop the capacity to conduct RRPs using agency MBS collateral and anticipated that this work would be completed by the spring"
I guess the Fed is much more of a "green" eco-friendly orgnaization that I ever thought. Talk about recycled garbage. Jesus Christ.

They have thrown a shit-ton of money at the mortgage market to support price levels in order to disrupt any price discovery of the related securities of the bank's balance sheets. If this is the leg of the table that is supporting the banks from imploding, they how in the hell is the Fed going to be able to pull that away?

I am not a sophisticated investor, but I can't see how they will have the will to remove their support. Right?

Sancho Ponzi's picture

I say let's demolish all of those hideous 3500-5000 sf McMansions people can no longer afford and build some nice, energy efficient 800-1200 sf urban homes. When things get screwed up, sometimes it's better to cut your losses and start over.

Anonymous's picture

I will immediately buy a house if they build with 1200sf which reduces cost by half.

trav7777's picture

still too expensive.

housing prices need to fall by half at least and then normalize around that.  Homeownership should not imply lifelong debt peonage

Bam_Man's picture

Of course they are going to continue buying MBS.

Where do you think the money is going to come from to absorb this year's $2.5Trillion+ in new Treasury issuance?

The Fed will own (monetize) the entire Agency MBS market if necessary to keep Treasury auctions from failing.

And no one will be able to accuse them of "monetizing Treasuries".

ghostfaceinvestah's picture

Only $4T to go, why stop now?  they can probably add another $1.5T this year, another $1.5T in 2011, and by 2012 they will only have to reabsorb the runoff.  Why not?

bugs_'s picture

Soon our balogne won't even have a first name anymore.


TheGoodDoctor's picture

What a joke. They knew they were going to have to buy more but said the program would be ended. I don't know what to believe anymore.

Bam_Man's picture

Hint: Don't listen to what they say. Watch what they do. And think like a criminal.

AN0NYM0US's picture

Don't listen to what they say. Watch what they do.


my initial reaction was to agree but in fact they have been doing what they said they would do at least that is what Tepper believed:

That was the case in early 2009, he says. Shares of banks such as Citigroup Inc. and Bank of America Corp. were collapsing on rumors they would be nationalized. On Feb. 25, the U.S. Treasury put out a white paper and a term sheet on its Web site for the government’s Capital Assistance Program. They said the preferred stock the government was buying in the banks would be convertible to common shares at prices far above where they were trading -- 37 percent higher in the case of Citigroup and 21 percent for Bank of America, according to Bloomberg calculations.

For Tepper, 52, that meant it was time to buy. “If the federal government was putting out this paper, they weren’t going to nationalize the banks,” he says




Assetman's picture

Interesting comment.

What they are doing: Buying MBS.

What they are saying: Will buy more MBS.

Does this mean that the Fed really won't buy more MBS-- or wait for very significant economic deteriroation, before actually putting the talk into action?

Who really knows?  And don't you just think that all the confusion with the doublespeak is exactly the way the Fed wants it.  So far, it's kept most asset values in a pretty tight ranges-- even though the ripoff of taxpayers continues in full force.

HEHEHE's picture

I thought they said they were ending all their silly prop up programs by March:)  How silly of me to have believed them.

mrmortgage's picture

FED has/will continue buying. Real bank/insurance rates for 30Y paper are in the low to mid 6% range for the MOST qualified borrowers with ample equity(20%+ min). The notion of 90-100% loan to value people getting rates in the low to mid 5% is a gift from the FED/US Citizens otherwise they would be laughed out of their local bank or be charged a rate of 6.50-7.50%. I know because we are backed by a credit union and have rate sheets from several dozen other institutions.


QE and housing is a policy instrument that has to continue otherwise the wheels on the bus will fall off.


jm's picture

Kicking the can like this just makes it a matter of time before the wheels go.

Seems that they don't really care what mortgage rates look like at this point, as no one can buy when the cost of living eats up collateral needed to secure a loan in the first place. 


trav7777's picture

This is the Fed's problem.

Dollar devaluation needed to stave off the deflationary implosion will make real assets, such as oil, increasingly expensive, thereby reducing free cash flow for credit service.

There is no two ways around that housing prices HAVE to fall.  The problem is that the synthetic economy used too many of them as material event triggers in the derivatives.

Only runaway inflation could convince someone to lever up right now.

faustian bargain's picture

Yeah but who wants to keep rolling when you're headed for a cliff.

cougar_w's picture

If rolling is how you measure success, you roll.

The lethal failure is not that they do not see the cliff, because they probably do. The failure is that they do not know how to do anything except roll.

My guess is that all empires expire in exactly this way.


Anonymous's picture

I'm beginning to like Greenspan more everyday. At least he raised interest rates because of fear of inflation. These clowns don't acknowledge shit.

Anonymous's picture

The FOMC is hell bent on destroying the currency and therefore the economy. Now they want to buy even more MBSs. Duh! whoever saw that coming. Oh the economy is doing fine now - got Bernanke man of the year didn’t it? BUT we need more houses! so he is going to keep buying MBSs and print more money. Nothing, absolutely NOTHING has been learnt from the experience of BLOWING BUBBLES IN THE LAST TEN YEARS.

cougar_w's picture

[absolutely NOTHING has been learnt]

You are incorrect, sirrah. What has been learnt is that you have to keep blowing bubbles.

Welcome to the nightmare. As it is with life itself, nobody is getting out of this alive.


Anonymous's picture

We have all failed to stop them or even slow them down. We get what we deserve.

cougar_w's picture

"banks might seek, as the economy improves, to reduce their excess reserves quickly and substantially by purchasing securities or by easing credit standards and expanding their lending"

Wait. Isn't that what they WANT the banks to do with all the excess money? How else does monetary injection work to boost the economy?

They make it sound like a problem to watch out for. So I guess they never really intended the $700B to hit the economy after all. They should get their story straight.

john_connor's picture

Maybe the Mayans were right.

john_connor's picture

It is about time to exit this country stage left.

cougar_w's picture

Or you can relax and let the country exit out from under you, stage right.

Same outcome either way.


john_connor's picture

Oh I am relaxed, and I will be more relaxed when I am sitting on an island somewhere before the country exits from under me.

Bam_Man's picture

The more physical gold I buy, the more relaxed I get.

Try it. It might work for you too.

Shameful's picture

What island in the sun did you have in mind if you don't mind me asking?  I'm still eyeing Singapore and hearing good things.

SteveNYC's picture

Australia. Big island, not a lot of people. Perfect.

Assetman's picture

They have their own housing/debt issues, just not a perverse as the US.

I'm thinking New Zealand.

Shameful's picture

Oddly enough that's the place I talked my parents into.  I don't like the long term outlook but they don't want to learn a new language and I think the Aussie Dollar will hold up better then most.  Now just waiting on my mom to transfer there :)

john_connor's picture

New Zealand and Singapore are candidates.  I have to do more research but the idea of doing this is gaining traction in my mind. 

trav7777's picture

World record household debt and an economy that depends upon China building empty cities.

They basically already spent 10 years' worth of expected growth.  Look at Australia's metrics and you see a country that has significant structural issues.

Find an energy exporter; all things revolve around that.

Norway or Brazil are my list, each with significant advantages and disadvantages.

Anonymous's picture

I don't get it.. Let's say the fed buys these things, then the people who sold it to the fed take that money and buy stocks/bonds/treasuries, etc.

ok - got that part.

Now, what would cause this to have to stop, short of the fed being audited? Why can't that circle just continue forever?