Whispers Of The Inevitable Unwind Of The Fed's SFP Program And The Ensuing $200 Billion Liquidity Injection Commence

Tyler Durden's picture

It was less than 24 hours ago when we first suggested that the Fed's Supplementary Financing Program is about to end. In addition to providing a $200 billion debt ceiling buffer (which the government will fill up in about a month), we noted that the end of this program, which was previously introduced to gradually phase out the ridiculous (in Q1 2010) amounts of liquidity, would provide an additional $200 billion in excess liquidity over a two month period, or effectively doubling the impact of POMO, which monetizes roughly $110 billion in bonds per month. Specifically, we said: "We are confident the US Treasury will announce that beginning with the
week of February 14, it will no longer roll maturing 56-Day Cash
Management Bills, which means that for the ensuing 8 weeks, one on every
single Thursday, there will be a total of $200 billion in incremental
liquidity flooding the market, and probably sending stocks, commodities,
and everything else that is not nailed down into the stratosphere all
over again.
" Today, Bloomberg has a full story on just this topic, which discusses precisely the end of the program. It is safe to say that within 2-3 weeks, the SFP unwind will commence, and the market will price in another $200 billion in additional free liquidity, which in turn will lead to excess bank reserves surging to about $1.7 trillion in the next 4 months, 70% higher from where they are now. If you think the market is worried about inflation now, wait until June. And that excludes that virtually certain QE2+ announcement: there is no way that the Indirects can shoulder the burden of buying $3-4 trillion in US Treasuries over the next 2 years. The Fed will have no choice but to continue monetizing everything.

From Bloomberg:

The Treasury Department will probably reduce its borrowing on behalf of the Federal Reserve as the Obama administration and Congress battle over raising the U.S. debt limit, according to Wrightson ICAP LLC.

Treasury officials may shrink the Supplementary Financing Program, currently at $200 billion, to as little as $5 billion while the government’s debt approaches its $14.29 trillion threshold, said Lou Crandall, chief economist at Wrightson, a Jersey City, New Jersey-based research firm that specializes in U.S. government finance. Treasury Secretary Timothy F. Geithner said Jan. 6 that lawmakers must raise the federal borrowing ceiling in the first quarter or risk a default on U.S. debt and a loss of access to credit markets.

When the Treasury sells bills at the Fed’s behest through the SFP, it drains reserves from the banking system and makes the central bank’s job of controlling interest rates easier. The Fed said a year ago that the program, set up in 2008 during the midst of its efforts to prop up the financial system, is helpful to the central bank’s monetary policy goals and might be part of future efforts to withdraw economic stimulus. Treasury estimates the legal limit could be reached between March 31 and May 16.

“Time is running out on the SFP auctions, but there is little risk that the Treasury will terminate them without any advance warning,” Crandall said in a telephone interview. “If the debt ceiling drags on to the point where the Treasury must take more drastic steps to stay under the limit, it might eliminate the SFP altogether.”

So when is the advance warning coming? All signs post to next Wednesday:

The Treasury will provide a borrowing strategy update on Feb. 2, when it announces the amount of securities it will sell under what’s become known as its quarterly refunding. The SFP program is not listed as a topic on the official agenda for the Jan. 28 meeting of the Fed’s 18 primary dealers that takes place before the release of the policy statement.

For now the Treasury is keeping mum on the fate of SFP. Which probably means that one can frontrun the massive inflow of capital about to be unleashed.

Colleen Murray, a Treasury spokeswoman in Washington, declined to comment on plans for the SFP. In a Jan. 21 comment on the Treasury’s website, Deputy Secretary Neal Wolin called on Congress to raise the limit and said proposals to “prioritize” debt payments over other obligations would be “unworkable.”

Yet the core pretext for the unwind of the SFP unwind, extending the debt ceiling, is a joke. At best, it can prolong the agony by a few weeks:

The U.S. can’t avoid reaching the debt limit by reducing the budget as being proposed by some lawmakers, Geithner said. “The need to increase the debt limit would be delayed by no more than two weeks,” Geithner said in his Jan. 6 letter to Speaker of the House John Boehner, Senate Majority Leader Harry Reid and all other members of Congress.

The Treasury chief also said his department’s toolkit of emergency measures, such as tapping government retirement funds and suspending some types of intergovernmental lending, would delay a debt ceiling breach “by several weeks.” At that point, he said, “no remaining legal and prudent measures” would be available and the U.S. would start to default.

Which of course means that as we have long speculated, the only reason for the SFP end is to ramp the market even higher, and to provide it with an even higher drop off point for whatever "unknown" event the Fed has in store in order to unleash QE3, 4, and so forth.

Treasury would likely shrink the SFP before the limit is
reached, according to Barclays Plc and Deutsche Bank AG. The
Treasury has shrunk the SFP in two previous debt-limit standoffs
and then brought it back when Congress restored borrowing room.

We stand by our conviction that the last 56-Day CMB auction will take place in mid-February.

Trade accordingly.



Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Ragnarok's picture

It's like double mint gum! Twice the POMO = Twice the Fun

docj's picture

Anyone else remember Jolt Cola?

All the sugar and twice the caffeine!

Got through my undergraduate finals on that swill, but I never thought it would become the mantra of our how-can-we-fool-J6P-today national financial and economic policy.

hambone's picture

Anybody know where the Fed thinks they are taking us?  It would be one thing if it seemed they pulled the system from a free fall and then stabilized at some level.  Yet, these moves are so unsustainable, so inflationary it really seems to give creedence to the idea they are trying to collapse the present system?  Why else press on and on?  The stated goals of full employment and stable inflation seem wildly at odds with their actions.  Instead the Fed is attempting to create another massive bubble and subsequent crash...but why???  Who will benefit (few) and who will be harmed (many). 

This Fed is too smart (malicious?) to do this accidentally.  Seems planned and desired.  But why? 

What is really at play here???  This is more than more money for the massively wealthy...What is this???

Bubbles...bubbles everywhere's picture

It's not about where the Fed is taking us. It's a club...and you are not in it!

hambone's picture

Yeah, I don't know the secret handshake.

Still, what does the club need w/ more money???  More property???

They own the printing press - they can aim the Fed firehouse of liquidity at anyone they like at any time. 

So why create the next and greatest bubble and subsequent crash? 

earnyermoney's picture

The Fed has us on the highway to hell.

DonnieD's picture

They are taking us down the rabbit hole.

SheepDog-One's picture

Yes if aliens landed in this country and looked around for 5 minutes, they'd ask 'So why is the reason you are so blatantly doing all you can to destroy your own country at the fastest speed possible'?

Pegasus Muse's picture

Their demonstrated true allegiance is to the criminal international bankster syndicate, not to America.

bingaling's picture

The system has already collapsed ,the alternative is unfathomable . This will go on until it can't .They have cornered themselves in . The globe is overextended credit cards are maxed . The only ones holding this thing up is central banks around the world working together .If one breaks ranks game over the world deleverages .Everything else is a side show

Dapper Dan's picture

I feel this question that you ask Hambone is the most important and yet least contemplated.

I have a theory, but it is so chock-full of conspiracy theory, conjecture, speculation and intrigue that it would be discounted by most all on this (ZH) site.




Caviar Emptor's picture

This Fed is too smart (malicious?) to do this accidentally.  Seems planned and desired.  But why?


@hambone: They're doing all this because they're hopelessly locked in to what is now an antiquated set of policies that worked once upon a time 30-40 years ago but have reached the end of their useful life. Just like strict Keynesian fiscal policy before it, and others before that. Worse: stubbornly maintaining the same old policies is creating a set of realities in the global economy whereby the US is exporting inflation, while creating biflation at home. For them to change course or admit that their policies are harmful would put them all out of business and discredit their entire careers along with that of their prophet, Milton Friedman. 

They've created a global-scale excess of dollars through 40 years of "deficits don't matter". And the chickens are coming home to roost now that those dollars have reached a critical mass, right at a time when large economies in Asia are switching from saving to consumption. 

They also won't admit that their response to past recessions is no longer appropriate in the current context. In a post-bubble world deflation severely limits the level of demand in the US. But their policy of "re-flation" is only serving to raise the cost of living and doing business, without lifting the demand level since consumers remain mired in high unemployment, declining real incomes, declining anticipated retirement benefits and declining real estate values. 

They won't admit that biflation is real because of their narrow academic view of reality. It would mean that their policies have gone off the rails and are no longer applicable to current economic conditions. It would mean the end of their careers as "saviors of the world". 

whatsinaname's picture

But inflation is under control ? No ? I mean look at how crude oil prices are being controlled and soon to be bandied around as signs of NO INFLATION !!

Dow 36K well in sight!!

SheepDog-One's picture

Oil price is going down, but gas prices arent, not here anyway.

smlbizman's picture

give me 15 mins and i will take care of that inflation problem that doesn't exist..be right back

RobotTrader's picture

Ugly year for crude oil so far.

Even uglier for gold and silver.

Everyone seems to be front-running the end of QE programs, and The Ben Bernank to come out with some "fighting words" about inflation.

TonyV's picture

But but but you told us that people will buy a lot of jewellry now that things are hunky dory.

RobotTrader's picture

SAN FRANCISCO (MarketWatch) — Crude-oil futures settled at an eight-week
Tuesday after remarks by a key Saudi Arabian energy official stoked
traders’ concerns that supplies would be increasing.

Crude for March delivery
 fell $1.68, or 1.9%, to $86.19 a barrel on the New York Mercantile Exchange. The close is the lowest since Nov. 30.

TheGoodDoctor's picture

WTF RT? You don't believe that printing money and falsely boosting the stock market will result in inflation of PM's et al?

bob_dabolina's picture

Uhm...Or, if you broaden your horizons a bit you will see that ALMOST every January going back 15 years crude sells off....as does the Russell2k and many other assets.

bingaling's picture

I am always amazed that when the head of a central banks speaks it is treated like Moses coming down from the mount . In reality ,often the words of the bankers never match their actions .

What was it Trichet recently said to cause the euro to rise " we have a close eye on inflation ." They can't stop EZ money just like China ,the US ,England ,Japan,etc. can't

trav7777's picture

was my initial impression as well, but there sure seems to be no "flight to quality"

The TLT has been far worse than POG or oil.  If they end QE, there will be no bid on anything

whatsinaname's picture

So they dont need to print more dollars to generate this additional 200B ?

SheepDog-One's picture

Bunch of elephants dancing on the head of a pin is what I see.

satansanus's picture


IS ZH synchronized with MSM ?

random shots's picture

All ZH has done is pull back the curtain a little bit and give us kiddies a peek of the nipple slip. You think this is new? That it has only gotten fucked up in the last ten years? It hsa always been like this!

Tyler, you have done a great job exposing how the sausage is made...it is time you take it to the next level and force credible action. If not, you run the risk of turning into that guy who rambles about how the man is keeping him down but never does anything about it.

hambone's picture

I fear if we don't change this, turn it around, some "outsiders" who appreciate our government even less will more than offer to help punish the US for the scenes like in Cairo being seen round the world. 

Imagine (doesn't take much) the outrage of those living now and soon to be in privation, starvation, while we support their politically friendly rulers.  And they've no maintaining middle class dreams to hold onto...they may have nothing to lose and everything to gain from "taking action".

The Fed "digital printarama" coupled w/ more of the same foreign policy is sure to bring some unwanted guests for our F'ing up their lives.

traderjoe's picture

I do not believe it should be left to one person to force credible action. It should be the masses the rise up and take back their government and their communities. 

ZH does well to report in its own fashion, making the occasional suggestion on enforcement or policy issues. To propose or incite anything further would stunt the reader from coming to their own conclusions. 

In both senses, I believe what we need is less leadership and more community. Anarchy is the word I would use, but not in the traditionally disparaging way. In the concept of self-rule. 


Punderoso's picture

Rise up? Don't you realize yet that you are Winston Smith living out 1984, and the proles are never going to do anything.  However, the Ministry of Love, Ministry of Truth, Minstry of Plenty are evolving as we speak. In ten years time Zerohedge will have already been shutdown for hate speech, treasonous views, and offensive and outlandish rhetoric.






John McCloy's picture

Ron Paul: "The Fed rescued the banks not the American public and their 23% unemployment"


dick cheneys ghost's picture

exactly. question is, will the banks ever be solvent?

Sudden Debt's picture









I'm not a liar!




not this time at least...






boob... GOD I LOVE BOOBS!!

willien1derland's picture

+100 - I like the sarcasm - with a rant like that you can provide the third Republican response to the State of the Union tonight or should I say State of the Onion as the Onion could not find a better venue for material than tonight's spectacle - Save the TaTas Folks -

Flapjackmaka's picture

Gold is getting killed., stocks up How long can this asses keep it up?

SheepDog-One's picture

So basically the FED's plan is to raise the market higher, so they can pull the rug out from higher levels? Oh, thats a great plan...everyone onboard buy for the plunge!.

gwar5's picture

This is getting to be like Kafka painting a Dali.  $200 Billion on top of ongoing POMO?

Billions for Wall Street while poor people fight over food on the other side of the planet?

Nothing strange at all about wanting to pour gasoline onto an open fire




Cheesy Bastard's picture

painting a Dali

Soon, very soon, we will not have the Monet to buy Degas to make the Van gogh.

A Texan's picture

Very clever...and also true.

sushi's picture

So true that I am going to just sit here and pick ass so.

EscapeKey's picture

Perhaps the idea is to "fatten" up the PDs, so they can carry on buying virtually unlimited amounts of treasuries, despite QE "officially" having ended?

And then, 12 months down the line when excess reserves have been depleted, the Fed will suddenly announce they THOUGHT the economy was recovering, but they need to do another round of QE.

plocequ1's picture

I must say. The HFT machines must of been fine tuned to make the market look like there is that special human element. Brings back memories.Very nice touches.

SheepDog-One's picture

Gold and oil prices dropping, but you cant buy it any cheaper...exactly how much longer can they keep this total farce running? I dont think its very long at all myself. And no one seems to be concerned seeing the FED firemen running into the burning building with more gas cans. Nah its all good, party time.

Dr. Sandi's picture

I just returned from NW Territorial Mint in metro Seattle on a little silver gathering mission.

NWT Mint buys, sells, melts and mints silver under their own name and for Pan American and others.

They told me they are almost out of silver. At one of the biggest private mints in the U.S?

Fortunately, the spot silver prices were DOWN so I could buy more silver than expected.

So we have a serious disconnect here. Shortage of real silver and, if price is any judge, an apparent excess of paper silver.

My advice to anybody thinking of buying on THIS DIP: get the order moving NOW!! This was my personal confirmation of those stories from around the world that dealers are short of silver. Even my favorite mint is short of silver.

Hang on, the ride is getting exciting right up ahead where we roll into the loop-de-loop segment.

trav7777's picture

anecdotally, the only real dealer in the DC area was asking known customers to sell him their silver at above spot during the price crash of 2008.  He was scrounging through inventory to find much of anything, both on the gold and the silver side.  One customer came in having prepaid on some 1oz bars and he had to refund or give the guy kangaroos instead; too many orders and not much supply.  Digging into shoeboxes for a few halves and quarters here and there, whispering to the repeat buyers that he'd pay spot+$1.25 for Ag ozs and heard him on the phone trying to call other dealers to find inventory to sell.

Perhaps there were problems upstream but it would seem that wholesalers supplying the dealers would have hedged against price movements.  If a retail guy was really willing to pay over spot (what he is supposed to be able to get it for at wholesale), then it's not likely there was inventory hiding in the back that he didn't want to sell for a loss.

Misean's picture

Ah, even more hot money to go sloshing and cascading around the globe, where it stops no body knows! Step on up folks, place your bets!

sabra1's picture

look at all the inflation being exported now to all these countries, causing massive food fights! if i were the USA, i would change my address so no one would be able to find me!  

Sudden Debt's picture

They don't care if the markets go up or down.

That's not why they put money in the system!

Volume is what they need.

And the higher the market goes, the lower the volume.

A drop in the market by 10 to 15% would generate enough volume to refund the banks for another 12 months.

SO =.....