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More "Permanent" OMO Buys - Where's the Exit?
On a sloppy day where the bonds are on a tear the Fed buys some more. The bid to cover (reverse) was 2-1. This Treasury coupon buy by the NY Fed Open Market desk was just a good opportunity for the dealers to off load some of last weeks duration buys. These Permanent OMO’s are just that. Permanent. There is not going to be a window to sell this stuff for a minimum of five years. Maybe forever.
Bernanke touched on this:
On the Federal Reserve's balance sheet to Congress 4/3/09:
"In pursuing our strategy, which I have called 'credit easing,' we have also taken care to design our programs so that they can be unwound as markets and the economy revive. In particular, these activities must not constrain the exercise of monetary policy as needed to meet our congressional mandate to foster maximum sustainable employment and stable prices."
These programs were not designed with care. They were emergency steps taken on the fly in the face of what looked like a pending disaster.
From the WSJ OpEd 7/21/09:
"The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner."
The Fed may have devoted some time to the issue of an exit strategy, but they aren’t seriously thinking of selling their holdings of Agency or Treasury debt anytime soon. Bernanke described three steps that would be considered to remove the excess liquidity caused by the QE policy. The fourth and final step was:
"Fourth, if necessary, the Fed could reduce reserves by selling a portion of its holdings of long-term securities into the open market."
They are never going to sell these holdings. When they mature the Fed will purchase something else to keep their balance sheet big. As Central Bank decisions go, this one will go down in history as a mistake. In 29 the Fed erred and tightened. In 09 Bernanke made sure that error would not be repeated. As a result of the 29 mistake the economy suffered for a decade. It is likely that we will suffer a different outcome in 2009. The result we be the same. A decade of economic problems.
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Actually, the smart COT Big 4 money is short precious metals and long the dollar. But let's not let facts get in the way of true religion...
The smart money is on precious metals, gold, silver, platinum, anything that represents a store of real value against paper assets like stocks, bonds, and currency that only have value based on market psychology. When that huge wall of debt at the Fed hits the budget in October, the Dollar will drop like a stone. Don't know about other currencies, but it is possible that the end of Dollar hegemony could cause a run on other fiat currencies, justified or not. The markets may well just say, "Wow, we never thought the Almighty Dollar would bust, let's divest ourselves and go for safer bets." The sea change in market psychology could very well be sudden and brutal. Prepare yourselves.
The fable of the Fed "tightening" too soon causing the depression is ludicrous.
The depression lasted more than 10 years because the Fed/Hoover/FDR did everything in their power to ensure liquidation of malinvestments did not happen.
I suspect you got this from some neoclassical macroeconomics chapter on "causes and consequences of the Great Depression."
Don't regurgitate this nonsense. Bernanke thinks he will avoid another depression by "not tightening." Meanwhile he's causing one for the same reason that caused the 30s, which he is ideologically predisposed to ignore.
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uh, in 29 they cut the rate from 6 to 1.5 and doubled the balance sheet. what tightening? ppl can't face the truth that they are powerless and need to do something. anything.