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The New SuperHawks of the FED
The
US economy has been aggressively & actively managed by the HEAVY
hand of the US Federal Reserve system since the summer of 2007, in my
opinion. During this era we have seen the Fed Funds rates slashed from
above 5% to .25% and held there for over a year.
We have seen the Federal Reserve purchase the Maiden Lane assets
from Bear Stearns. For an encore, they returned to do it again with
AIG….twice. The Fed also started a series of special liquidity
facilities, including one with that exact name. These facilities, like
the Term Auction Facility, Primary Dealer Credit Facility, & the
Term Securities Lending Faculties to name a few, were intended to
enhance system liquidity.
We have seen the Federal Reserve roll out Quantitative Easing
1.0 (buying of MBS), Quantiitative Easing “Lite” (the MBS roll off, and
replacement with US Treasuries), & Quantitative Easing 2.0 (direct
POMO operations to support treasury prices as needed anywhere in the
curve).
The sum of these actions are that the US Federal Reserve has
generated credits on its own balance sheet, which have been used to buy
up US assets at no *Actual* cost to the Federal Reserve. Their balance
sheet has more than doubled in size during this short time frame as the
Bank has injected liquidity into its member banks.
The US dollar has experienced significant pain during this process,
dropping against both other fiat currencies, but also against most
commodities. Very recently, the market has been expecting some kind of
comment on the continuation of Quantitative Easing, now expected to be
called Q.E. 3.0.
However, it now appears that the end of this cycle could be
arriving. The much ballyhooed Quantitative Easing 3.0 has not yet been
defined and, if the US economy continues to grow, may not be needed at
all.
The
Federal Reserve has a unique structure with regional Presidents. This
gives the Federal Reserve a choral affect at times. Since the Fed
allows each of these regional Presidents a chance on the podium, it
gives us a chance to hear more than one voice on a topic when it
concerns the state of the economy.
Lately, the historically outnumbered hawks on the Board have been
waiting for a change in the rolls of voting members. This change has
taken place, and with it a new voice of concern over the actions already
taken has started to arise from voting members.
The first of these comments caught my eye today. It was from the
Philadelphia Federal Bank President Plosser, who announced a wish for
the Federal Reserve to change its dual mandate of growth balance with
controlled inflation, to an inflation-only focus. There are significant
ramifications to this, if it were to happen. It is very interesting in
the context of the future actions of this Fed, once we reach the stage
when we need to unwind the Quantitative Easing already in play.
Fed’s Plosser ”Headline inflation is all that matters. Core only matters to extent it helps predict headline inflation
The news flow on this Friday was fascinating, with a burst of Federal
Reserve Presidents making public comments on the same topic. It was
very obvious, that this has been under discussion for awhile, and a new
round of jaw boning is getting started. In a matter of hours, I counted
no less than 5 comments from the Federal Reserve and its new club of
hawks. The silence from the rest of the chorus was…. interesting!
“Following through on that to the tune of $600 billion,
like we’ve said, I think is appropriate,” Chicago Fed President Evans
told reporters at the regional bank’s headquarters. “I personally don’t
see as many needs for a further amount, as I probably thought last
fall.”
It appears that votes are changing within the makeup of the Federal
Reserve’s voting members. This could have serious implications in the
coming months if the US economy slows down, and lack of liquidity starts
to become significant again.
Minneapolis Fed President Narayana Kocherlakota told reporters in
Marseilles that the U.S. economy would need to worsen “materially” for
the bank to consider further bond-buying.
Evans comments, along with those of Atlanta Fed President Dennis
Lockhart who said on Friday that “it’s a high bar” for the Fed to do
more, suggest the debate at the Fed has moved away from a consideration
of further easing.
It appears that Q.E. 1, lite & 2.0 will be drawing to a close by
the middle of this summer, if only for a few months, while the system
attempts to see if it is capable of standing on its own without
liquidity injections from the Fed.
“The economy is looking pretty good,” Bullard told
reporters in Marseille, France, today. “It is still reasonable to review
QE2 in the coming meetings, especially this April meeting, and see if
we want to decide to finish the program or to stop a little bit short.” Bloomberg
“The oil price increases so far is not enough to derail
the U.S. recovery at this level,” Bullard said. “If oil prices stabilize
where they are, we’ll be fine.” Prices would have to go substantially
higher for there to be a “significant and material effect,” he said.
“We have to weigh those in the decision” on whether to stop the Fed’s QE2 program earlier than planned, Bullard said.
I honestly expected that the events in Japan had green lighted the
Fed to start Q.E. III. But it appears that the shift in the votes,
along with expected massive stimulus expected to be generated in Japan,
has slowed the need. It appears that Japan will be providing the world
with liquidity, as it rebuilds its infrastructure.
When you consider that the IMF (realistically a vehicle typically
funded by the US Gov indirectly) is going to need to help bail out the
European banking and sovereign debt markets again. It is possible that
the Federal Reserve maybe be ready to firm up the value of the US
dollar.
It has been the proverbial one way trade for a while now. The words
of the different Presidents of the US Federal Reserve in the last few
days, and their actions and words in the coming weeks maybe pointing
towards a change in the Bernanke Put.
If so, commodities may have a headwind in the near term, as the US
seeks to raise the value of the US dollar, which is used to price
commodities with around the world.
I expect we could see rates raised in 2011, and the start of a
possible winding down the HEAVY hand. If so, the markets will be acting
confused for a while, as major shifts in strategy take shape. The last
thing anyone expects now, is a STRONG US Dollar.
When you consider that Bill Gross has gone flat US Treasuries, and
they are supposed to be 40% or so of his bench mark, a surprise small
rate increase by the Federal Reserve would make more sense, than not, in
my opinion. In fact, you could argue it’s already long over due.
- http://www.newyorkfed.org/markets/maidenlane.html
- http://www.ft.com/cms/s/0/69e8c92c-e758-11df-880d-00144feab49a.html
- http://imarketnews.com/node/28402
- http://www.realclearmarkets.com/news/reuters/finance_business/2011/Mar/2...
- http://www.bloomberg.com/news/2011-03-26/u-s-1st-qtr-gdp-may-not-be-as-s...
Confessions of a Macro Contrarian
»
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Just to get to a real interest rate of 0, rates would have to rise approx 5%. Cost of debt would be 700,000,000,000 per year. Nah, rates never going to rise. Real interest rates will have to rise to at least 5% to underpin the USD. One could envision cost of debt rising to 1,400,000,000,000. Nah, interest rates can never go up. If inlation comes in a bit higher, well, we will need Volker back to tame the monster. 20% real interest rates may be required. 6.800,000,000,000 per year? Nah, interest rates won't go up.
Didn't use $$$ sign as the dollar will dissapear if interest rates go up. Just a bunch of zeros with no real value and obviously no intention to pay back.
Everything is just peachy. I suggest the US minimum wage go to 4000.00 per hour for a few years so joe 6pak can catch up a bit.
I posted this above and am moving it ... sorry for the double post ...
Jim Rickards worked at the Fed for a time and knows how they operate..."The Fed spends 10% of it's meetings deciding what they are going to do and 90% of it's time discussing how they are going to jaw bone their decision"
The Fed, with it's bloated balance sheet, can now monetize about 1/3 of new Treasury printing without a QE 3 roll out. And, purchasing 1/3 of new treasury issues is enough to control interest rates of treasuries.
Perception of dollar strength is everything... hence the term that the Fed uses when discussing inflation is 'inflation expectations'. If consumers perceive that prices are going to continue to rise they will dump dollars in favor of hard assets... Not what the Fed wants... and, don't forget that 60% of dollars are held by foreigners so the Fed has to consider what foreign holders of dollars perceive is the future direction of dollar purchasing power.
The Fed has exported a lot of inflation and weakened the dollar significantly while destabilizing many governments. Is there mission accomplished for the near term? Will the Fed risk a rate hike while continuing to buy 1/3 of all US Treasury Issues?
The Fed wants to stem the flow of dollars into commodities, especially PMs and oil. It's possible that the Fed might jack interest rates up to shake the faith of PM investors and oil speculators and continue POMO in equities.
Since China/SE Asia and the Mid East are now setting marginal prices of PMs I don't see how the Fed can hope for a meaningful, long term pull back in PM prices.
Oil prices are really in a different catagory and need their own analysis. Much depends on the out come of current events in the Middle East. If the US can make it's military more 'indespensible' than ever to the rulers of Saudi Arabia then the US might have the leverage to force SA to keep oil prices at or near current levels. SA is such a large oil producer that it sets the marginal rate.
Much can be gleened from this recent Jim Rickards interview on King World News...
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/3/27_Jim_Rickards.html
Thanks for this comment and link. Very insightful for a naif like myself. I bought silver long ago because my father urged me to do so shortly before he died. I didn't know why I was doing it, I just did it. Now I am beginning to understand why and I'm buying more. I've learned that when the government controls the currency it can take your wealth whenever it wants and the judges and courts [who are supposed to support the Constitution] barely raise their heads from the trough to snort in derision if anyone complains about it.
++
SW: Thanks for the helpful comments above, didn't mean to scoop you. Couldn't agree more.
The Rickard's interview of 3/12/2011 is of special interest also. In it, Rickard's predicted what these people were going to do, and the fool who wrote the piece above describes what Rickart predicted. The Chinese are not going to fall for it, but Bernank may cause a dip in PMs, so be prepared to buy.
Listen to:
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/3/12_Jim_R...
latest on fed propaganda. (MOPE)^^6
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/3/27_Jim_R...
..
What no one is mentioning is that without QE, AND with rate hikes, USD up, PMs down. That's why the recent financial propaganda that PMs, especially silver, are at a top. Two legs of the same disinformation campaign. JPM, as one of the key masters of the universe, must be in deep shit.
"The last thing anyone expects now, is a STRONG US Dollar."
Not true...several people-- Jim Rogers for example (he has suggested the USD could rally 20% in the short & intermediate term), have been saying this for a couple weeks now....
Also, great contrarian indicators like Goldman Sachs have been saying the EUR/USD could rally to 1.50 from here (see 3/18 post: http://www.zerohedge.com/article/goldman-raises-eurusd-target-150-sets-1... )....
Of course, the fiat currency game is one of which country is relatively more miserable http://exploitthemarket.com/blog/playing-the-currency-markets/ , they are all fundamentally flawed and in the end they will all fail--the question is who falls faster... I did not think the EUR would last as long as it has- I was calling for it to collapse back in 2008, clearly I misjudged the power of the dark side, but it is inevitable that they all become worthless.
Don't knock kick-the-can if you haven't tried it.
Wouldn't a rate increase on $14 trillion be insta death?
The fed can't raise rates. They will destroy their own balance sheet. And Japan will start dumping soon to raise money for reconstruction. The fed is only trying to talk tough to keep the market expectations in check. They are boxed in a corner and they have no choice but to do Qe3. Without the fed there is nobody left to buy treasuries.
Doves trying to be Hawks. The QE is running, interest rates are almost 0% and are going to stay near 0% unless there is Armageddon. It is pure theatre though, great acting.
The fed is insulated but it has been clear that the free money printing critics and the public opinion in America is against them..and growing, so the fed governors are talking no QE to claim they were against it all along and it was that Man -Ben ,who did it all..it won't work. they will hang together in the end to extend this policy to it's lunatic conclusion.
With the federal deficit and rollover requirements, without the Fed, who'll buy the mass quantities of treasuries? How high would interest rates have to go to attract enough non-Fed money?
1) I am not sure the fed presidients have a voting voice on the rate setting issue (someone please check)
2) a number of fed presidents were against QE 2
3) there are no voting hawks, on any central bank anymore. what this is is that xome are tellling ben he won't get the free ride anymore (I hope) and that some open opposition will happen
Comedy gold.
good article.
Won't happen. Deficit would explode to even more unimaginable levels. They will jimmy with the CPI to keep up the mantra of no inflation, or 'no dangerous inflation'. And they will keep reminding us that there is a difference between 'inflation' and 'cost of living increases'.
The Department of Deception (aka the MSM) will keep up the story line so everything will be just fine.
a surprise small rate increase by the Federal Reserve...
hahahahahahaha
press 2 for spanish
jajajajajajajajaja
:) +100
I've already started loading long USD/JPY and short EUR/USD, the dollar is about to make a serious comeback I do believe.
I've also started a short on the EUR/USD but I'm not touching the Yen. I just don't know what what to expect from that one. Somehow I think the west will try to protect the 3th largest economy from falling.
Although many on ZH don't agree with you, I, too, believe the $ is going to run up some. I also believe the S&P will drop sharply. Everyone seems to be on the "side" (of the boat) that's Buying The Fucking Dip. Makes me think the next dip isn't one you want to buy. ( I don't like the Yen, as well)
Seems to me the rationale for a stronger Yen can only come from unwinding of the Yen carry trade. A weaker Yen would make sense either because the central bankers stay in control, and the G7 coordinates to further weaken the currency, or because the markets come to their sense, and realize the Japanese economy, with it's 220% debt to GDP ratio, insolvent banks and insurers, demographic nightmare and massive rebuilding costs is only going to escape near term insolvency through massive monetization. Whether this will spare them longer term is unclear.
It's why I am utterly unmoved by the Japanese equity story - I feel whatever you make on the equity you lose on the currency. However, it looked to me like Japan was approaching a fiscal meltdown even before recent events, and I don't buy the rebuilding is bullish argument, when what has been most affected are sectors such as farming, fishing etc - the areas that have little effect on the international markets, but were seen as a vital part of the character of the nation. In fact, many were only kept alive through considerable financial help from the government anyway. But, from what I can see, many, if not most of the workers in these fields are out of the business for good.
+1
but but but.
higher interest rates destroy share markets.
higher interest rates mean there is more debt to GDP.
what are we talking here a move from zero to zero point one?
because anything more would destroy the foney recovery and blast amount owed as debt part of budget to something even more scarey.
the Fed is about as interested in inflation as they are about what it does to the price of bananas ...their money printing is all about bailing out the bankrupt US banks and US Govt ...the policy is 'Pretend & Extend' and has fuk all to do with inflation or the economy
Prosser now asks us to believe the slippery Fed wants to change tack (wriggle) out of focus on full employment, GDP and economic growth (having failed on all counts) to just inflation (a manipulated figure and political football for decades)
This is a shell game for the snake oil salesmen of the Federal Reserve
It is and always has been about bailing out their DC and WS bum-chums
If the Fed wants to focus on inflation, what is it doing with property and MBS's on its balance sheet? If moving the goalposts at this late stage then buying or keeping bankrupt banks assets on its balance sheet has nothing whatsoever to do with their new role. When can we expect a sale of these superfluous assets Mr Prosser???
The Fed and Mr Prosser should be honest about its role: it buys debt, most of it toxic from their toxic parasitical buddies in Big Govt and Big Banks ..inflation is the white noise, the real policy is Pretend & Extend
...their money printing is all about bailing out the bankrupt US banks and US Govt ...
Thank you for this post, well said. The Fed is the enabler between the unholy alliance between the USG and the WS Banks. Each is dependent on the other, one for unlimited debt financing and the other for minimal oversight and backstopping their risky financial schemes.
It just may last for a while, more than many like to think. If the Fed can buy enough cash producing assets to finance the USG debt, then it can extend for a long time. Of course someday it will all crash or war will ensue, in which case we will be told "no one could have seen it coming"
sschu
Regarding the above comments. Bravo. Many posters make much more sense than the sputum spewed from the withered lips of the mouthpieces of the ded, er fed.
QE-infinity is as perennial in today's USA as five o'clock tea under the Victorian Empire...It is the quintessential expression of "manifest destiny" and "plausible deniability" of the NWO of American decadence. Our money, your problem. Period. Don't like it? Watch out, CVN Enterprise not far away...All guns ready to blow 'from here to eternity', he/whoever/wherever... We don't like people who eat babies in their duck soup, who peg their money so unreasonably to ours, who sell us more than we can afford to buy... without wanting our devalued greenbacks in exchange. We have no choice...nor do they...This will go on as long as we like it to...And when we say 'they', that includes the American people of Main Street...just like all those other mugs.
Capito?
QE to infinity and beyond has become a concensus opinion, if not literally than at least implicitly. Now the hawks are again causing concensus to waver.
It is the perfect time to let some steam (liquidity) out of market speculation and end QE ... for the time being. Asset prices, commodities and equities, may have a rather knee jerk reaction which will cascade with margin calls should it come to that.
Prices are well above crisis levels with plenty of layers of support in between. Banks are not as leveraged and are sitting on mountains of reserves that are themselves just sitting. The FED holds more USTs than anyone else having reduced exposure and risk of fire sale to other sovereigns who may not be allied with current US interests. So letting steam out (even if this liquidity is in the long run as toxic as the Fuki variety) should not create a systemic failure.
End result : Don't get too comfy with the surreal present. This too shall pass.
If you feel that QE-3 will not occur then you must subscribe to interest rate hikes and asset bubble collapse on WS!
I don't know what other options they have. Can you imagine the debt payment on 14T going to 15T in this coming year if interest rates rise? What will that do to USD? And to WS assets? Hair cut time! No, to me QE-3 seems more comfortable. Whatever the level of the cash cushion in PDs there are shadow banking risks still unfathomable (BOFA 1 trillion in RE?) that could re-spiral. What can you say about a banking sector that has not netted its exposure on volumes of 600 T/year in derivatives? Try selling them an interest hike. It's like torching Casino Royal!
This is a tardy response, apologies for that.
I think that Rosenberg's view makes more and more sense here, which is that the end of QE2 will precipitate a risk off move with commodities and equities getting shellacked, since the "fundamentals" will be outweighed by the sudden withdrawal of the liquidity pump. If they are selling commodities and equities, are they selling bonds too? NO. Bonds will be bid and the USD will rally. In essence, the managed economy / market will move lower in its big fat trading range. A move back to 1040s on SPX would dovetail nicely with various lines of support over multiple time frames, and would be a 20% + correction. As that point approaches, bonds will be bid at large not simply as a flight to safety but in recognition that the economy is being sucked back into the deflationary vortex. At that point, rates are low (sub 3% on 10yr), speculative fervor has been reduced, corporations are still sound since their balance sheets are not overleveraged, PMs have been decimated in the margin cascade, commodities in the toilet have taken out the inflation threat in emerging markets along with the concurrent threat of political instability which has gotten out of hand (not simply because it is undesirable from a perspective of global harmony, but since Libya is now costing an extra $500MM a week and this is truly unsupportable), USTs are once again refinanced at spectacularly low rates and voila, enter QE3 to commence the whole charade once again ...
Oh, whether that happens only after a last push of equity indices and the SPX up through 1400 is anybody's guess, since the black arts of market manipulation are just that, more art than science ...
very nice and plausible scenario. Appreciated.
To quote some other experts:
Jim Rickards
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/3/11_Ji...!.html
"...the size of the Fed’s balance sheet is now so vast that the reinvestment of principal payments from the existing assets will be enough to monetize a large portion of the Federal deficit without having to increase the total size of the balance sheet."
"..what we have is permanent QE until such time as the Fed decides to tighten financial conditions. This is unlikely to happen until mid-2012 at the earliest, perhaps later in view of the housing double-dip and increasing oil prices. In any case, QE will be with us for an“extended period” no matter what the Fed announces..."
Dan Norcini
http://traderdannorcini.blogspot.com/2011/03/federal-reserve-officials-t...
"Apparently the strategy was to get several of the FOMC governors to hit the airwaves talking about ending the QE program. Since it is QE that has been partly responsible for Dollar weakness - along with the abysmal fiscal condition of the nation - something had to be done to prevent a Dollar crash. This is the reason we are getting a sudden rash of Fed officials looking for microphones and venues to talk about ending QE. "
Be assured that this is all carefully coordinated and MOPE at its finest.
Did I not read recently that the $ flow from MS holdings was flaggins due to delinquent payments. Maye not as much money coming in as needed to support purchases?
Excellent points. Jim Rickards worked at the Fed for a time and knows how they operate..."The Fed spends 10% of it's meetings deciding what they are going to do and 90% of it's time discussing how they are going to jaw bone their decision"
The Fed, with it's bloated balance sheet, can now monetize about 1/3 of new Treasury printing without a QE 3 roll out. And, purchasing 1/3 of new treasury issues is enough to control interest rates of treasuries.
Perception of dollar strength is everything... hence the term that the Fed uses when discussing inflation is 'inflation expectations'. If consumers perceive that prices are going to continue to rise they will dump dollars in favor of hard assets... Not what the Fed wants... and, don't forget that 60% of dollars are held by foreigners so the Fed has to consider what foreign holders of dollars perceive is the future direction of dollar purchasing power.
The Fed has exported a lot of inflation and weakened the dollar significantly while destabilizing many governments. Is there mission accomplished for the near term? Will the Fed risk a rate hike while continuing to buy 1/3 of all US Treasury Issues?
The Fed wants to stem the flow of dollars into commodities, especially PMs and oil. It's possible that the Fed might jack interest rates up to shake the faith of PM investors and oil speculators and continue POMO in equities.
Since China/SE Asia and the Mid East are now setting marginal prices of PMs I don't see how the Fed can hope for a meaningful, long term pull back in PM prices.
Oil prices are really in a different catagory and need their own analysis. Much depends on the out come of current events in the Middle East. If the US can make it's military more 'indespensible' than ever to the rulers of Saudi Arabia then the US might have the leverage to force SA to keep oil prices at or near current levels. SA is such a large oil producer that it sets the marginal rate.
Much can be gleened from this recent Jim Rickards interview on King World News...
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/3/27_Jim_Rickards.html
when did everyone think they will revert to sanity??? Why all the talk like they give a damn?? they want to destroy certain governments right now ... damn it all they say
"The Fed wants to stem the flow of dollars into commodities, especially PMs and oil. It's possible that the Fed might jack interest rates up to shake the faith of PM investors and oil speculators and continue POMO in equities."
If the FED get sufficient "static" about continuing QE, the FED will stop dead, and let the markets drop until enough political will coalesces behind continuing QE.
When that happens, BTFD.
+
An exercise in perception management. Utterly laughable.
Absolutely right - and the title of the article shows how good their disinformation machine is.
So, what level of hike? If it's 25 points...likely is already discounted by the market. 50 or 75 make more sense, which would cause some damage to the Dow but should stabilize the price of crude. 100, anyone?
The $64,000 question is what will the Fed do 6-8 months down the road when foreclosures ramp up from the rate increase (however paltry), unemployment stays locked at 16-18% (SGS, not USG) and bread is heading toward $4 a loaf?
My bet's on OE3 into infinity - remember, 2012 is a prez election year.
if the US economy continues to grow, may not be needed at all
well this is the fly in the ointment ,,
this is boga boga at its lying best ,
the only thing growing is the length of the noses as the fed tells tale tales and fancy tap dancing.
distorted and manupulated data, watch the presses roll for japan, for undisclosed expenses hidden .. for another 2 trillion on the debt cycle ..
one whiff of a pull back and interest raters watching housing and markets and retirement saving collapse..
not before the election count on it..
when has the fed leveled and got one right ,, they are batting 0 for 100
The growth of the economy will sharply decelerate because of one thing - the price of oil. There seems to be a general misperception that the price of oil is high due to political threats. No the price is higher because there is 1 million barrels a day of very high quality oil is gone from the market, the type of oil of which refiners can not easily replace.
Getting back to QE3, unless they are willing to see a steep stock market drop and a new recession starting, the Fed will have to come up with some new plan, and soon.
The only reason the economy is "growing" is because of 8% Inflation. Do you know the US EXPORTS Crude Oil? Fruit? Produce? People only look at inflation of what we buy, but what we SELL is making The Govt's numbers look good. Think.
I'm pretty confident there wlll be no QE3. Bob McTeer, former Dallas Fed chief, told CNBC that there would be "no new ocean liners" though there might be some eyewash about "keeping the balance sheet" safe. Dick Fisher, the new Dallas Fed president, is absolutely opposed to weakening the dollar. Plus you have the opinion of the new Congress on the house side. Are those GOP not going to launch an investigation of Bernanke if he keeps up his errant way? I just don't see it. The markets are strong enough now to stand a 10% or 20% or even a 30% correction.