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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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FED troll
you follow what they do, not what they say
and what they do is print, loot and conquer!
any questions?
i hate to say i agree with this comment but when I see former hard money guys like Bill Ford and Larry Kudlow more interested in the habits of bankers' families i pretty much agree. in the seventies we had wage and price controls, margin requirments that were sky high so you couldn't borrow to make the trend even more unfriendly and most importantly a land war in Asia that was never going to go beyond Vietnam. Now we have "prices set by markets" (high and moving higher) and "margin rates said by Wall Street" (zero and staying there until the labor market improves--which means there goes your labor market) and "war with Libya" to go with apparently "the need for war with Syria, too" among other things (like where is this recovery anyways?!!!) While looking back i think a good argument can be made we never needed Paul Volker to begin with back in the 80's I think equally an good argument can be made by the "recessionistas" of this Fed that "the bankers need them about as much as they need a hole in their heads." equity markets do go higher--but if we're staring down the extraordinary elements of soaring commodities, a soaring dollar, surging US interest rates and a Japan that is a nuclear disaster and a Europe that is on the verge of the greatest bankruptcy in human history then I'm really having a hard time understanding how the USA "get's moving" IN A GROWTH SENSE and in the NEAR term (six to eight weeks.) This is not to say recovery isn't ABOUT to be underway, that the entities of South East and East Asia and Latin America can't pick up the slack of "lost" (Japanese demand) and "found" (European bankruptcy). I think Japanese equities represent a profound value--for institutional players. I still think giving Jimmy Cramer a hard time is the greatest mistake you'll ever make. But having said raise cash six weeks ago i'm having a hard time not seeing some good deals not coming into a view for a few weeks if not a month or two.
how do u figure they can handle 20% drop? it will automatically create panic. things are worse for average individual now than before...i think they are playing psy-ops to test response. all they have to do is say no QE3 and they can watch market nosedive. primaries will know in advance and prob ride the short down. if it goes too far, they'll say, u know what economy is bad, maybe we do need QE3...and then primaries will ride long back up...
I think there are plenty of people waiting for a big drop to get back in. One person for sure anyway.
"how do u figure they can handle 20% drop? it will automatically create panic. things are worse for average individual now than before...i think they are playing psy-ops to test response. all they have to do is say no QE3 and they can watch market nosedive. primaries will know in advance and prob ride the short down. if it goes too far, they'll say, u know what economy is bad, maybe we do need QE3...and then primaries will ride long back up...", kubrick007
EXACTLY !!!!! Part of their game...........
The Fed has to start talking about this. Better to be seen as trying "your best" to get out of the markets in a world where everyone is now scrutinizing and crticizig your blatant manipulations. This approach buys times and some cover to go with QE3.
"Gosh, we really want to stop, we just can't et. But next time, we promise!."
I also disagree on 20-30% correction being tolerable. If the market drops 10% I know a whole lot of people who will take their toys and go home. If it drops 20-30%, everyone I know just about will scream 2008 and get into cash faster than you can say "Dow 5000".
In my opinion a 20-30% correction will set off a panic spiral that takes us to 40-50%.
I don't know if I have faith enough in B.G's "integrity " , that is, seeing he has sold off all bonds , that we can expect a small rate hike. But it is hard for Big Money to hide ALL its moves . Perhaps Bill is right - rate change .Drop in bond price . So when rate announcement , preceeded by hints, clues , and hieroglyphs to the monied , where should the big money be going . Buy bonds for better yield , hmmm , bet not. Or a flight in hard assets - commodities . Surely corporations will pay more to borrow . Not to mention J6P . More bargains coming in real estate. Rates up , begats more rates up .
"Secrets of the Temple" written by William Grider
Interesting to me that the Fed has finally joined in the hawkish sentiments started by BoE and then the ECB.
Introduction of perception management application, maybe. Was that a fake breakout for AUD/USD last week?
BHP needed AUD to do buybacks
Cheers.
Looked good to me. I traded it. Long term I guess we'll see as it's still overvalued, but then when you're debt is a moderate percentage of your GDP instead of your GDP being a moderate percentage of your debt as well as having and actual interest rate...
...I know you from elsewhere... I think.
Maybe from just around ZH? Used to write comments at FF but not for a while since Matt Carniol left.
I like to put out live, time-stamped trades with entry prices, targets and stops. Usually on BK's articles. Trade only for my own account so no promotion or selling of service. Also tend to trade shorter term, 1, 2, 3 or 5 days duration.......futures, CFDs and fx.......7 years.
Went long the AUD/JPY at 77.85 right off that TD article re the Ten Trillion Yen being posted.
There is a LOT of tradable information at ZH.....imho.
Traded OIL off of the ZH coverage of the UN vote on Libya as another example.
Thought Plosser's remarks Friday were scripted as part of an overarching design to manage market perception, and timed into the close to slow down or stall the falling dollar
Wondering about a possible DT looming for US equities and possible range trade setting up, so if you have thoughts then be my guest. Also, a sustained break higher for AUD probably implies the same for the Dow. If so then the DAX has lots of room to run back to 7300 and that would be my top pick for a long equity.
If it's short then I like Spain's ESP35. Lots of volitility and wide price swings.
PS......just noticed your comment on Leo's Sun Setting article right below EscapeKey. Thanks for your insights re living in the UK. I started school in Plymouth. My father was on exchange with the Royal Navy. For some reason Guy Fawkes made an impression on me at the time.
With someone who has as much public clout as Plosser coming out with remarks like that out the blue something is afoot.
Don't really look at indices much apart from S&P; too much spread and too much volatility.
Just to be a complete black sheep I've been bearish on Gold since Thursday, really strong sell signals on the spot price, and all kinds of weird PA on spot Silver at the same time.
Maybe I just recognise you from here, just something about the way you commented seemed familiar.
Glad you enjoyed the other post. Everybody always remembers remembers, the 5th o' November :)
It's true now, and it's always been true: if the Fed made its long term intentions known, everyone would place the appropriate bets, and the stated intentions would be self-fulfilling. The Fed has two tools to fight deflation: the jawbone(s) of their ass(holes), and the printing press. They are using jawboning extensively, as it only costs them credibility, plus they have the media to help them push their story. "There are no truths here, there are only stories. We didn't come here to tell the truth, we came here to tell our side of the story."
I still expect one great, final deflationary sag to silence public oppostition to QE. Once the people demand the "someone do something," QE will be OUR idea and not the Fed's, and they will be off the hook. The perception of the viability of central banking will have been preserved.
Maybe, and frontrun by a rate cut from the RBA next week?
Not happening. We are going the full Weimar route, with Benny Bubble in charge.
Watch their hands, not their lips.
The Fed always claims that their rate reductions are temporary, and that they will raise rates when their economic miracle becomes self-sustaining.
This is of course, rubbish. The Fed knows it *should* raise rates, but doing so would reveal their "recovery" to be the utter sham that it is.
Believe in rate rises only when you see them. Until then, this is just standard Soviet-style propaganda.
saw the other day JP Morgan got a "vault allocation" or something likee that at the COMEX and their gold/silver could not be touched if JP went bankrupt.... is there any validity to this?
What a J/K,they cannot meet obligations now.
A rate hike will murder them.
Look for JPY to start selling Treasuries, I see no way they cannot afford to do so.