Sell Side Reactions: Mea Culpa From Barclays As Goldman Calls Fed Action "Baby Step" Toward QE2

Tyler Durden's picture

From Goldman, which is taking the miss in desired QE by $800 billion like a man (recall the firm had asked for $1 trillion QE lite or whatever one wants to call it)...granted a very rich man, with discount window access:

A "Baby Step" Toward QE2
BOTTOM LINE: FOMC takes a "baby step" toward renewed quantitative easing by deciding to reinvest principal repayments of agency and mortgage-backed securities. Other aspects of the statement reinforce the sense of increased uncertainty about economic prospects. Kansas City President Thomas Hoenig continues his dissent.


1. The Federal Open Market Committee downgraded its assessment of US growth prospects and reacted, as we thought they might, by deciding to hold the size of their portfolio fixed by reinvesting principal repayments of agency and mortgage-backed securities in "longer-term Treasury securities." (They already roll existing holdings of Treasury securities.) In an accompanying statement, the New York Fed's Open Market Desk indicated that purchases would be concentrated in the 2- to 10-year sectors of both nominal coupons and TIPS.

2. In our view, this marks a "baby step" toward renewed quantitative easing later this year or early next, as discussed more fully in last Friday's US Economics Analyst, though this obviously depends on a view that the economy remains as sluggish as we forecast . Technically, the step marks the removal of a slight bias toward tightening in the sense that it keeps the balance sheet fixed rather than letting it shrink over time. In March, Brian Sack, Manager of the Open Market Desk, indicated that this shrinkage would be in the neighborhood of $200bn from that time through the end of 2011 (roughly a 21-month period, so just short of $10bn per month), though of course this figure may have risen as lower interest rates would have instigated more mortgage refinancing. To our knowledge, the Fed has not provided an updated estimate of this run-off.

3. This part of the decision has obscured other changes in the statement, most of which were in the direction anticipated. In particular, the opening statement recognizes a slowing in the pace of recover of both output and employment, the increase in equipment and software is downgraded to "rising" from "has risen significantly," and the last sentence is revised to recognize that the pace of recovery is apt to be "more modest …. than had been anticipated." On the other hand, the committee removed the statement that "financial conditions have become less supportive of economic growth."

4. Changes in the inflation paragraph were inconsequential, removing references to declines in prices of energy and other commodities but continuing to note "measures of underlying inflation have trended lower." The main thing to note here is that the committee chose to keep this idea in the statement despite upward revisions to the core PCE index. Those revisions preserve the sense of disinflation, but from a slightly higher position than previously.

5. Kansas City President Thomas Hoenig renewed his dissent to the "rate commitment language," which remained unchanged word for word, and extended the objection to the decision to reinvest.

And Barclays, which said no chance in hell the Fed would do anything, is first to offer its mea culpa:

FOMC loses confidence in the strength of the recovery
Changes to the FOMC statement indicate that the Fed has lost some confidence in the strength of the recovery. In order to "help support the economic recovery," the Committee voted to keep the Fed's holdings of securities at its current level by "reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities." The statement, as expected, also retained the language indicating that the federal funds rate is likely to remain exceptionally low for an extended time.
In respose to the incoming data received since the last meeting, the FOMC indicated that "the pace of recovery in output and employment has slowed in recent months." The Committee continued to indicate that business spending remains robust while household spending remains constrained by "high unemployment, modest income growth, lower housing wealth, and tight credit." The FOMC expressed its unease in the state of events by noting that "the pace of economic recovery is likely to be more modest in the near term than had been anticipated." In other words, the Fed does not appear to view the recent slowing of activity as simply a soft patch in the recovery.
On the inflation front, the statement removed the language suggesting that lower energy and commodity prices were pushing inflation lower in favor of past language stating that inflation is likely to remain subdued and with stable inflation expectations.
The statement noted that the maturing principal and interest from agency debt and agency mortgage-backed securities will be reinvested into "longer-term" Treasuries. Subsequent guidance provided to the Open Market Desk at the FRBNY indicates that the Fed will concentrate its purchases in the two- to ten-year portion of the curve. This is similar to the operating procedures put in place under the original Treasury purchase program, which amounted to $300bn. Furthermore, the directive states that the Desk should keep holdings of securities at current levels, which was $2.054trn as of August 4, according to the most recent H.4.1 data.  
Finally, if the Fed has indeed lost a measure of confidence in the strength of the recovery, the change in strategy towards keeping the balance sheet at an elevated level will likely lead to increased speculation about additional asset purchases at coming meetings. Our view is that simply reinvesting the proceeds from maturing agency securities will not provide much additional stimulus and, should the outlook continue to worsen, then the Fed will likely initiate a new round of asset purchases, most likely in Treasury securities.

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Gully Foyle's picture

Bob Wiley: Baby step to four o'clock. Baby step to four o'clock.


Bob Wiley: step onto the elevator... baby step into the elevator... I'm *in* the elevator.
[doors close]


Bob Wiley: [to himself] ... baby steps get on the bus, baby steps down the aisle, baby steps...

Unscarred's picture


Yeah.  Should have went with Death Therapy.

It's a guaranteed cure.


Dr. No's picture

QE1.0, QE1.999, QE2.0.... Which one will be the mint in which finally spelled the end to Mr. Creosote Man?

NOTW777's picture

why cant anyone say that the fed has been lying about the summer of recovery.  now they mention a "slow patch?"

DosZap's picture

Wait till they announce FREE INTEREST on trillions of dollars in housing Re-Fi's.

There's your QE 2.........all set for November.

How bout, another 28 Billion, to keep those Union thugs happy,gotta keep that base together..........

Now, aren't you sad you were a good little fella, and paid your's off the HARD way.As in HONEST?


 D.C. nothing but Empty Tombs,White washed seplecures, full of dead mens bones.


qussl3's picture

GS: ONLY 2T? WTF..... Switch off the damn algos.


jvota's picture

I know what you're thinking. "Did he fire six shots or only five?" Well, to tell you the truth, in all this excitement I kind of lost track myself. But being as this is a .44 Magnum, the most powerful handgun in the world, and would blow your head clean off, you've got to ask yourself one question: Do I feel lucky? Well, do ya, punk?


DosZap's picture


rapunzel's picture

can't find him right now but found some one else!

Young's picture

ZH music recommendations right now:

1. Muse - Uprising
2. In Flames - Mirrors truth
3. Bloodhound gang - The roof is on fire (for obvious reasons)

Enjoy brothers and sisters...

Dr. No's picture

"The End" by the Doors.

Young's picture

Oh oh oh! R.E.M. - It's the end of the world as we know it... Classic!

Dr. No's picture

Funny, but I always think of Tommy Callahan and Richard trying to sing along on their ill-fated road trip.

suteibu's picture

Great!  One of the best J-bands ever.'s picture

No doubt. Picked up FLCL3 soundtrack in June and I can't stop playing it.'s picture

Check out this version, it's not a fan edited video but rather comes off the FLCL dvd. Little Busters is probably my favorite song on the album. Other big favorites are I Think I Can, Blues Drive Monster, Carnival, Crazy Sunshine, Funny Bunny and Shooting Star. It's all good!


Little Busters FLCL (with subtitles)

suteibu's picture

Thanks for the link.  I gotta go back and watch that series again.  As for The Pillows, I got them on everything that carries music. 

ZeroPower's picture

I just dont get anime. Kinda gay, imo. 

Rover's picture

Muse, nice...listening to all albums on random this afternoon.

rapunzel's picture

muse U P. rising
W H E R E ?

redarrow's picture

It doesn't matter how much QE they do. The addict has reached a point where the tissues have emasculated and he needs to go to detox or die. Sh-- and what do they do? Push in the needle. 

All that you need to know about market direction is that the biggest markets of the SP500 are in austerity mode. China, India, UK is choosing austerity, the rest of Europe will have no choice but to. What do you think happens to the bottom line of multinational companies whose key markets are shrinking? You bet we are headed down baby, I am short this stupid rally.

molecool's picture

That's all it is now - hope fueled rallies in anticipation of more free money and borrowing from a non-existent future. We should all be so proud...

chistletoe's picture

Once a snake becomes so hungry

that it starts to eat its own tail,


you don't exactly know what is going to happen,

you don't exactly know how or when its going to turn out,

but you can be kinda pretty sure

that its not going to go well

for the snake ....

Dismal Scientist's picture

Buying your own debt is a sure fire admission that deflation and higher bond prices are coming

Cognitive Dissonance's picture

Only to those who wish to face reality. Which seem to be far and few between when you can still hear the cries from the herd of "Don't fight the Fed". As long as people wish to spin this (to themselves) as "good" for stocks, all reality is stopped at the door.

realtick's picture

When it comes to trading the trend is the only reality there is,

and the trend is up. Period.

When it comes to commenting and spinning and pontificating,

then reality is whatever you want it to be.



Cognitive Dissonance's picture

Agreed regarding trading.

However, the suckers in this market are average Jane and Joe, who are told to "invest" in the market, not trade. They have been told, still are being told, that in the long run they will come out way ahead in stocks for their 401(k) and IRA. These people are not trading and couldn't trade primarily because their accounts aren't that flexible and they aren't trained to do so. Thus they are the suckers for the machines.

LMAO's picture

@ realtick


"When it comes to trading the trend is the only reality there is,

and the trend is up. Period"


So even after a lower low you tell us the trend is still up?!


Your "reality is whatever you want it to be"...Excellent "technical analysis". Blind guessing and jumping to conclusions are we....?


Thanks for sharing



Dismal Scientist's picture

Very few people in my experience have the ability to admit that their future is screwed by inexorable logic until it is too late. I choose to provide for the future and play the game in the meantime as well. Its a helluva of a tightrope, but beats not playing at all, IMHO

Cognitive Dissonance's picture

Very few people in my experience have the ability to admit that their future is screwed by inexorable logic until it is too late.

Hum, I thought government was supposed to protect average Joe and Jane from the sharks of the world. Meaning regulate the markets and provide a fair economic system they can prosper in. Not cradle to grave care but not an adversarial system. Doesn't look like it's ever been a fair game, though that's exactly what Joe is sold from kindergarten. Government is not only not protecting the people but are deliberately exposing the people to the sharks.

Dismal Scientist's picture

Think you missed the sarcasm <on>. Sadly that is merely the truth

Jim in MN's picture




He said "shrinkage"




Brian SACK said it



Clayton Bigsby's picture

"In March, Brian Sack, Manager of the Open Market Desk, indicated that this shrinkage"

They said sack and shrinkage in the same sentence - heh heh...