Monetary Policy

Tomorrow's NFP number will be one of the most critical releases from the BLS: if on one hand the number is far greater than expected, it will effectively mean that QE3 will not begin immediately after the end of QE2, just like QE1 ended on March 31, 2010 only to see QE Lite implemented 4 months later. That the Fed is not willing to take a political gamble and send oil to $150 is conceivable, which is what would happen should Jon Hilsenrath start leaking QE3 rumors. On the other hand, the economy is once again turning lower as recent diffusion data (not to mention housing) has been indicating. Should the Fed implicitly tighten, by not loosening, the economic contraction will accelerate drastically, and capital markets will follow suit. And since as Hugh Hendry noted earlier, there is no China to pick up the slack, the stakes on the all in gamble in this bet that the virtuous cycle has picked up, will likely cost Bernanke his job if he ends up wrong and QE3 is needed anyway. Of course, as many believe, and as Bernanke himself has said, manipulating the market and stimulating inflation is and continues to be the Fed's only objective. Obviously, the waterfall effects in either direction here are huge. Which is why if tomorrow's NFP number is a beat and not just any beat but a massive one (read well over 250,000), it will be an attempt by the administration to cement the idea that the economy is now recovering. Anything at or below consensus will merely push the decision one month forward, however it will be too late to prepare the political landscape for QE3 in May, just two months ahead of the end of QE2. So tomorrow is likely D-Day on QE3 (or at least a direct continuation of POMO past the June 30 expiration date).

In the second day full of Fed president speeches we hear from St. Louis hawk James Bullard who spoke in Prague on recent developments in monetary policy, and delivered remarks titled “U.S. Monetary Policy: Recent Developments” as part of a central bankers panel discussion at the 19th European Banking and Financial Forum in Prague. During his discussion, Bullard explained how the Fed’s second round of
quantitative easing was “a classic easing of monetary policy” and “an
effective tool, even while the policy rate is near zero.”  He also
discussed the situation in early 2011, stating that “U.S. growth
prospects remain reasonably good for 2011.”  He added that recent global
and domestic events “present considerable uncertainty, but can be
resolved in benign ways.” Finally, Bullard talked about the path to
normalization.  “Discussion of the normalization of U.S. policy will
likely return as the key issue in 2011,” he concluded.  Overall, the presentation had a not surprisingly hawkish tone. Don't forget it was precisely a year ago that the Fed was being extremely hawkish all over again, with reverse repos flying left and right, and everyone expecting that the economic "growth" was self sustainable, until it wasn't.

The much anticipated hearing on "The Relationship of Monetary Policy and Rising Prices" chaired by Ron Paul and includes such witnesses as James Grant has started. It should be quite interesting because the last time we checked, Grant had refused to drink the Kool Aid.

Ben Bernanke, who is expected to appear before the Senate for his biannual Humphrey Hawkins presentation any second, has just released his latest Monetary Policy Report to the Congress. Some of the highlights from the report: i) Bernanke says longer-term inflation expectations will remain stable, and risk of deflation has become negligible; ii) The Fed has tools needed to withdraw stimulus, and reiterates rates will remain low for extended period; iii) A sustained oil price rise would be a threat to growth, price stability, particularly if it unmoors inflation expectations; iv) The recent rise in commodity prices likely will lead to only temporary and modest increase in US inflation; The live CSPAN webcast can be watched here.

Federal Reserve Chairman Rudolph Shalom Von Bernankestein will testify before the House Budget Committee starting at 10 am Eastern today. Congressional employees of the Fed and the Banking syndicate are expected to question the Fed's plans on avoiding inflation and the current unemployment rate. We expect more of the same "QE is working because after spending $2 trillion we got 650,000 part time jobs, and we are certain it is working because rates are surging, and wholesale mortgage are now again at the higest since April, which doesn't make sense but I am a Princeton economist (Ph.D.) and you don't get this complicated stuff."

Our esteemed Fed Chairman Ben Bernanke is about to find his policies running face first into a BRIC wall. He’s been exporting inflation abroad to the emerging markets all the while claiming it doesn’t exist. With growing civil unrest due to soaring food and energy prices the emerging markets are now fighting back.

In what is increasingly shaping up to be a showdown of epic proportions, the brand new chair of the Monetary Policy Subcommittee, Ron Paul, whose sole purpose in life for the past 20 years has been putting the Federal Reserve out to pasture, and returning to the gold standard, will soon spar with none other, than his, and every middle-class American's nemesis, the Chairman. And it could soon get even messier. In an interview with Fortune magazine's Nin-Hai Tseng, not only does the Texas doctor make it all too clear that he once again has presidential ambitions, but when asked whether he wants to end the Fed, gives the following brilliant reply: "Well, I don't expect to. The Fed's going to end itself when they destroy the system. So yes I would end the Fed but I would do it gradually and have a transition." Good luck Ron. However, there will be no gradual transition. If anything, it will be protracted, very much involuntary, and quite likely violent, as it would mark the end of a century-long scheme to transfer countless ounces (no pun intended) of tangible wealth to the ruling oligarchy in exchange for worthless and infinitely dilutable linen.

Despite rumors that various splinter forces within the Republican party are attempting to block Ron Paul's fateful chairmanship of the Monetary Policy Subcommittee, we now have confirmation that the only sane politician left will now be Ben Bernanke's direct nemesis during any and all future Congressional spectacles starring the printing unchallenged one. And with US debt creeping ever closer to the debt ceiling, coupled with the dollar for dollar monetization of the US deficit, such spectacles will soon be plenty.

With everyone's attention focused squarely on Ireland and whether or not the country would be finally put out of its misery, one thing that most missed is that after today's release of subpar economic data, Europe has now entered a double dip. While this is not news to Zero Hedge readers, as we were confident this would happen when the EURUSD passed 1.30 for the first time several months ago, it may take others by surprise. Unfortunately Europe's troubles are only going to get worse. The only way to stimulate organic growth now, read create another export-led bounce, requires the devaluation of the euro. However, that would mean that the ECB would have to not only launch a comparable program to QE, which would paradoxically anger an inflation-weary Germany (whose economy would benefit the most from an export boom) but far more importantly, anger the New York Fed. And this Europe can not afford - keep in mind that in Europe's rickety financial structure in which a whole lot of countries are kept on life support, the ECB is only the second to last (and far less reliable) provider of resuscitation services. The last one is the New York Fed, which courtesy of its FX swap lines, now has infinite leverage over what happens in Europe. Should there be another crisis, and there will be, the Fed's generosity will be tested again. As will the IMF... to whose various credit lines America just happens to be the biggest sole contributor. There is a word for this type of arrangement: total leverage.

Here is why an open-ended QE2 may be a very moot point: Slate reports that Ron Paul, Ben Bernanke's greatest nemesis, will chair the all important monetary policy subcommittee. In other words, Bernanke v Paul theater will soon be a weekly feature. Too bad Alan Grayson will be no longer present.

And now back to the popcorn.

The Tea Parties have returned the 10th amendment and constitutional governance to the discussion, and clearly impacted elections. What they don't seem to talk about much is the weak dollar's role in our malaise. Absent changes in dollar policy, the Tea Party movement could be discredited too.

As if there was any doubt before which way the arrow of control, and particularly causality, points in America's financial system, the following stunner just released from Bloomberg confirms it once and for all. According to Rebecca Christie and Craig Torres, the New York Fed has issued a survey to Primary Dealers, which asks
for suggestions on the size of QE2 as well as the time over which it would be completed. It
also asks firms how often they anticipate the Fed will re-evaluate the program, and to estimate its ultimate size. This is nothing short of a stunning indication of three things: i) that the Fed is most likely completely paralyzed due to the escalating confrontation between the Hawks and the Doves, and that not even Bernanke believes has has sufficient clout to prevent what Time magazine has dubbed a potential opening salvo into a chain of events that could lead to civil war: in effect Bernanke will use the PD's decision as a trump card to the Hawks and say the market will plunge unless at least this much money is printed, ii) that the Fed is effectively asking the Primary Dealers to act as underwriters on whatever announcement the Fed will come up with, and thus prop the market, and, most importantly, iii) that the PDs will most likely demand the highest possible amount, using Goldman's $2-4 trillion as a benchmark, and not only frontrun the ultimate issuance knowing full well what the syndicate of 18 will decide in advance of what the final amount will be, but will also ramp stocks on November 3 to make the actual QE announcement seem like a surprise. This also means that the Primary Dealers of America, which include among them such hedge funds as Goldman Sachs, such mortgage frauds as Bank of America, such insolvent foreign banks as Deutsche, RBS, UBS and RBS, and such middle-market excuses for banks as Jefferies, are now in control of US monetary, and as we explain below fiscal, policy.

"Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC's dual mandate, it would be appropriate to provide additional monetary policy accommodation. However, others thought that additional accommodation would be warranted only if the outlook worsened and the odds of deflation increased materially. Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations." - FOMC Minutes

One of the more amusing side-effects of the Keynesian system's death throes are the ever greater disconnects between a central bank's lies about reality and its actions. In this case, there is likely no better recent example than the BOJ (our Fed has been less vocal in its minutes recently in extolling the virtues of the US economy, which is the primary reason why the only thing driving the market are expectations of the arrival of "QE the Saviour"). Goldman has compiled a handy table showing how beginning in September 2009 there has been a major divergence between the BOJ's economic assessment and actual policy decisions, confirming that a nation's central bank is nothing but a populist tool to preserve a political system, even as it acts completely in opposition to its convictions.

Regarding our collateral framework, the Governing Council has decided to keep the minimum credit threshold for marketable and non-marketable assets in the Eurosystem collateral framework at investment-grade level (i.e. BBB-/Baa3) beyond the end of 2010, except in the case of asset-backed securities (ABSs). In addition, the Governing Council has decided to apply, as of 1 January 2011, a schedule of graduated valuation haircuts to the assets rated in the BBB+ to BBB- range (or equivalent). This graduated haircut schedule will replace the uniform haircut add-on of 5% that is currently applied to these assets. The detailed haircut schedule will be based on a number of parameters which are specified in the press release to be published after todays press conference.