System Open Market Account

Goldman Interviews Former Head Of The Plunge Protection Team

"Purchasing a wider set of assets—as do some other central banks—might enable the Fed to have a larger effect on financial conditions and promote faster recoveries. But it would also involve putting more taxpayer money at risk and having an imprint on a wider set of risk premiums in the market."

Fed Reveals Balance Sheet "Normalization" Schedule: Will Reduce Reinvestments By $10BN/Month

Coming in earlier than many expected, the Fed for the first time laid out how it plans to "normalize" its balance sheet which it expects to reduce by trimming reinvestments in TSYs at a rate of $6Bn/month initially, and MBS at $4Bn/month, or a total of $10bn/month, and will increase the reinvestment caps in steps of 10bn at 3 month intervals over 12 months until it reaches a total 50bn per month.

George Orwell's Monetary Policy

"Tightening is easing..." Monetary policy is a black box and former Fed chair, Alan Greenspan, acknowledged this more than 20 years ago...

Fed Revises Reverse Repo Terms: This Is How It Will Implement The Rate Hike

As expected, in addition to raising the Fed Funds rate by 25 bps, the Fed similarly noted that it would revise the mechanics behind its reverse repo operations, raising the rate it charges on reverse repos by 25 bps to 0.5%, the actual means by which the Fed will hike rates for most market participants. Here is the statement that the Fed released regarding the change in overnight reverse repos.

We Know How This Ends - Part 2

In the end we all know that “informal central bank cooperation” doesn’t really amount to anything.  That lesson could be applied to the Bundesbank “selling dollars” in 1969, the PBOC “selling UST’s” in 2015 or the worthless, useless Federal Reserve RRP in 2016.  They really don’t know what they are doing, they never have and it truly doesn’t matter fixed or floating.  Adjust accordingly because we know how this ends; we’ve already seen it.

Fed Reveals Rate Hike "Plumbing" Details: Removes Cap On Reverse Repos, Limits Each Counterparty To $30 Billion

Perhaps even more important than the actual rate hike announcement, the one statement the market was particularly focused on was the Fed's "implementation note", which lays out the Fed's thought process on how it will actually raise rates in order to maintain the Fed Funds in the 0.25%-0.50% range. What it reveals is that in addition to removing the daily limit on aggregate borrowings through its overnight reverse repurchase facility, previously set at $300 billion (recall that according to Citi, the Fed may need to drain up to $1 trillion in excess liquidity to effect the 25 bps hike), it will have a per counterparty limit of $30 billion per day, which may or may not be enough.

The Fed's $210 Billion Hangover (That No One Is Talking About)

With more than USD 200bn of Treasury securities held by the Fed due to mature in 2016, the Fed will have to make meaningful monetary policy choices in advance. Fed VP Stanley Fischer commented on SOMA maturities in his speech last Friday, but it appears very few have taken notice as yet and even fewer comprehend the challenge soon confronting The Fed. Many believe that Twist had pushed maturities farther “into the future”. The “future” is Q1 2016. (Note: a shrinking balance sheet is a defacto tightening)

Behold: The Federal Reserve's First Plunge Protection Team

The NY Fed has been kind enough to just release a pic of the NY Fed's "Open Market Operations" team - i.e., its last line of defense tasked with preserving the American way of life - as it was first seen in the heat of World War II, some time in 1944. Because when one thinks of the veterans, one must not forget the men and women who quietly held it all together by BTFD.

With A Looming Debt Ceiling X-Date And Still No Deal, Here Is Another Trade Idea

On September 26, when we wrote "As US Default Risk Spikes To 5-Month High, Here Is How To Trade The Debt Ceiling Showdown", we suggested a simple 1M/1Y Bill flattener, which has since resulted in a massive profit to those who put on the trade with appropriate leverage, leading to the steepest outright inversion the short-end curve has seen on record. For those who engaged in this trade, it may be time to book profits and move on, as the risk of a negative catalyst - a shutdown/debt ceiling resolution - gets higher with every passing day that we move closer to the October 17 X-Date. However, those who wish to remain engaged in the short end of the bond market where the highest convexity to the daily newsflow can be found, one possible alternative trade is to shift away from cash markets, and into shadow banking, via the repo pathway.

Dallas Fed's Fisher: "We Own A Significant Slice Of Critical Markets. This Is Something Of A Gordian Knot"

"This is a delicate moment. The Fed has created a monetary Gordian Knot.  Whereas before, our portfolio consisted primarily of instantly tradable short-term Treasury paper, now we hold almost none; our portfolio consists primarily of longer-term Treasuries and MBS. Without delving into the various details and adjustments that could be made (such as considerations of assets readily available for purchase by the Fed), we now hold roughly 20 percent of the stock and continue to buy more than 25 percent of the gross issuance of Treasury notes and bonds. Further, we hold more than 25 percent of MBS outstanding and continue to take down more than 30 percent of gross new MBS issuance. Also, our current rate of MBS purchases far outpaces the net monthly supply of MBS. The point is: We own a significant slice of these critical markets. This is, indeed, something of a Gordian Knot."

 

Gold And The Endgame: Inflationary Deflation

Excessive monetary stimulus and low interest rates create financial bubbles. This is the biggest debt bubble in history. It is a potent deflationary force and central banks are forced into deploying increasingly aggressive (offsetting) inflationary forces. The avoidance of a typical deflationary resolution to this economic long (Kondratieff) wave is pushing the existing monetary system beyond the point of no return. The purchasing power of the developed world’s currencies will have to bear the brunt of the “adjustment”. Preparations for this by the BRICS nations, led by China, are advancing rapidly. The end game is an inflationary/currency crisis, dislocation across credit and derivative markets, and the transition to a new monetary system. A new “basket” currency is likely to replace the dollar as the world’s reserve currency. The “Inflationary Deflation” paradox refers to the coming rise in the price of almost everything in conventional money and simultaneous fall in terms of gold.