Can The Fed Ever Exit?

Tyler Durden's picture

We have extensively discussed the size (here - must read!) and growth (here) of the Fed's largesse in soaking up massive amounts of the primary and second Treasury (and now MBS) markets with the ongoing theme of 'what about the exit strategy?' among other things. The onset of QEternity likely means the Fed's balance sheet will grow to over $4 trillion within the next year and, as UBS notes, although the Fed has suggested that it will not begin an exit strategy until 2015, the magnitude of the excess balance sheet argues for considering whether the Fed has the ability to unwind their balance sheet. We, like UBS, believe that the Fed will find it far more difficult to exit than they have found it to enter given the limitations of the exit tools frequently cited. There are three main tools for reducing the Fed’s balance sheet: asset sales/maturation (bad signaling), reverse repurchase agreements (size constraints), and interest on reserves (inflationary).


Via UBS:

  • Asset sales/maturation. The portfolio shift to a longer average maturity means that the Fed is unable to reduce its balance sheet only by letting securities mature. There would be no material reduction until at least 2016 and even then the reduction would likely be under $250bn. Outright sales face a different problem – expectations. Unlike purchases where announcing a certain amount of purchases reinforces the Fed’s goal of lowering rates via expectations, any sales would likely result in the market pricing in a fully normalized balance sheet. As such, an initial sale program of just $200bn would not be credible as the expectation would be that the sale announcement signals a desire to return to normality requiring an addition $2.5tn in sales at some point.
  • Reverse repurchase agreements. This tool is swamped by the magnitude of the drain required. At present money fund assets are roughly $2.5 trillion, $200 billion less than the excess balance sheet we anticipate by the end of 2013. However, this statistic does not tell the full story as reverse repurchase agreements only make up just over 20% of money fund assets, or just $500 billion. The other primary counterparty the Fed would rely on, the Primary Dealer community, are unlikely to be able to participate in anything close to that size. While these figures do not prevent the Fed from using this tool, they do suggest it can only be a part of the overall solution.
  • Interest on reserves. Although interest on reserves theoretically creates a floor on rates in the interbank market, it does not prevent banks from using funds to make loans. Loans eventually end up as deposits somewhere and, as such, the overall level of deposits at the Fed provide little guidance as to whether the funds are circulating in the economy. The only way to prevent lending would be for the Fed to raise this rate sufficiently to make banks prefer depositing the money at the Fed to lending to their client base.

QE3 and QE4, if enacted and continued until the end of 2013, will leave the Fed with excess balance sheet of roughly $2.7 trillion.


Fed Treasury holdings by coupon maturity date (2013-2042) expected at the end of Operation Twist at the end of 2012.


Money fund assets have been falling and the total amount of repos done by money funds does not appear sufficient to allow the Fed to rely solely on reverse repos from this financial segment to drain liquidity.

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surf0766's picture

NO. Next discussion. !

Careless Whisper's picture

The Careless Whisper INTERESTING STORY OF THE DAY & Threadjacking

Today's "interesting story" starts out rather ehhh, but upon digging deeper there's something there that I think ZH readers will find interesting. Our story starts with "Good Morning America" weatherman Sam Champion (he was born with that name), announcing his engangement to Rubem Rubierb. Rubem Robierb is an artist/photographer. He's from Brazil, and is. of course. hot. All Brazilian men and women are. That's the way it is. Here's the official press release and photo;

This is a photo of Mister Rubierb from his web site:

Well, legally blonde (I call her that affectionately because she is damn smart) Ann Romney is guest-hosting one morning next week on GMA and now people are speculating that she may feel "uncomfortable" with gay Sam Champion. ppffft. Amateurs. She will sieze this opportunity to be inclusive, as she has already supported responsible stem cell research, and can certainly think for herself. Okay, now the interesting part for ZH people. It seems Mister Rubierb had an art exhibit earlier this year. It was called "Show Me The Money", and before any of you say, that's art? Let's remember that good art inspires thought, and I maintain that these works of art are certainly provocative;'S%20VOICE.JPEG





ratso's picture

What, if any, are the reasonable alternatives to the Fed's present course of action?

Zero Govt's picture

Ratso -  the use of the word "reasonable" when considering the Feds actions is extremely unreasonable

we're talking about loonatic Bubble Ben here, from Planet Uranus (an Ivy League University), not some capable and professional business manager balancing his budget for the month 

machineh's picture

When Bernanke unveiled QE1, he promised it would be withdrawn in due course. But the next year, he announced QE2 -- so much for good intentions!

Here's the skinny: the Fed will NEVER reverse QE, for two reasons: (1) It would crash the economy; (2) E-Z money KongressKlowns would react by abolishing the Fed's hybrid structure and making it a full federal agency under their control, with some smart-mouthed jerk such as Barney Frank in charge.

Like every politician, Bernanke fully intends to leave his reeking monetary Augean stables behind for the next Chairsatan to shovel out.

I hereby nominate the Bernank to the National Hall of Shame, to take his deserved place alongside his mentor and co-conspirator Greenspan (not to mention previous Chairstooges such as Arthur Burns and G.William Miller). LOSERS!

CrazyCooter's picture

I am missing the jist of this threadjacking. Usually, it's relavent content.

That art is crap. I am so sick of modern art. Look, the quick and dirty political statement stuff, fine. Is there a skill there? Of course. But the things, in my life, that really get my goat, are things I can look at ... FOR YEARS ... and still have an infatuation with. The list is very short, but when I see 'em, I buy 'em (if I can afford). The list is short, but great art is timeless.

Often, people who have a "life of art" are funded from other sources and do not "survive" on their creativity.

Maybe my bar is too high. Or maybe I am annoyed that he made TX too small. Take your pick.



Chuck Walla's picture

Call me when rubberbum gets one to look like Jesus.  Or Ben sucking Keynes...



CH1's picture

They don't care.

The Primary Dealers - aka, the owners of the Fed - have been skimming from every dollar of debt created.

When it all goes down, they'll run up a new banner, ride in to the rescue, and start over.

Sheeple will be suckers, again.

economics9698's picture

I would bet people figure it out, some people, and hang them.

Clashfan's picture

How charmingly Quixotic. I'll take the other side of that bet and win every time. I don't think there are any examples in history of such stuff happening, really.

economics9698's picture

WWII, it was done frequently. 

People forget when the fiat dies everyone will learn about banking and who was responsible for the collapse. 

When America is sacked and burned by central banking the public will figure it out.  

All those ex-government employees eating oatmeal everyday...they will grow a brain sooner or later.

kaiserhoff's picture

The French Revolution?

The German response to France and their Jewish bankers?

Iceland if it had come to that.

Clashfan's picture

The so-called "French Revolution" was a Templar construct from start to finish.

rotagen's picture

The Rothschilds of the world  won't "exit" until you kill them.  They would gladly kill you first.

economics9698's picture

I agree, we need to kill them.  And by we that means we who understand who they are.

Radical Marijuana's picture

Yeah, there is no feasible plan for Fed's privatized fiat money runaway frauds to "exit."  Those behind that achievement have an advanced agenda to deal with the world's real problems, their way! The supreme organized criminals that controlled our governments, in order to legalize counterfeiting of our money supplies by them, already have well-developed plans in place for the future. I think those plans are insane, and will go horribly out of control, but nevertheless, that appears irrelevant, and will certainly not change anything that matters.

The "exit strategy" for the people who set up the Federal Reserve Board is genocidal world war, and democidal martial law. They plan on going for broke. They have built a global electronic fiat money fraud system, backed by atomic bombs. They have no intention of backing out. They have no exit plan other than to wipe out the majority of the world's population, and then, they hope to mop up afterwards.

Therefore, I am forced to agree with rotagen.

Tragically, I believe that almost all of us going to lose. They will continue to try to kill us, before we kill them, and that will go out of control, and almost everyone will be killed instead. Hence, the real future will be as utterly unpredictable as total war with weapons of mass destruction! I can not see any plausible way to prevent that from happening. The established systems are ALREADY runaway electronic frauds, of making more and more "money" out of nothing, as debts. That debt slavery has ALREADY become debt insanity. There is NO sane exit left! There is only the old-fashioned insanity of starting a war abroad, and using that excuse to impose martial law at home. Both of those things are practically guaranteed to go wildly out of control, very fast, after they get to a critical point of craziness. The trillionaire mass murders that control our current civilization are going to attempt to consolidate their power, using their tried and true traditional means, of backing up bigger lies with more violence. However, those bigger lies are now electronic frauds, and more violence means weapons of mass destruction.

Of course, I still WISH that I did not believe that!  I still WISH I could believe that some series of political miracles would save us instead.  However, in practice I see no possible "exit strategy!" The Fed is the runaway triumph of Fraud, backed by Violence. It has no possible exit, other than political miracles, OR the insane mass murder of most of the human population. There is no real contest between the probabilities of those two options, since, when the use of weapons of mass destruction goes out of control, and the imperatives of militarism take over, then the "kill them before they kill you" situation thoughout human history gets astronomically amplifed by science and technology, in ways that kill just about everybody.

Clashfan's picture

I was thinking of posting a list of great ZH screen names, potential ones.

Right now, for example, I'm wishing my sn was Bertha Champagne. It just has a ring to it, you know?

Still don't know why you didn't go with Radical Reefer.

Radical Marijuana's picture

Yeah, I should have!

It has a nice alliterative ring.

The reason behind the name I use is that I inherited the name "Marijuana Party" when I officially became the "leader" of a registered Canadian political party called the "Marijuana Party." That party was originally created by young radicals, that deliberately liked that name, and picked it precisely because they KNEW the history behind the word "marijuana."

"In the beginning was the word, and the word was a lie."

That is, the original English word for that plant was hemp. The Latin name was cannabis. Both the words "marijuana" and "pot" come from Mexican Spanish slang, due to the history of the propaganda campaign that rebranded hemp as "marijuana," in order to assert that "marijuana is almost as bad as murder," since most people back then would not understand nor recognize that making marijuana illegal was criminalizing all cannabis, and therefore, hemp industries would be put out of business ...

Anyway, in 2004, the Canadian election laws were changed in ways that deliberately burned that little Marijuana Party to the ground and bulldozed it over. I became party "leader" because nobody else was willing and able to. In fact, everything since then has gotten much worse here. Canada always has followed after the USA, and in 2012 Canada adopted the American style mandatory minimum prison sentences for cannabis crimes, and our the current Canadian government is doing everything it can now to wipe out the medical marijuana programs that it was forced to allow due to a series of Canadian court decisions. Since everything is ACTUALLY getting worse, faster, I am actually the "unleader," in retreat, of Radical Marijuana in Canada, as an officially registered political party name, through Elections Canada.

"Radical Marijuana" is a phrase which is deliberately analogous to "Crazy Nigga."  In fact, there are deep isomorphic analogies between human races and different breeds of marijuana plants. The resin on the marijuana flowers is similar to the pigments in human skin that protect from Ultra Violet light. That is, melanin in human skin protects from sun burn, while the THC on the marijuana flower is highest in concentration around the bracs, that protect the immature seeds from too much UV light. Therefore, pot plants that evolved in the high altitude tropics evolved to produce lots of resin when they were flowering, while lower latitude, lower altitude pot plants did not evolve to do that so much. Pot plants have the genetic variability to get sun tanned like people do. Pot plants that naturally grew in areas like the Ukraine produced very little psychoactive resin. They were analogous to the human beings that migrated to live beside the glaciers, and therefore turned "white" or Caucasian, because they needed more UV light to be absorbed, so that their bodies could produce enough vitamin D (which is actually not a vitamin, but a hormone.) Pot plants that grew at lower latitudes or higher altitudes, like for instance in northern India, evolved to produce lots of resin, to protect their seeds.

Therefore, medical marijuana is "black pot" that is accepted because it comes wrapped in a white lab coat. While industrial hemp, which is forced to have less than 0.3% THC, in the few countries where that is legally allowed, is "albino pot."

That is also the history behind why the scientific names for that plant are wrong. Cannabis is actually one species, like human beings are one species. The distinctions between Cannabis indica (hemp from India) and Cannabis sativa (useful hemp) were scientific mistakes. The hemp plant is ONE SPECIES, the same as Homo sapiens is ONE SPECIES. The racism that asserted that black people were not human (as exemplified by the Dredd Scott case decided by the US Supreme Court in 1837) was similar to the historical mistakes that said Cannabis was a genus, instead of one species. In fact Cannabis should not be capitalized, because it is NOT a genus, but rather cannabis should be the name for a species.

Anyway, the entire history of the names for that plant were totally screwed up, due to the history of prejudice, that was actually worse than the prejudices between different human beings! Human beings have become profoundly insane, due to the triumphs of the biggest bullies' bullshit being able to dominate our culture so totally! The insane attitudes that human beings have towards plants are actually MORE INSANE than the attitudes that some human beings have towards other human beings. The word "marijuana" illustrates that, and the legalized lies, backed up by legalized violence, in the form of the marijuana laws, are the single simplest symbol, and the most extreme example, of the general pattern of social facts that EVERYTHING is controlled by huge lies, backed up with violence ... LIKE THE MONETARY SYSTEM, as dominated by the Federal Reserve Board.

Therefore, there was a history behind why I ended up using the name "Radical Marijuana." ... I like to think that name may be like a judo technique? That is, one does not try to use one's lesser strength against one's opponent, but rather attempts to channel the opponent's greater strength to end up acting against them. I have the same idea with respect to the fascist plutocracy that was made and is maintained by the trillionaire mass murders, like the people that were able to make and maintain the Federal Reserve Board. It is NOT possible to stop the fascist plutocracy. However, it MIGHT be possible to push it beyond where it would have otherwise stopped? ... In a sublime way, that is another answer to the question of whether there is any exit strategy for the Federal Reserve Board. ... Of course, that appears like me merely day dreaming about some implausible political miracles, like I typically do, since the there is NO reasonable hope for the future, and therefore, irrational hopes might be better than no hope at all?

machineh's picture

In 2012 Canada adopted the American style mandatory minimum prison sentences for cannabis crimes.

Another legacy of Steven Harper, the Canadian George Bush who just won't go the fuck away till he's wrecked everything.

glenlloyd's picture

No, there will never be a FEXIT..

ToNYC's picture

Apocalypse Fed:

The back-fires the Fed will build to halt the raging fires of rising interest rates will be something to watch away from the debris field in the cities.

Skateboarder's picture

The sign at the entrance of the dead mountain in Lord of the Rings is the best analogy I can think of.

"The way is shut. It was made by those who are dead, and the dead keep it. The way is shut."

Of course it can never exit. It was designed so!

Urban Redneck's picture

you passed the best analogy on the way in here

l'enfer c'est l'autres (le FED, les banques)

welcome to eternity

economics9698's picture

The Fed will exit when starving masses are told there is tons of gold at 33 Liberty PlNew YorkNY 10038.  Let then try stopping a few thousand rioters and a few snipers backing up the rioters.

Clever Name's picture

I have a very simple solution.


Vaporize it! Debt crisis solved!

lolmao500's picture

Maybe they gonna end up selling all that crap to the pension funds...

Xibalba's picture

Debt jubilee!

Atomizer's picture

My post has an indirect correlation, you'll understand soon.


What is the problem with evaluating group dynamics under the current foundation of social networking platform?

About Group Relations Conferences 

  • Ad saturation with diminishing effects
  • Alter egos
  • Role playing
  • Someone who wishes to become a follower
  • A EBT dependent’s doped up on Medicare drugs prescribed by a Doctor
  • The list goes on. 

Listen to me very closely, your another cut into our budget. You can wince all you want, its coming! Please fight with Big Bird on who stands in line first. 


Atomizer's picture

Glad my point was made. [-6] just shows the fear and denial of awareness.

Peter Pan's picture

Can the FED exit? Well Ron Paul was willing to show it the exit.

The real question however is, HOW MUCH DEEPER WILL IT GO?

saints51's picture

Ron paul wanted to audit the Fed and open the Fed to competition eventually making the Fed end itself. I may be wrong here but that is how I understood it.

topspinslicer's picture

Power corrupts... why would they exit?

razorthin's picture

No.  It's purpose now is to swallow up all of our debt then evaporate.  Problem solved.


brak's picture

How many BTUs do those digital 1's and 0's put out?

Skateboarder's picture

Negative. Each bit stored uses energy, as opposed to providing it like paper would. Using digital money expends more energy than it generates, I'm guessing.

StychoKiller's picture

Flash memory chips only use energy to read/write data, not to store it.

GMadScientist's picture

They're called watt-hours; most mainframes still use a bunch.


Urban Redneck's picture

forget being worth less than shit, @ 12.7 btu a dollar would be worth less than a fart...

(i needed some toilet humor to wash away the satre stench)

Poor Grogman's picture

Two possible exit strategys occur to me.

1. Eventually own everything ( nothing more to be said)

2. Eventually backstop/ own all financial liabilities then just Corzine them away.

Is there something I'm missing?

you enjoy myself's picture

#1 is really the only way, isn't it?  as mentioned in the piece - "...the sale announcement signals a desire to return to normality requiring an addition $2.5tn in sales at some point" - everyone would rush to dump on an epic scale at the first hint of selling.  hasn't all non-Fed buying over the last 3 years been solely for the price appreciation and not the yield?  virtually no one plans on actually holding to maturity when the yield is a negative real rate - the dumping would be NFLX-like and we'd have 20% interest rates instantly.  so yeah, i bet you the Fed's balance sheet just gets permanently inflated.

misnomer00's picture

Well, theoretically, inflation will never come if the Fed official policy is to be the last buyer of bonds and speculators will front run the Fed on each and every issuance of new paper. (as Gross did with MBS). Interest rates will go lower in that case and the inflation that the Fed wanted will never come.

Shit will hit the fan once there is a big supply shock (war, tsunami, earthquake) disrupting supplies and at the same time increasing demand for goods. That time the same speculators will frontrun the Fed on the sell sde of bonds and this time there will not be a single buyer. And boom - the whole system falls within a couple of months..

misnomer00's picture

Look at Japan. Decades of money printing and debt and inflation still does not pick up. Little do they know that once the inflation that they so badly want does come, it will be like the trunk of the giant redwood sequoia up their tiny little pinprick of an asshole.

I had expected the bif tsunami and nuclear power shutdown to bring the supply shock that I was talking about but the fucked up state of growth in the world has actually helped them keep inflation down. If war with China on the islands does ensue, its over.

Already Japanese exports have started to decline and CPI has leveled off. I am going to be looking at Japanese prices (currently at 117.8 in terms of Jan-83 prices of 100) to cross 123 levels as my indicator for the inflation scenario to materialize. (Prices peaked at 123 in 1998).

Buying USD/JPY will be the winning trade in that scenario.

q99x2's picture

I mentioned that in 2008 when tje gang of treasonous banksters, financial terrorists if you like, went and met with, a more than willing president and threatened him with marshall law and the collapse of society as we know it if he didn't sign where they told him to and whereafter the banksters also told him, "and by the way we can't stop the meltdown from eventually happening" and where then he responded, "how much time do we have to bring the DHS TSA HomeLand Security and military both foreign and domestic up to snuff=ing out any decent citizen that might complain, and whereafter the banksters replied, "we can't be certain but if you give us Leon Panetta to help us take over the United States, the we can probably give you as much time as it takes." that is when the gang of treasonous vermin first knew.

This article lets us know that the time when the collapse takes place is much closer than in 2008.