What Fed Exit?

Tyler Durden's picture

Bloomberg's Joshua Zumbrun has released a much overdue, MSM apocryphal, somewhat realistic outlook on the endspiel of Bernanke's central planning: i.e., the unwind of the Fed's balance sheet that from just under $3 trillion will reach $5 trillion by the end of 2014. We say "somewhat" because the conclusion in the article is that there is some hope still for an orderly wind down of the Fed's assets without a complete market collapse. The reality is that there is no such hope.

As we have explained previously, the market now demands roughly $85 billion in ten year equivalent "Flow" per month injected by the Fed: this was what QEternity allowed the market to price in as the basis level for the future and is why we knew with 100% certainty that Twist would be extended the day it was announced on Sept 13, only without the offsetting sale of ZIRP-umbrella securities (which are irrelevant from a 10-year duration standpoint), a forecast that has now been adopted by everyone. In plain English: the market needs the Fed to inject $85 billion each month just to stay level, never mind grow (sure enough, the market highs for 2012 were hit the day after QEternity was announced, confirming the market will need to see even more monthly flow to continue rising).

Anyway, some of Zumbrun's key highlights:

A decision by the Federal Reserve to expand its bond buying next week is likely to prompt policy makers to rewrite their 18-month-old blueprint for an exit from record monetary stimulus.


Under the exit strategy, the Fed would start selling bonds in mid-2015 in a bid to return its holdings to pre-crisis proportions in two to three years. An accelerated buildup of assets would also mean a faster pace of sales when the time comes to exit -- increasing the risk that a jump in interest rates would crush the economic recovery.



The bigger the balance sheet, “the riskier the exit becomes,” Richmond Fed President Jeffrey Lacker said during a Nov. 20 speech in New York. “That is something we need to think carefully about.”


Krishna Memani, director of fixed income at OppenheimerFunds Inc., said a too-rapid sale of assets risks disrupting the $5.2 trillion market for agency mortgage debt.



“They have to find ways of unwinding the balance sheet without dumping all of it in the marketplace,” said Memani, who oversees a bond portfolio of about $70 billion, including about $6 billion of mortgage-backed securities.



“The more they add to the balance sheet, the longer it will take to normalize,” said Hanson, who worked on designing tools that will be used in the Fed’s exit strategy as an economist in the monetary affairs division at the Board of Governors in 2009.

“The exit is going to take a long time,” said Stephen Oliner, a resident scholar at the American Enterprise Institute in Washington and former Fed Board senior adviser. He estimates the Fed’s holdings could rise to more than $4 trillion.


If the Fed were to start bringing its holdings back to their pre-crisis level today, it would have to sell almost $2 trillion over a period of two to three years under its current exit plan. Assuming holdings grow to $4 trillion, asset sales could come to $3 trillion over the same period.
The Fed’s other tool is to extinguish reserves by selling bonds back to dealers. Even a fully-explained plan could push up home borrowing costs as traders account for hundreds of billions of dollars of new supply flowing back into the market.


“We are deep into experimentation at this point,” Oliner said. “It’s understandable that people are worried.”

All relevant and credible insights, which however can be summarized with one simple fact and an even simpler chart courtesy of Stone McCarthy.

The fact: "The measurement of duration risk translates to an average price decrease of approximately 7.65% for each percentage point increase in all yields." In other words a DV01 of well over $2 billion. So much for that total credible Fed "capital" of $55 billion which would be wiped following rates rising by a tiny 32 bps. But where it gets fun is extrapolating, because at the current rate the Fed's balance sheet will hit a 10 Year average duration by 12/31/2014, on $5 trillion in holdings. A DV01 of $5 billion, or $500 billion for a 1% rise in rates!

As for the chart:

The chart shows, without a doubt, that the Fed is now the sole monopolist of Treasury demand expressed in mid-modified duration - i.e., the risk parameter most relevant to the Fed as it attempts to push everyone into higher risk assets (when instead all it is doing is merely allowing everyone to frontrun it). It also shows that in the past 3 years, the Private Sector has had its exposure to US Treasurys grow by virtually a non-existent amount, a simple fact that would make the head of steeped in theory and clueless of actual practice hollow pundits, such as Paul Krugman, explode.

To put it simply, the Fed's QE can not stop as there is no real market, or demand for TSYs expressed in duration terms, a fact the Fed's 4 year meddling in the market has been able to conceal quite effectively. Alas, the Fed knows this. The Fed also knows that in a country which will continue piling up $1 trillion + deficits forever, there will always have to be a backstop funder of the US deficit. Since China is long gone as a buyer of US paper, this only leaves the Fed.

In other words, the simplest reason why the Fed will never exit is because the US will never again run a budget surplus, meaningless discussions over what a token $80 billion a year tax increase (which will fund the US deficit for 2-3 weeks) will do notwithstanding, and the Fed will need to monetize ever more US-sourced paper until Bernanke and his successor after 2014 are the only "market" for bonds left standing.

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Pool Shark's picture



Can't happen.

Won't happen.




CH1's picture

It's all BS for the sucker class.

nope-1004's picture

Fed Exit?  LMFAO!!!!!  Impossible, the Fed is the market and has cornered themselves.  They are all in until the end, and they fucking know it.  This is just more MSM misleading bullshit.  Bernanke's a troll who tried to manipulate and stop the natural forces of nature:  Failure!  Now he's stuck in his own toilet.

Ben Bernanke,  Your 15 Minute Man is so full of shit, you gotta be seriously stupid to believe the Feds' lies.


TruthInSunshine's picture

This is what happens, bitchez, when you have batshit crazy level people running monetary policy.

Ben "The Fed Will Not Monetize the Debt" Bernanke & his cohorts, from Yellen to Dudley, have already done the acts that will inevitably prompt future crises.

That these people have done what they've done is nothing less than truly remarkable. It's almost not possible to overstate how badly they've broken all markets.

Anyone who believes that the economy is growing in real terms, let alone not contracting (and then add in the ECB's following in the footsteps of the Fed, and look at growth rates across the EU, with Germany starting to crater now, as well, not to mention a who-can-possibly-know-how-badly-an-even-more-opaque-than-conventionally-thought-of China is doing), or that the Fed's actions have been a massively significant factor in creating a broken economic foundation that will haunt us for many, many years to come, is simply delusional.

I'd love to hear how Krugman, or any other dipshit of his "caliber," living in the types of ethereal air of vacuums they happen to live in,  make their predictions as to the mechanics, timeline and consequences of the Fed "unwinding" its present balance sheet, let alone the even more crammed full of toxic shit balance sheet it's going to have in two year- Krugman has sworn up and down consistently that the Fed's wholesale swallowing up of tnotes for some 32 odd months now has had minimal impact on interest rates, DESPITE what the Fed itself has had to say it's official reasoning for doing so is, and Krugman has said yields on U.S. debt are efficiently priced, essentially (how can anyone consider him to be anything other than a total liar?).

The shit is beyond insane. Anyone who claims there's anything under control with respect to this particular issue is either an absolute moron or an absolute propagandist.

The bottom line for the TL;DR crowd is that the future crises won't be kicked down the road because we're living through them now, and they will only deepen, no matter what is "officially" stated or reported. And yes, that"forward discounting mechanism" that is known as the equity market, which has not such a brilliant track record of getting that "forward" thing right, will be reacqainted with economic reality, regardless as to what the Fed, ECB, BOE or PBOC do or oon't do (see Nikkei since 1990 for a rougly approximate road map for the future).

Mr Lennon Hendrix's picture

What is crazy is not that this policy is implemented by those who are paid big bucks to learn the fiat science of economics, but that people who live their days as lawyers and docters, as bartenders and plumbers actually believe the Central Planning will work.

GetZeeGold's picture



What do you wear to something like that?


 ...the Fed is the market and has cornered themselves.


After 100 years they finally cry uncle.....and fully admit they're totally open to suggestions.

JPM Hater001's picture

Im late to the game here but does anyone else think this may be a CIA plot to bring down the Rothschilds?

GetZeeGold's picture



Better late than never I suppose.....but I must warn you those cats have one hell of a headstart.

Muppet Pimp's picture

Kennedy was killed November 22, 1963 for trying to expose the international banking cabal.  One month later silver was dropped to 40% in our coins.  5 years later no more silver in our coins.  Hmmmm.

(Edited for accuracy, originally claimed silver was removed entirely in 1964)  

Antifaschistische's picture

If the FED "built" it's balance sheet with money/debt that it invented/printed/debit-cash-entry.  Then, what does it do with the real money others pay for those assets in an unwind?   Does the FED drop that money in virtual shredder?   Even if it took a huge haircut, who would care?   If you ended up with 20% of 3T.

Not sarcastic...not rhetorical, I'm really not sure how this plays out.

Mr Lennon Hendrix's picture

I don't know what the Fed's average YTW is but it shouldn't be anything special.  Maybe it is 3%.  But what is important is the flow of money, not the stock (as Zero Hedge drills everyday) and so those payments could not go into the shredder - they are needed to continue the puschase programs.

rocker's picture

Remember da Bears. BTFD.  The shorts and Prechter followers are broke too. Yes we all know how it ends, but 2014 ?!?

Didn't the Bernanke say we are there till 2016. Who knows. The Reality is this is how the game is and has been played for years.

With the Internet and a smarter generation something has been exposed for all to see for what it is. Devaluation of your Dollar.

The new generation understands that the Wars were on a Chineese Credit Card. They want the bill paid by those who did profit from it.  

CunnyFunt's picture

Too fucking right, rocker. I think too many have been burned predicting "the end". For the "illusioned", times are bullish!

old naughty's picture

When Ben's wet dream became our reality !

Yen Cross's picture

Cunny, you remind me of my Uncle Bud/ Mind you Cunny, I'm deep into my 40's... He was recon/tunnel-rat in Viet Nam.

  Anyways/ Uncle Bud had this giant grey "ash tray", that was alive. If his hand went under the ash tray, that was bad news/

  Uncle Bud also had an Attic/ and [ Bert lived in the attic}... Bert wasn't mean, he was always hungry. Uncle Bud used to throw Bert "hot dogs" so he was well fed.

   The point I'm trying to make is, Good people Transend culture, indifference, and most importantly, ( a good hug)

RiverRoad's picture

It's all about the flow of fiat .....until it isn't.

XitSam's picture

+1 for the Freudian typo: pus-chase

ArkansasAngie's picture

And ... we are back to where we started the crisis -- it isn't a liquidity problem is insolvency.  And while some of the 99% are insolvent it is the 1%'ers who are actually wiped out.  Implementing moral hazard is how you solve this mess.


PoliticalRefugeefromCalif.'s picture

I'm pretty sure that will signal another lecture from the White House on the necessity of "shared sacrifice" as being the patriotic thing to do.

another cup of water in the soup and no one will notice.

media will handle it. 

ElvisDog's picture

To put it simply, who is the Fed going to sell its $3-4T of Treasuries and mortgage secturities to under a ZIRP world? Answer: No one. Those who have the money won't buy those securites at near-zero interest rates. And it's not a matter of "the U.S. can print its own money". No one will buy a 10-year bond unless the expected reduction in the purchasing power of the money invested is less than the interest rate. That doesn't work under ZIRP.

TruthInSunshine's picture

The Fed will wither at some point, intentionally, somehow forcing its septic holdings onto the American Taxpayers, and will be reincarnated in the form of yet another fractional reserve institution, only with a more patriotic sounding name, like "The Bank for American Prosperity," or some such nonsense.

You can't kill this thing. It's like an even more resistant-to-everything cockroach. We're on version III of the beast.

Poor Grogman's picture

The beast didn't count on the internet reformation.

The beast will die in time,

Does anyone know of a cockroach that lives under a heat lamp for long?

NumNutt's picture

This is the begining of the end game. The beast is starving, and it has now started to consume its own tail to satisfy the hunger. How long you think that can last? 5 years? Something like that, then it is Argentina all over again. Anyone have any hard numbers of how much capital is moving around via EBT cards? 48+ million EBT card holders is a large group. I am beginning to think we have past the tipping point of the source of cash in the system now being generated more from the federal government then the private sector. Obama must be proud.

Big Slick's picture

"Obama must be proud"

I remember 2008: 'Elect me and I will "fundamentally transform our country."'

What did the electorate living in this free, capitalist, representative democracy think we were going to be transformed into?

Just like Al Qeada, he said what he was going to do... and then went and did it.

jeff montanye's picture

i think he is a less influential person than g w bush, except to the extent he co-opted the democratic party into an undeniable acceptance of bush's revisions of the constitution, multiple aggressive wars, non-enforcement of financial control fraud laws, transfer of government funds to the financial control fraud perps and giving design of the nation's healthcare (and ...) policies to the industries that could most profit by same.  the original wrinkle of executive assassination of citizens is obama's own signature stamp, but hey, he was a professor of constitutional law.

Lets_Eat_Ben's picture

We don't know the half of it

SWIFT 760's picture

TIS is correct. However the purposeful debt enslavement wont end with American citizens. The systematic decline will eventually ensalve all global citizens. Then, some bullshit second coming of Christ (martians?) or some such shit will force the masses to follow their new savior. Thus a new currency and global gvt is born. Those who resist are deemed the problem and thusly cleansed.

Debt is name of the game. Debt will force gvts to collpase (Greece, Spain, etc). The insiders will reap trillions and endless power ( ie puts and calls day before 9/11).

The kikenvermin are mainly responsible. So yea, jewbux still suck.  

RiverRoad's picture

We'll sell our treasuries to whomever at the point of a gun, no doubt.

HurricaneSeason's picture

401Ks and other pensions will be magically tranformed into treasuries at the push of a button too, without a shot fired. They'll take everything down with them.

disabledvet's picture

actually the answer so far has been WALL STREET. And those that have bought have ENORMOUS returns to show for it. but i do agree if the economy doesn't get moving then i think the reserve currency status of the dollar will be tested...and dramatically so. obviously the whole game of chicken over the "fiscal cliff" could test that dollar value as soon as this coming week! hard to see a dramatic move lower vis a vis the yen given Fukuhsima...even with Fukushima that is a pretty spectacular collapse of the dollar still. obviously in Europe the economy has completely tanked...but as with Japan this has been euro positive for some time now. this says to me "the policy is failing." i'm still not bailing on equities...for a multitude of reasons not the least of which is a pretty well worthless greenback...but should there be a "crisis of confidence" in the USA about repayment of said debt i think a "debt cascade" is quite probable.

TruthInSunshine's picture

Good luck sticking with equities based on the belief that the USD that underlies their valuation (even foreign equities are significantly impacted by USD strength/weakness) is weakening.

This is just yet one more reason to believe that the crash is going to be bigger than even many bears expect; the sell-side carnival barkers are preaching the "buy equities because USD weakness is good for exports, blah, blah, blah" when the companies exporting goods are doing so for remittance of payment in USD.

prodigious_idea's picture

With employer-sponsored retirement plans (mostly 401(k)) constantly buying bonds to accomodate the investment selection of participants, won't the TSYs get purchased by money managers for those same plans - at least in part?  And isn't that steady in-flow part of the reason for price stability in the market(s)?

Alexandre Stavisky's picture

Remember the entire global central bank franchises will backstop all the systemic risks.  All financial instruments will be made whole by printing, and indexes will be supported by printing.  Derivatives and CDS and IR Swaps are all written by the banking syndicate with insurance to counterbalance risk written just by a differing arm.  No defaults will ever be declared and any event which trivially threaten the system will be met with money creation.

Banks have been recapitalized by money creation.  Sovereign bonds have been retired by money creation.  New bonds have been floated at historical lows by money creation.  All federal excess expenditure is funded by money creation.  All entitlements, gov't pensions, military, and gov't employment which exceed receipts will be paid via money creation.  US Dollar will be defended as global reserve currency as another support mechanism.

Hugely inefficient paradigms of gov't sponsored employment and entitlement in the welfare/warfare matrix allow distribution of newly created money.  Insurance companies also distribute through payouts via collection on investments in Ponzi bond market and equity shares in public markets propped with printed money.

Thus huge swathes of compromised paper can be removed from public markets to be sequestered by central bank franchises, interest rates can manipulate to simulate favorable borrowing terms, derivatives will always be backstopped in order that no destabilizing events occur. Etc.,etc.,etc.

In other words, true wealth creation is in serious contraction, but money creation masks the effects.  Multinationals and franchise directed leviathan companies continue to crank out consumer goods as they are equipped to operate in this environment.  Small business, dead.  Independent small professionals, dead.

So the path to hyperinflation is not only possible, it is the ONLY possibility.  Any part of the economy not well connected to the franchise system will atrophy and die taking their goods and services with them.  But money creation and distribution (irrespective of merit) will expand and explode.

System dies with universal access to large sums of money because the creators of the desired goods are exterminated.

We'll see in this ship of state,

Water, water, everywhere,
Tho' all the boards may shrink;
Water, water, everywhere,
Nor any drop to drink.


With throats unslaked, with black lips baked,
Agape we heard the call:
Paper! we for joy did grin,
And all at once our breath drew in,
As they were drinking all.

See! see! (I cried) the ship, she tacks no more!
Hither to work us weal;
Without true breeze, without a tide,
She steadies with upright keel!

The many men, so beautiful!
And they all dead did lie;
And a thousand thousand slimy things
Lived on; and so shall I.

Through collapse, until

We'll go like those that hath been stunned,
And are of sense forlorn:
Much sadder and wiser men
To rise ev'ry zombie morn.



Radical Marijuana's picture

Quite the overwhelming degree of agreement in the Zero Hedge comments on this article. Far more than most other topics! Of course, I completely agree with the TruthInSunshine view: Anyone who claims there's anything under control with respect to this particular issue is either an absolute moron or an absolute propagandist.

The real world is controlled by a combination of lots of fools, tricked by fewer liars. The result is that the whole world is being controlled by huge lies, backed by violence, which can never make those lies become true, but only continue to drive civilization to become more and more insane, because it is more and more controlled by bigger and bigger lies. The obvious problem with being controlled by huge lies is that those are FALSE, and the consequences of continuing to behave on the basis of believing what is FALSE are that the situation must necessarily go out of control.

The current systems are the madness of runaway triumph of the Fraud Kings. The end game of the FED is the deliberate destruction of free markets, not ever, somehow, the return to free markets. Of course, there is no intention on the part of those who control the FED to ever unwind what they have screwed up. Their plan is to continue to twist it and twist it, until it breaks. There is no intention to ever go back to a democratic republic. There is no intention to ever go back to free markets. The intentions of the people that control the FED are to drive the deliberate destruction of America, so that there will be a clear field to impose global government, where the Fraud Kings have complete and total control over everyone. The intentions behind the FED are to deliberately collapse the American economy into chaos beyond repair. Their plan is to replace the democratic republic that they have deliberately destroyed with a global system where they control the whole world's money supply, and control all of the armed forces which back up their financial frauds. I do not think that there is any doubt about those points above. However, there are lots of doubts about whether it will actually be possible to consolidate the hegemony of the banksters into that kind of global government.

I maintain the following axiom:


However, I believe that the only relatively stable and sustainable ways that works is IF there evolves dynamic equilibria between the difference systems of organized lies and robberies, so that there is an overall ecology of those factors, which maintains enough diversity to be sufficiently adaptable. The runaway triumph of the Fraud Kings, as manifested in America by the FED's actions, is creating an insane monopoly, which is extremely unstable, and which cannot be made stable by consolidating those banksters' monopolies on a global scale. Therefore, I do not believe that wiping out the American democratic republic, and assimilating the remains into a globalized system of financial frauds and force, is on any path towards something which will actually enable global control, but rather, will provoke global chaos beyond imagination, which will wipe out the international banksters, as well as just about everyone else too.

However, what I believe is obviously a practically pointless thing. The world is overwhelmingly dominated by fools tricked by liars, and neither group will pay any attention whatsoever to my point of view, nor to most of the points of view expressed by Zero Hedge, and most of the people who post comments here. The world IS controlled by fools tricked by liars. There are no good reasons to believe that will change, except through the destruction of most of the fools, and perhaps most of the liars too? After working on the problems of attempting to persuade the fools not to be tricked by the liars, I have belatedly recognized that everything I have trying to do for several decades was a waste of time. Both the professional liars, and the masses of fools that they trick, are beyond any ability to influence with evidence and logical arguments, since their social habits are simply to totally ignore those, automatically, without even looking. Therefore, the world IS out of control, since it IS controlled by huge lies

Quantum Future's picture

So you are a quiter.


What a waste!

Brilliant mind gone cold....

rbg81's picture

One really wonders if any serious analyst believes there will ever be a FED exit.  Really doubt it--I think most of them are just going through the motions of doing their job.  Which is important these daze as the Fed actions have made the job of Economics "experts" otherwise irrelevant.    Anyone who says that the Fed will ever shed assets or raise interest is either lying or stupid.  And I don't think too many of these guys are fundamentally stupid.  The Fed is all in until the System collapses on itself.

Dareconomics's picture

When I read the original article yesterday, I knew there would be posts about it today. Up until the GFC, the Fed used interest rates to control monetary policy. After every recession ended, it would raise rates, but they could never raise them to the same levels prior to the economic downturn.

Once intervention is begun, it cannot stop:




rbg81's picture

Good article, but mostly confirms what most of us here on ZH already knew.  The Fed is allowing Politicians to take the easy way out.  Rather than being "mean" and taking entitlements away from the poor, they're shafting everybody--except maybe the Super Rich.  But their doing their shafting in a stealth manner which makes it hard to point fingers.  Joe & Jane Sixpack know they're being screwed, but can't figure out the why or how.  The perverse thing is that as the System become more unstable, people will demand MORE Government intervention, which will only make the problem worse. 

economics9698's picture

Yep that's the plan.  Germany 1920s.

ElvisDog's picture

I would slightly disagree. They don't want what happened in 1920's Germany to occur, they think they are so smart ("I'm a student of the Great Depression") that they can print indefinitely while avoiding hyperinflation. That, I think, is the hubris that is guiding Bernanke, et al. in what they are attempting.

hoos bin pharteen's picture

Thing is, the Germans in the 1920's thought the exact same thing - they didn't set out to destroy their economy and ultimately trigger WWII.  And many of them were far better men than Bernanke.


centerline's picture

We are locked on course - the Fed is doomed, but built to serve this purpose... no surprise there.  Nothing will compare to the coming liquidation though.  

GetZeeGold's picture



They don't want what happened in 1920's Germany to occur


....and you think the Germans did?

fonzannoon's picture

in the 20's the rest of the world was not trying to debase along with germany. how does global devaluation play into this?

nope-1004's picture

+1.  I agree.  Hyperinflation of one currency means relative to another.  But if all corrupt central banks debase together, then what?  We know the "what", because we are living it now:  Lies about employment, lies about GDP, lies about productivity, "new normal", "better than expected earnings", libor manipulation, precious metals manipulation, MF Global thefts, Peregrine Financial thefts, on and on.  But after this "what" we are in now, the next phase gets interesting.  No doubt, one or more central banks topple.  It has to happen at some point.


centerline's picture

Given the level of counterparty exposure, when something meaningful finally breaks, I expect the game to get much more serious.  We ain't seen nothing yet!

blunderdog's picture

   Rather than being "mean" and taking entitlements away from the poor,

It's not the welfare programs where the big "entitlement" money is going, tho. 

It's Social Security and Medicare.  Those programs are the BIG bucks, and the main reason is because they're given to everyone who's old--whether they're rich OR poor.

Anyone who can ballpark the Federal "welfare" spending within a 20% margin of error knows full-well that even complete ELIMINATION of stuff like foodstamps and "free phones" isn't going to make a lick of difference to the deficit at the end of the day.