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Fed Minutes Reveal "Waning Benefits Of QE", Mentions Risk Of "Capital Losses"

Tyler Durden's picture


As one might have expected the tension during the most recent FOMC meeting was palpable in the minutes as opposing dovish and hawkish less dovish views on the costs and benefits (and non-comprehension of the machinations) of QE were evident.


The likely path of tapering seems clear (and mention of extending the reverse repo facility is notable) but how forward guidance will be implemented remains the hottest topics and Eurodollar prices suggest the latter even more so than the former.

Pre-FOMC Minutes: S&P Futs 1832.0, Gold $1225.5, 10Y 2.995%, EURUSD 1.3570, USDJPY 104.95

The punchline:

Regarding the marginal efficacy of the purchase program, most participants viewed the program as continuing to support accommodative financial conditions, with a number of them pointing to the importance of purchases in serving to enhance the credibility of the Committee’s forward guidance about the target federal funds rate. A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue, although some noted the difficulty inherent in making such an assessment. A couple of participants thought that the marginal efficacy of the program was not declining, as evidenced by the substantial effects in financial markets in recent months of news about the likely path of purchases.

Uhm yeah: remember "The Fed Now Owns One Third Of The Entire US Bond Market", and that the Fed now has a DV01 of over $3 billion. Someone at the Fed finally got the memo.

On the risk of bubbles:

The staff presented a short briefing summarizing a survey that was conducted over the intermeeting period regarding participants’ views of the marginal costs and marginal  efficacy of asset purchases. Most participants judged the marginal costs of asset purchases as unlikely to be sufficient, relative to their marginal benefits, to justify ending the purchases now or relatively soon; a few participants identified some possible costs as being more substantial, indicating that the costs could justify ending purchases now or relatively soon even if the Committee’s macroeconomic goals for the purchase program had not yet been achieved. Participants were most concerned about the marginal cost of additional asset purchases arising from risks to financial stability, pointing out that a highly accommodative stance of monetary policy could provide an incentive for excessive risk-taking in the financial sector. It was noted that the risks to financial stability could be somewhat larger in the case of asset purchases than in the case of interest rate policy because purchases work in part by affecting term premiums and policymakers have less experience with term premium effects than with more conventional interest rate policy. Participants also expressed some concern that additional asset purchases increase the likelihood that the Federal Reserve might at some point suffer capital losses.

Shouldn't the Fed never, ever mention the possiblity of capital losses as it immediately becomes a self-fulfilling prophecy? It continues:

... it was pointed out that the Federal Reserve’s asset purchases would almost certainly provide significant net income to the Treasury over the life of the program, especially when the effects of the program on the broader economy were taken into account, and that potential reputational risks to the Federal Reserve arising from any future capital losses could be mitigated by communicating that point to the public.

So, as long as the public knows that the Fed's DV01 of $3 bilion can and will lead to massive balance sheet losses, all will be well?

On the Overnight Reverse-Repo Facility:

... the Committee considered a proposal to increase the caps on individual allocations in the ON RRP test operations from $1 billion to $3 billion per counterparty. The proposed increase in caps was intended to test the Desk’s ability to manage somewhat larger operational flows and to provide additional information about the potential usefulness of ON RRP operations to affect market interest rates when doing so becomes appropriate. Participants generally supported the proposal, with one participant emphasizing the usefulness of extending the end date of the program beyond the end of January. However, some participants questioned the extent to which the proposed limited increase in the caps would provide additional insights about the operational aspects of the ON RRP program or the potential market effects of ON RRP operations. A few participants suggested that it would be useful to evaluate the potential role of an ON RRP facility in the context of the Committee’s plans for monetary policy implementation over the medium and longer term.

Usefulness? Why window dressing of course.

Remember peak uncertainty? "The staff viewed the uncertainty around the projection for economic activity as similar to its average over the past 20 years." So much for that.

Finally, some housing market perspectives:

The pace of activity in the housing sector appeared to continue to slow somewhat, likely reflecting the higher level of mortgage rates since the spring. Starts for both new single-family homes and multifamily units increased, on balance, from August to November, but permits—which are typically a better indicator of the underlying pace of construction—rose more gradually than starts over the same period. Sales of existing homes and pending home sales decreased further in October, although new home sales rose in October after falling markedly in the third quarter....  Mortgage rates rose over the intermeeting period to levels about 100 basis points above their early-May lows. On balance, refinancing applications were down substantially since May while purchase applications declined much less. House prices rose significantly in October, but  some indicators suggested that the pace of house price gains continued to decelerate relative to earlier in the year.

Full minutes below:


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Wed, 01/08/2014 - 15:03 | 4312383 Al Huxley
Al Huxley's picture

How come we haven't seen Hilsenrath's analysis yet?  What's the delay?

Wed, 01/08/2014 - 15:08 | 4312418 seek
Wed, 01/08/2014 - 15:10 | 4312431 jcaz
jcaz's picture

They fear "Reputational risks"-  really?  Really?

Wed, 01/08/2014 - 15:31 | 4312523 zaphod
zaphod's picture

Why are they worried about capital losses? The FED just stated that the S&P is not in a bubble and is undervalued...

Wed, 01/08/2014 - 15:41 | 4312554 Hedgetard55
Hedgetard55's picture

How can they have a "loss" in REAL terms when their REAL cost basis is zero?

Wed, 01/08/2014 - 15:12 | 4312444 whatsinaname
whatsinaname's picture

In summary - We will keep printing.

Wed, 01/08/2014 - 15:50 | 4312585 Headbanger
Headbanger's picture

Nope!!  In summary..  Y'all is fucked now!

Wed, 01/08/2014 - 15:13 | 4312446 TrustWho
TrustWho's picture

This is an indication the Fed is reading ZeroHedge and responding.

The Fed must protect its credibility....this makes me laugh

Wed, 01/08/2014 - 15:29 | 4312514 Race Car Driver
Race Car Driver's picture

I think it's pathetic that the multitudes of billions of people are ruled at the whim of a few words of a few evil motherfuckers. Something could have been done about all of this at some point long ago, but our ancestors were a bunch of fucks. It's all too late for that now. Even just a few years ago anyone discussing current events with any eye toward reality were dismissed as kooks and nut-job conspiracy theorists. Hell, there's retarded inbred deniers that - in the face of all evidence to the contrary - still do it today.

We deserve what we have - and what we have coming.

Wed, 01/08/2014 - 15:48 | 4312579 Headbanger
Headbanger's picture

Good one Al!!  And me thinks the absence of an immediate anal-ysis by Hilsenrath is an even more ominous sign of things to come from the Fed.

Wed, 01/08/2014 - 16:18 | 4312675 AngelEyes00
AngelEyes00's picture

Reading between the lines, it appears they have come to the conclusion QE is no longer having any effect.  Probably because the stock market has bubbled up and now floating in a small range. 

It also sounds like they are very concerned about exiting, and that's why they are definitive now about continuing to taper 10b a month to end QE by year end or earlier.

I'm very excited about this because this will tell us where things stand.  If they can taper to zero and we are all still standing, fine.  But my guess is the 10 year rate will ascend towards 4% by June, then 5% by Sept., and then what the heck do they do? 

Wed, 01/08/2014 - 18:10 | 4313112 NihilistZero
NihilistZero's picture

If perception is as important as they say, I don't see how they can untaper.  I've long felt this whole period of QE has simply been about clearing the banks balance sheets as much as possible.  This whole system is predicated on booms and busts and their only goal is to make sure Wells, Chase, BofA and Citi survive each downturn.  I expect the 10 year to rise, but not exponentially so as money still needs to be moved and parked and Treasury notes aren't getting replaced by Bitcoin anytime soon.  I figure Housing Bubble 2.0 pops and takes a swath of specuvestors and wannabe rentiers down with it.  Economy keeps trudging along with FED bennies keeping us from a depression just like they have since 2008.  Incomes are stagnant but the price of housing dropping gives the little guy some breathing room.  Obamacare blows up the health insurance industry and everyone is on medicaid within 5 years or so.  We still monetize debt but there is little real action by exporting nations as the American consumer still vital to the whole mess.  Spirits are down for many, but life goes on.

Wed, 01/08/2014 - 15:03 | 4312384 Deathrips
Deathrips's picture

Fuck You Ol Yellen!


Silver Bitchez



Wed, 01/08/2014 - 15:05 | 4312392 Central Wanker
Central Wanker's picture

The fuckers are trapped :-)

Wed, 01/08/2014 - 15:34 | 4312532 Race Car Driver
Race Car Driver's picture


You don't get it. 'They' are not trapped. 'They' have unlimted resources and power. This is 'their' plan.

'We' don't have squat. It's 'we' who are trapped. It's 'us' who are being lead to slaughter.

Wed, 01/08/2014 - 17:37 | 4312975 Herd Redirectio...
Herd Redirection Committee's picture

Not entirely.  They have to either sacrifice the US Gov't (the worlds largest debtor), or the USD (world reserve currency).   It looks like USD will be the one to bite the bullet.

Wed, 01/08/2014 - 15:05 | 4312397 Al Huxley
Al Huxley's picture

Also, somebody forgot to kick off the sell 'gold algo' - sloppy.  Is this kind of slipshod manipulation what we can expect under Yellen?  Are there no standards anymore?

Wed, 01/08/2014 - 15:08 | 4312417 Bastiat
Bastiat's picture

$4 and still girly slapping.

Wed, 01/08/2014 - 15:11 | 4312435 Bastiat
Bastiat's picture

$2more -- I guess I hurt someone's feelings.  I'll shutup now.

Wed, 01/08/2014 - 15:24 | 4312496 NoDebt
NoDebt's picture

Up arrow for using the word 'slipshod' in contemporary discourse.  

Wed, 01/08/2014 - 15:05 | 4312398 gjp
gjp's picture

Remember the 'measured' 25 bp rate hikes from 2003 to 2007?  Holding Wall Street's hand all the way, titans of capitalism get worried when they have to think for themselves.

Please tell me we don't have to live through four or five more years of this shit.

Wed, 01/08/2014 - 15:07 | 4312408 ejmoosa
ejmoosa's picture

Why are they more confident now about jobs than they were a year ago, when the average # of jobs added per month has fallen since 2012?

Wed, 01/08/2014 - 15:09 | 4312421 Rising Sun
Rising Sun's picture

uh, they're lying and the herd believes them


you don't need to convince everyone

Wed, 01/08/2014 - 15:09 | 4312409 Obama_4_Dictator
Obama_4_Dictator's picture

Wow, this is going to be unprecidented in scope and most people have no idea the FED is playing chicken with their life savings.  It's just so sad. To me this is much more interesting than anything on TV, but then again, I'm not your average Amerikan.....


EDIT: whoops I forgot most Amerikans have no savings....nevermind - game on

Wed, 01/08/2014 - 15:11 | 4312438 Cursive
Cursive's picture


Funny how people are different.  The more I live with it, the less interesting it gets. 

Wed, 01/08/2014 - 15:16 | 4312449 Obama_4_Dictator
Obama_4_Dictator's picture

I feel ya, It's getting old, but it's still fascinating to watch.  I've been following this stuff since 2008, and I have to admit it's ehausting.  I'm amazed at how long the final innings of this game is taking.


We must not quit fighting the good fight. We are the last ones left who are even paying attention.

Wed, 01/08/2014 - 15:21 | 4312485 Cursive
Cursive's picture


Agreed.  Be ever vigilent.

Wed, 01/08/2014 - 15:28 | 4312509 Yardfarmer
Yardfarmer's picture


Wed, 01/08/2014 - 15:35 | 4312521 Obama_4_Dictator
Obama_4_Dictator's picture

To me this is the most important fight of my life.  It seems like my life is leading up to this, call it destiny, call it God's devine intervention, who knows...I've moved from Cali to Texas to part of teh tip of the spear.  I've been to the Alamo, where we matched with modern muskets to fight dracionian laws, the only political event staged at the Alamo since the fall.  I will never give up my rights or stop educating fools, even if they don't want to hear it! The Answer to 1984 is 1776!


Also, I have this tattoo:

Wed, 01/08/2014 - 15:33 | 4312528 BandGap
BandGap's picture

Be whatever. Actually, there are more people aware now than in recent years.

And dying was never meant to be quick. TPTB sure as hell are going to give themselve time to get off the ship.

Wed, 01/08/2014 - 15:09 | 4312420 LawsofPhysics
LawsofPhysics's picture

So, it's taper off then.  < shocker >

Wed, 01/08/2014 - 15:09 | 4312424 Seasmoke
Seasmoke's picture

Houston. We have a PROBLEM. 

Wed, 01/08/2014 - 15:09 | 4312425 Sufiy
Sufiy's picture

Professor Laurence Kotlikoff: The Inform Act - The True Size Of The American Debt

 Professor Laurence Kotlikoff discusses The Inform Act and the true size of the American Debt. "The country is in the worst shape than Detroit, it is basically bankrupt." China knows it and buys record amount of Gold this year.

Wed, 01/08/2014 - 15:51 | 4312590 SmallerGovNow2
SmallerGovNow2's picture

Awesome interview.  thanks...  Everyone support the "Inform Act"...

Wed, 01/08/2014 - 15:54 | 4312599 Chupacabra-322
Chupacabra-322's picture

THE UNITED STATES OF AMERICA (corporation) is in its FOURTH bankruptcy!
Bankruptcy 1: 1791, about the time the Bill of Rights and signing of the Constitution was finalized.
Bankruptcy 2: 1861 (about 70 years later) resulting in the issuance of 'greenbacks'
Bankruptcy 3: 1931 (again, about 70 years later) when gold was confiscated by the government, and finally
Bankruptcy 4: NOW--since 9/11/2001 ( almost 70 years to the day as the last bankruptcy was September 10, 1931.

Source: http://realitybloger.wordpress...

Wed, 01/08/2014 - 17:40 | 4312985 Herd Redirectio...
Herd Redirection Committee's picture

Check your link, yo.

Wed, 01/08/2014 - 15:10 | 4312428 Rising Sun
Rising Sun's picture

Here comes the slide - 210p EST - took long enough

Wed, 01/08/2014 - 15:10 | 4312430 vote_libertaria...
vote_libertarian_party's picture

'waning benefits'?  I'd say it is doing exactly what they want.  Turbo boost stock prices and prevent....sorry, DELAY the collapse of the bond market for just one more more...

Wed, 01/08/2014 - 15:11 | 4312434 NoWayJose
NoWayJose's picture

How does the Federal Reserve holding cause 'net income' to the Treasury?  Technically, the Fed turns over interest to the Treasury, but who pays the Fed that interest and principal?  Why... the Treasury!

Wed, 01/08/2014 - 15:47 | 4312573 ncdirtdigger
ncdirtdigger's picture

So, who's on first?

Wed, 01/08/2014 - 15:11 | 4312436 fonzannoon
fonzannoon's picture

There goes gold. delayed reaction. Luckily we have a btfd happening in stawks which will keep the 10yr from blowing out....although the 10yr is going to 3.5% soon enough.

Wed, 01/08/2014 - 15:16 | 4312459 Al Huxley
Al Huxley's picture

Pretty tame - I'm beginning to think that my shorting the miners has put some kind of floor under them.  I had no idea the markets revolved around my trading decisions, but now may be the time to load up.

Wed, 01/08/2014 - 15:20 | 4312475 fonzannoon
fonzannoon's picture

You know I actually believe that you are one of the few people that actually wields that kind of power.

Wed, 01/08/2014 - 15:20 | 4312477 Grande Tetons
Grande Tetons's picture

There is more, AL. 

Commodity my friend, George.

Wed, 01/08/2014 - 15:25 | 4312498 madbraz
madbraz's picture

End of QE = no support for stock manipulation = end of risk trade = resumption of safe haven bid = treasuries rise = yields collapse


What part of this is so hard to understand?

Wed, 01/08/2014 - 15:43 | 4312564 BandGap
BandGap's picture

At 3.5% this motherfucker is lit!

Wed, 01/08/2014 - 15:13 | 4312445 101 years and c...
101 years and counting's picture

so, the depression is still kicking the Fed's ass.  at some point, the Fed will give up.  when the peasants are fulling invested in stock funds.  we're getting close.

Wed, 01/08/2014 - 15:14 | 4312451 Al Huxley
Al Huxley's picture

Bonds aren't feeling the FEDs love.  Its almost as if losing that FED backstop has people questioning the quality of US government debt.

Wed, 01/08/2014 - 15:30 | 4312517 NoDebt
NoDebt's picture

Bite your tongue!  It's because we're in a blossoming recovery.  Things are getting better, rates are rising.  It's not a lack of faith in government cheese.

Wed, 01/08/2014 - 15:34 | 4312531 Al Huxley
Al Huxley's picture

My mistake, sorry Ben!

Wed, 01/08/2014 - 15:15 | 4312452 Quinvarius
Quinvarius's picture

Stock market appears confused.  Hmmm.  In a real market, at these nosebleed prices, I'd be getting out.

Wed, 01/08/2014 - 15:16 | 4312457 Xibalba
Xibalba's picture

These dumb pricks don't comprehend the Law of Diminishing Returns.  

Wed, 01/08/2014 - 15:17 | 4312462 The worst trader
The worst trader's picture

Garrenteed 150 billion per month by april. Just sayin..............

Wed, 01/08/2014 - 15:21 | 4312480 SmallerGovNow2
SmallerGovNow2's picture

+1 for the rack...

Wed, 01/08/2014 - 15:18 | 4312470 Babaloo
Babaloo's picture

Should be DV 01 of 3 Trillion - not 3 billion.


But what's a few zero's among friends?

Wed, 01/08/2014 - 15:19 | 4312471 PontifexMaximus
PontifexMaximus's picture

Non event, should be good for a no brainer closing, business as usual.

Wed, 01/08/2014 - 15:24 | 4312492 walküre
walküre's picture

markets are totally illiquid

volume must be worse than on Christmas Eve

Wed, 01/08/2014 - 15:24 | 4312494 Bastiat
Bastiat's picture

USDX right at early Nov high which looks like resistance.

Wed, 01/08/2014 - 15:30 | 4312516 Yardfarmer
Yardfarmer's picture

It'll never get past 81.40 or I'm Obama's uncle.

Wed, 01/08/2014 - 17:11 | 4312857 BigRedRider
BigRedRider's picture

Better to be Obama's uncle than Kim Jong un's uncle...just sayin...

Wed, 01/08/2014 - 15:25 | 4312497 Spungo
Spungo's picture

We need more guys like Schiff and Faber openly mocking the fed. If enough people are convince they will never taper, the fed might actually taper just to prove everyone wrong.

Wed, 01/08/2014 - 15:26 | 4312501 Musashi Miyamoto
Musashi Miyamoto's picture

Don't believe that bullshit, there is only one direction this is going. UnTaper BitcheZ

Wed, 01/08/2014 - 15:46 | 4312572 Obama_4_Dictator
Obama_4_Dictator's picture

If we do get the untaper, does that fianlly mean commodies will finally go to the moon? I mean at that point, no one can deny that the Fed lost ALL credability...

Wed, 01/08/2014 - 15:54 | 4312596 Musashi Miyamoto
Musashi Miyamoto's picture

Have faith in our overlords. Don't underestimate their abilty to bullshit. Were talking about the Kruger and Friends, They are clever to come up with a spin.

Wed, 01/08/2014 - 16:01 | 4312619 Obama_4_Dictator
Obama_4_Dictator's picture

True, I should never have questioned these phd's, they are much smarter than I. I'm sure they will figure it all out. Excuse me for my pestilence. 

Wed, 01/08/2014 - 15:26 | 4312503 ptoemmes
ptoemmes's picture

God Dammit.  Is Hilsenrath sleeping?  New Years Resolution or something...How am I supposed to know what to think?

Wed, 01/08/2014 - 15:34 | 4312530 realWhiteNight123129
realWhiteNight123129's picture

The obvious

market cap of stocks + market debt + Government debt = Financial assets

GDP = circulation of present goods (goods and services and commodities consumed)

There are too many financial assets in nominal terms to the nominal dollar value of GDP.

You can smash the denominator (financial assets) with bankruptcies.

Or you can push up in nominal terms the price of the items circulating (GDP target, a.k.a inflation).


Wed, 01/08/2014 - 15:42 | 4312560 Fix It Again Timmy
Fix It Again Timmy's picture

What's next?  Martians buying bonds?....

Wed, 01/08/2014 - 15:44 | 4312568 ableman28
ableman28's picture

The negatives aspects of QE pointed out by most analysts tend to miss some of the most obvious.

With respect to the Fed they are stuck holding what Treasuries they have bought until maturity unless they want to take a gigantic whack to par once they really wind QE down.  The Fed has been holding down the price of new issues for years now by bidding low to the dealer (Treasury) and "winning" giant portions of new issues at bid-down rates the private market would never bid at.  Once the Fed stops bidding and its only the private market interest rates will go up.  They already have, substantially, simply in response to TALK that the Fed would taper QE.  If the Fed doesn't decide to hold onto what they have to maturity and starts dumping what they have at then obtainable market price they have so much it will whack the market value down further.  

When reverse repo starts in earnest and banks "surrender" excess deposits in exchange for Treas paper does anyone think they will exchange at par when the market value falls off?  For reverse repo to pull alot of money out of excess deposits the Fed will have to accept anywhere from a 4-12% discount to par.

The US Govt is the big loser when it comes to the end of QE and artificially lowered rates.  The govt has run up so much debt in the last 5 years, and its rollover needs are so huge, that new issue to covering maturing debt generates a much higher debt service requirement.  Sort of like when you can only make the minimum payment on a maxed out card and then the issuer decides to keep raising your interest rate.  

Wed, 01/08/2014 - 16:07 | 4312641 thunderchief
thunderchief's picture

Now that we've f#%^ it all up, we want to stop...
Ben wants his Ivy tower job back.

Hey Benny, go back to jerkin off at Uni and calling it sex, and tell all those kids with student loans how you really went out into the real world and gave everyone VD.

Wed, 01/08/2014 - 16:16 | 4312666 The worst trader
The worst trader's picture

Timber? Less free money waaaaaaaaaaaaaaaaaaaaa We will crash the market till you feed us!

Wed, 01/08/2014 - 16:25 | 4312706 thunderchief
thunderchief's picture

What a bunch of double speak mumbo jumbo.

It's like their in a giant orgy and can't figure out where to start, if their finished, and where they left their cloths.

Now I know what that term 'In god we Trust' meant.

For fucks sake you couldn't trust these fools to find their own unit!

Wed, 01/08/2014 - 17:07 | 4312849 BigRedRider
BigRedRider's picture



Yeah, but how are they defining  "job" nowadays?  are 29 hours a week now the standard "job"?

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