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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Al Huxley's picture

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

jcaz's picture

They fear "Reputational risks"-  really?  Really?

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...

Hedgetard55's picture

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

whatsinaname's picture

In summary - We will keep printing.

Headbanger's picture

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

TrustWho's picture

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

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

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.

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.

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? 

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.

Deathrips's picture

Fuck You Ol Yellen!


Silver Bitchez



Central Wanker's picture

The fuckers are trapped :-)

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.

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.

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?

Bastiat's picture

$4 and still girly slapping.

Bastiat's picture

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

NoDebt's picture

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

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.

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?

Rising Sun's picture

uh, they're lying and the herd believes them


you don't need to convince everyone

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

Cursive's picture


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

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.

Cursive's picture


Agreed.  Be ever vigilent.

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: https://scontent-a-dfw.xx.fbcdn.net/hphotos-frc1/260489_2138241015139_67...

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.

LawsofPhysics's picture

So, it's taper off then.  < shocker >

Seasmoke's picture

Houston. We have a PROBLEM. 

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. http://sufiy.blogspot.co.uk/2014/01/professor-laurence-kotlikoff-inform-...

SmallerGovNow2's picture

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

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...

Rising Sun's picture

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

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 day....one more....one more...

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!

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.

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.

fonzannoon's picture

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

Grande Tetons's picture

There is more, AL. 

Commodity currencies..meet my friend, George. 


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?

BandGap's picture

At 3.5% this motherfucker is lit!

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.

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.

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.

Al Huxley's picture

My mistake, sorry Ben!