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Why The Fed Will End QE On Wednesday
Submitted by Lance Roberts of STA Wealth Management,
This week we will find out the answer to whether the Federal Reserve will end its current quantitative easing program or not (click here for more discussion on this issue). Today is the last open market operation of the current program, and my bet is that it will be the last, for now. Here are my three reasons why I believe this to be the case.
1) Much Smaller Deficit Restricts Treasury Bond Issuance
Over the last few years, the Federal deficit has shrunk markedly as infighting between Republicans and Democrats has restricted government spending to a large degree while taxes were increased across a broad spectrum of American taxpayers. The good news is that the U.S. government is closer than in many years to running a balanced budget, although it is has been more by accident rather than through a logical approach of budgeting and waste reductions. The bad news is that deficit spending has been a major contributor to economic growth in the past and the reduction of such has been a drag on economic growth recently.
The chart below shows the level of federal spending, revenue and the deficit. I have added the Federal Reserve's balance sheet which has been a major buyer of U.S. debt in recent years.
One of the reasons, as I explained previously, that the Federal Reserve will allow the current QE program to conclude is because the shrinking deficit is reducing the number of bonds being sold by the Treasury.
"But in the economic recovery phase, the federal deficit commenced shrinking sooner than the Fed commenced tapering. There reached a point at which the Fed was acquiring more than 100% of the net new issuance of US government securities. At that point, the Fed's buying activity was withdrawing those securities from holders in the US and around the world. Essentially the Fed was bidding up the price and dropping the yield of those Treasury securities, and it was doing so in the long-duration end of the distribution of those securities.
The Fed has taken the duration of its assets from two years prior to the Lehman-AIG crisis all the way out to six years, which is the present estimate. It is hard to visualize the Fed taking that duration out any farther. There are not enough securities left, even if the Fed continues to roll every security reaching maturity into the longest possible available replacement security."
The chart below illustrates this point.
As you can see, the net change to the Federal Reserve's balance sheet swelled during each of the quantitative easing programs. The liquidity supplied flowed into the financial markets driving asset prices higher. Importantly, notice the extreme level of balance sheet expansion during QE 3 which caused assets to surge in 2013. However, since the beginning of 2014, the balance sheet expansion has markedly slowed and along with it the inflation of asset prices.
Importantly, with the Treasury issuing fewer bonds due to reduced funding needs, the Federal Reserve can not keep the current pace of purchases going without the risk of potentially creating a liquidity problem within the credit markets. I am quite sure that the Federal Reserve is aware of this issue which is why, despite many bumps in the market this year, they have continued their pace of reductions without pause.
For investors this is critically important to understand, as shown above, there is a very important correlation between the Fed's QE programs and the liquidity flows that support asset prices. As that liquidity push is extracted from the financial markets, there will be a corresponding increase in market volatility. "Tapering" is in effect a "tightening" of monetary policy which historically slows the growth rate of asset prices.
2) Not Ending Program Could Send Wrong Message On Economy
Boston Federal Reserve President, Mr. Rosengren, recently stated that: the Fed's asset purchases have achieved their stated goal, the jobs report for September is already in and his economic forecasts have not changed.
"There has been substantial improvement in labor markets, and as a result I would be pretty comfortable [ending purchases] at the end of the month.”
"Fed Speak" holds much sway over the markets. After each meeting, as Janet Yellen gives her press conference, market participants are quick to parse her words and place market bets on what they think she is implying. Up to this point, each post-meeting confab has been a reaffirmation that the economy is improving enough to expand without the support of monetary policy.
It is very likely that if the Federal Reserve decided to keep its current pace of bond purchases in place it would likely be interpreted that the economy is indeed not as strong as the statistical headlines suggest. Such an interpretation could lead to a repricing of risk, and a sharp decline in asset prices, that would potentially destabilize consumer confidence. This is not the outcome that the Federal Reserve is looking for.
3) Must Normalize Policy Before Next Recession
Most importantly, the economy is now more than five years into the current expansion. As shown in the chart below, we are now in the fifth longest economic expansion on record. This sounds great until you realize that has been achieved with the lowest level of economic growth of any post-WWII recovery.
While much of the mainstream media, analysts and economists ignore normal economic cycles, it is very likely that we are closer to the next recession than not. This is not a bearish prognostication, but rather just the realization that despite the Fed's best intentions, normal economic and business cycles have not been repealed.
The problem for the Fed is that with the effective interest rate near ZERO, one of their most important monetary tools to offset recessionary drags within the economy has been removed. The chart below shows the history of the Fed's overnight lending rate as it compares to economic growth, the market and recessions.
Historically, each time there has been a crisis, or recession, the Fed has responded by dropping the effective Fed funds rates in order to induce borrowing and lending within the economy. As stated, with the rate near zero, the Fed is trapped without an important policy tool if the economy slips into a recession in the near future.
This is why they have been so vocal about raising short-term interest rates. The Federal Reserve needs to normalize monetary policy before the next recession hits in order to have some "working room" to stem off any potential future crisis. Ironically, there is a case to be made that the Fed's interest rate policy manipulations are a cause of economic crises and recessions.
For these reasons, I highly suspect that the Federal Reserve will announce the end of the current "QE" program during their post-FOMC conference on Wednesday. How the markets respond initially will be focused on what she "says," however, going forward the "lack of liquidity" may become a much more important issue.
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PressTV - US child poverty remains at highest rate in 20 years: Report
We need another " Joe the Plumber " spread the wealth tour...
Central economic planning does not work.
and the next down turn will start thursday...
WHHHAAAAAHHHHH!!
NO MOAR QEEEEEEEEE!!!
WWWHHHHHAAAAAHHHHHHHH!!!
Oh, I can't wait for this. Gotta remember to stop by the store tonight to stock up on the extra buttery popcorn.
http://www.gifbooster.com/pin/4120/deer-eats-popcorn_64#.VE6Wj8khAgw
QE to eternity. Its like riding a bicycle, stop paddling and you hit the dirt.
Just for fun between us bond guys.
There has yet to be a sustainable green shoots "recovery" taking place. By all measures, we're dragging along at some 2% to 2.5% and that's with several definitional changes to GDP which has kept us afloat. Remember the Intangibles? Talk about made up.
Nominal GDP is overstated.. As the deflator, CPI, et al are understated.
So..... let's say concensus is right about moving the Funds rate up.
Only one more excuse like the weather, Ebola (they come up with new ones every quarter) whatever, followed by a new bad number and ba-boom, it's back to another round of Something New and Entirely Different (which will be in name only as the option remains to print print print, "Go to work, Mr Yellen".)
We are firmly ensconced in a Liquidity Trap, which is a monetary phenomenon cause by non-monetary factors. And the CON-gress critters and president ain't drawing us back from a high tax, low growth, governmental largesse dependent, overly regulated environment.
Not to mention that the Feds are ordering up 36 million (you read that right!) immigration cards over the next 5 years.
Jobs? What jobs?
That's a governmentally dependent new addition to the Free Shit Army gonna vote Democratic.
Don't forget LBJ's famous quote which I'm paraphrasing out of politeness here; "I'll have them voting Democrat for the next 100 years."
Also, have you seen the charts of the consensus forecasts form the Fed and private economists laid out for 5 or so years trailing quarters for GDP and Fed Funds?
Each and every one is a small hockey stick
Each one
None of which come true.
The biggest risk that is non-consensus and of the greatest impact to portfolios regardless of asset class is that we're following in Japan's footsteps.
Go back and look at the yield levels and Nikkei over the last 25 + years.
Just thinkin' about the future.
4) When Equities Crash, Investors' Flight To Safety Will Keep Bond Yields Low
[obvious...]
"But in the economic recovery phase, the federal deficit commenced shrinking sooner than the Fed commenced tapering."
WTF?!
Assuming the 4.5 trillion FRN Balance Sheet QEeefing really does end Wednesday, Belgium is really going to have to strap on its Big Boy Pants very soon.
Go Belgium!
is anyone talking about the Fed unwinding thier balance sheet?
LOL - best comment on this thread! All this QE bullshit is just the S&L crisis from the 90's all over agan. Only this time, it's the FR that is the Bad Bank that is taking all the toxic loan shit from the troubled banks. The FR only has 2 choices to handle all this toxic shit. Their first choice was to inflate it away using QE to monetize the debt. All that has acheived is a stagnant economy, with falling incomes, and higher cost of living metrics that equals an economic death sprial like Japan. The only difference is the FR has blown the next bubble, US Stocks. So now the FR is setting up their second choice. Pop that equity bubble (just like they pop every bubble they have blown since 1913), and use the panic to force congress to grant them more "special powers" to clean up their own engineered disaster. After the crash, it will be a swap of traditional equity and bond holdings into a new Govt Retirement Mechanism (MyRA anyone?) that will roll up SS too.
The paniced sheeple will be so terrified at their stock market losses, and subsequent threat to their pension funds, Money Market Funds, IRAs, 401s and Social Security, that it will be easy to push them towards what the elites want, which is one central govt. controlled and banker financed retirement program (Serf City, Here We Come!) The end result is the sheeple will end up owning all the toxic shit that the FR now owns, that originally came from the banks going back decades. A complete redistribution of assets and wealth from the masses to the elites in exchange for bad debt. A bankers utopia.
Just think French revolution except this time a very large number of the people are armed to the teeth.
These stupid elites just can't help themselves. The power that they perceive is constant throughtout generations yet it has never stopped heads rolling.
"just the S&L crisis from the 90's all over again"
Didn't some of those @ssHats go to jail?
We promote, bonus and give tax free earnings this time around...
Kinda different.
Make sure that someone tells Belgium and the Cayman Islands that they will have to step up the plate more often when "QE ends."
END THE FED.
fwiw, i think we're the caboose on the global growth train ... cars ahead of us will grow ever more desparate (print) as they go off the rails ... their printing will end up buying treasuries (in bid to weaken their currencies to boost growth) via carry trade
It's over, to do otherwise now would cost the FED whatever remaining credibility they still have.
Sorry BTFD'ers, you just may have to get a job, or I dunno, learn how to trade without training wheels.
Central planning works for those at the Center!
They'll "end" it for the moment so it will give them plenty of jawboning room for hyping its quick return. Once a crack addict, always a crack addict.
Elsewhere- SA paper blames American "rednecks" for Ebola response:
http://tinyurl.com/o8ngfkg
Sure, they will "Draghi" the thing for at least 6 months. Party on Garth. Step up and get ya some.
What do you expect. HALF of the kids out there belong to single parent households.
Kids raise themselves nowadays!!
Yes, and when the school day ends, over a million American schoolchildren have no home to go home to. How's that possible in the richest, most exceptional, most indispensible nation on earth?
The Fed will end QE the same day Hell Freezes over and brother calls to say he is sorry . . .
Actually, QE ends with the collapse of the financial system and the imposition of martial law.
Have a nice day.
They have no choice. Trust.
There is no post meeting conference this time.
I thought the US debt clock shows we are still running over $ 1 trillion deficits and any claim to the contrary relies on accounting chickanery? I think Michael Snyder from EconomicCollapseBlog has made that point several times. We might have a temporary cease of QE but the fed will be quick to react if markets collapse, verbally at first. It might have to run thin on credibility using words only before it actually unveils the bazooka....
TPTB really want to crash the markets between election day and Jan. This gives them political cover against the Republicans. Look for the MSM to blame the election of the Rep's for the crash, before they even get sworn in!
It's probably the SS trust fund that is causing the extra debt. I think they are cashing in 400 billion a year. This would be counted as a wash for deficit reporting. And doesn't free up anything for collateral.
It fully depends on which number massager you believe. Still think we are running close to 1T without all of the off book chicanery. All in all- it matters not. We are never paying it.
I just wish the FED and the TREASURY would announce a tax holiday and just print up 2.8 trillion and pay all of our taxes for us since apparently all this debt we owe- is never an issue. They could just print up 5 years worth of that shit and nothing changes, does it?
Some people believe what the Fed says, i.e. the bullcrap about tapering. No mention of the 100s of trillions of interest rate swaps that have to be kept viable by invisible QE.
Don't tease us with (yet another) Fed Head-Fake.
To quote Elaine from an old Seinfeld episode (in which Jerry claims he could tell if her orgasms were real): "Fake. Fake. Fake, fake, fake, fake. Definitely fake!"
"The Fed has taken the duration of its assets from two years prior to the Lehman-AIG crisis all the way out to six years, which is the present estimate."
current QE buying treasuries with avg maturity 9 yrs
"Most importantly, the economy is now more than five years into the current expansion."
Ya don't say.
Reason number one is wrong.. We are schedule for a trillion in debt this year. You need to use accurate tools. Off budget stuff shows up the debt levels but not the budget.
End QE. I will believe it when I see it. Also, what happens to the markets in a couple days if indeed the QE ends?
I agree, the Fed with an unloaded gun facing the next business cycle recession? They must reload and be ready for a deep recession coming soon. Or, has the business cycle been repealed, as Mr. Gordon Brown in the United Kingdom declared just months before the financial crisis.
Housing, auto loans and student loans, these three help create billions in new money. A slow down in borrowing or demand for these will also choke the economy. Military spending is set to explode higher, driving new deficit spending and corporate profits. Look there for returns, defense stocks have been reflecting the new ISIS war, and the new cold war. The police state also advances with government funding a giant corporate service industry to CIA, NSA, Military Intelligence, local police and other agents of state control and repression.
plus 100s of trillions of OTC derivatives like interest rate swaps
I've wondered how we would really even know if "QE" has ended - 'cuz they say so?
Most transparent Fed, ever?
Imagine this: Use QE to print trillions of dollars and make sure it ends up in the hands of the 0.1 percent. Then stop QE which wipes out the 99.9 perecent. The 0.1 percent can now buy up everything.
Admittedly simplistic but if it happens it will have been obvious.
I agree Jack. Every time the past announcement of QE ending, the financiers of this country started to tank the markets. Every time the Fed responded with new QE just like last week. I just do not see them stopping QE at this time. They will state they stopped it, but will only rename the program something else to keep the markets up and continuing to rise. Working stiffs like me and so many others here know the economy sucks. Hell even alot of my firends are no longer buying into it. The only bright spot for them are the markets and I do not think anything will change at all.
Or after the elections they will just let the fucker tank depending on the new congressional make up and impose new tough rules on us peons. But until then nothing is going to change. I think they will coninue to print as so many dumb fucks equate the stock market to the real economy. Notice how the markets tanked this time so badly because the new fed chairperson was slow to respond. Hell Bernanke would have put out more QE the same frigging day!!! LOL
The official deficit is coming down but Washington's need for funds is determined by cash flow needs. When Social security starts to cash in some of those paper bonds in the 'lock box'...then there will be trouble.
Until recently SS had excess funds and those funds went to the general fund. Now we have reached the point where that flow must reverse. The general fund must not only learn to live without that money but must begin to pay back what it borrowed.
Politicians work on the fantasy budget. Some may actually be surprised that there is not as much moola to blow. Those who understand the real cash flow of the nation ...well those few are likely already in full panic mode.
"When Social security starts to cash in some of those paper bonds in the 'lock box'...then there will be trouble."
even Treasury lists those IOUs as "non marketable" securities.
when we hit shortfall, deficit will hit turbo drive (unless taxes raised and/or benefits reduced) as Treasury will have to issue more debt to cover (as IOU money long since spent ... ALL OF IT)
Maybe the SS Administration can sell them to a collection agency for 10 cents on the dollar.
"Historically, each time there has been a crisis, or recession, the Fed has responded by dropping the effective Fed funds rates in order to induce borrowing and lending within the economy. As stated, with the rate near zero, the Fed is trapped without an important policy tool if the economy slips into a recession in the near future." The printer hasn't worked over the last 5 years, but we may need to use it later. It will definetly work then.
Which begs the question then, at what rate does the US technically go bankrupt? 4%? 5%?
If inflation is higher than what they are paying in interest, then they are practicing financial repression, and getting healthier. At least that seems to be Abe"s goal. It worked in the US from 1945 until the really high inflation became problematic in the 1970s.
Actually, the US government has been bankrupt for at least a century. Now, it has some $2 Trillion in hard assets (buildings, land, weapons, commodities) and well over $300 Trillion in liabilities. These numbers are based on data, assumptions, and formulas provided by Financial Reports of the US government.
Only the QE that the Public can see will end. The Belgians will still be big buyers...
lol. egg-xactly. The Men behind the curtain are from Belgium... Christ Almighty are we being duped.
WHO IS INJECTING $$$ INTO DERIVIATIVES!?!?!?!? Those pesky Belgians!?!?!?!?
http://investmentwatchblog.com/fate-of-economy-decided-on-november-15-20...
To be fair, it was the clearing house (EuroClear I beleive it was?), not the sovereign nation of Belgium. I'd expect any clearing house to perform the same function, at almost any location on Earth, and channel it back, probably to be injected into, or leveraged for, the shadow banking system.
I think the proper term Miserable Fat Belgian Bastards.
It wouldn't surprise me if they bought all commodities, clandestinely, then dumped them into the ocean, or gave the oil back to SA. Not much difference from what they're already doing.
I beg to differ - they can't stop QE or Wall Steet will throw a temper tantrum- fuck everybody not on the inside until the wheels come off!!! Then we can have too big too jail part deux.
If the street thought they were really ending QE this week, they would be having their temper tantrum now in an effort to force the FOMC's hand. The market is f*cked, even if we have to wait until Thursday morning to see it.
lets see-in 4 weeks we have black thursday and Friday--
sales will be good because they will tell us they are good.
then look for january when we see 4th qtr retail sales and they are down.
But we can always tell them that sales were down because it unexpectedly got cold in the 4th quarter? That sort of black swan is like an economic mulligan, right?
I have a hard time taking a person seriously who makes statements like "must normalize policy before the next recession" when we have never left the 2000 depression and rates can never go back to "normal".
heh heh ... Lance is Mr "10yr @ 4% in 2015" ... he'll be in for a surprise
You have to analyse who the person is before you analyse what the person says. Because some of what many people say, even the most corrupt and evil, may be useful or accurate. So you can't throw the baby out with the bathwater
Once you do that LR's perspective will make perfect sense
Then you can filter out the useful information he occasionally gives vs. the corrupted or biased information he gives from his perspective
I mean look at the X in his daily X change. That should tell you everything you need to know alone if you understand symbols. If it doesn't look familiar let me give you a hint
https://i.imgur.com/rCyKZny.png
I have a hard time taking a person seriously when they make comments like "despite the Fed's best intentions".
ps: There is no recession, automation has been chewing away at jobs since the 1950s.
And there are no business cycle.
Hate to tell you, even the mainstream econ guys disagree with you.
The system works when most people have a job (they spend money) and people have a wage that can pay their bills
The premise of get rich and never stop raping the people
Awsome at first....but....take a guess what happens when people are hungry
This doesn't mean shit! Where FED stops (temporary) ECB will continue. The result is moar of the same.
I'm scared,,,,,hold me, Janet!,
I think he's saying that it's time to clear the sheeple's chips off the green felt, again.
F the FED
bring it on ... end QE !!!
what a bunch of BS
QE will stop...then start up under a brand new, improved name!
Bond Purchase Retention or some such...
Here comes MyRA program
Roberts is delerious. The banking famlies will do whatever they damn please until they decide that they want to do something else. It's got nothing to do with economics. It's all about their need to destroy and control.
WTF!! WHAT HAPPENED TO QETERNITY?!?!?!
I WANT MOARE!!
MOOOOORE!
MOOOORE!
MOOORE!
https://www.youtube.com/watch?v=EADAxuqnqqQ
It'll just go to some stealth mode like Belgium
There has been such a substantial improvement in the labor market, that a record 92.6 milllion people were not workiing last month.
All the reasons that QE should end will be forgotten and trumped when the headline reads "Stocks plunge 1.5%!". At that point, the Fed will come up with any excuse it thinks will 'fly' and announce QE4.
Bring on the "Innovative Financial Instruments".
It's for the children
"The good news is that the U.S. government is closer than in many years to running a balanced budget"...
Stopped reading right there. WHAT UTTER, COMPLETE, HORSESHIT...
Only $1.1 trillion in new debt... Yep, tiny shortfall...
The solution whatever it turns out to be will always involve taking as much money of yours as they can and sending it to the elites.
So if you got something to protect...you better protect it now.
The article is correct that the Fed will end QE on Wednesday, but will of course start it up when the market starts tanking. If they run out of Treasuries or other high quality assets to buy, they'll just buy more crap from _oldman or their buddies at the ponzi hedge funds. The fiscal backstop will take care of the losses, in secret of course.