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Goldman On What To Expect From Tomorrow's Fed Announcement

Tyler Durden's picture


With the expanded two-day FOMC meeting (which until 45 days ago was supposed to be just one day) set to start shortly, here is chief policy maker Goldman Sachs reiterating again how much futile loosening to expect from the Fed. Nothing new here: Goldman repeats its call that Twist will hit tomorrow (and in a following report MS reiterates its call for Torque), sees IOER being cut from 0.25% to 0.1%, (sending the money and repo markets into a tailspin), but stops short of demanding another major round of LSAP. Basically, anything short of this will crash the market; anything long of this (as Rosenberg predicts) including several hundred billion in outright bond purchases, sends risk and gold soaring, and the dollar plunging.

From Goldman: FOMC preview.

  • Although not a done deal, we see a high probability that the FOMC will announce further easing steps at the conclusion of this week’s meeting (September 20-21). The committee put an easing bias in place at the last meeting, and Fed communication—the August FOMC minutes, Chairman Bernanke’s Jackson Hole speech and a number of press reports—has signaled that easing options will be discussed. Moreover, after a two-day meeting, the Fed will be technically prepared to take action.
  • A change in the composition of the Fed’s balance sheet—“Operation Twist”—looks very likely. However, there is still considerable uncertainty about the size and maturity mix of the sales and purchases. As a complementary measure, we also expect that the committee will announce a cut in the interest on excess reserves (IOER) rate to 0.1% from 0.25%, although this is a much closer call. An IOER cut would lower market interest rates a small amount and could aid communication.
  • We see low odds of a change in the Fed’s communication of its policy objectives, a proposal supported by Chicago Fed President Evans and others. This is a complex and somewhat controversial idea, and likely requires further discussion. There also appears to be little appetite on the committee for an outright expansion of the Fed’s balance sheet.
  • The easing tool the Fed used last year—balance sheet expansion—does not look like a realistic option for the upcoming FOMC meeting. The Wall Street Journal reported that this tool “doesn't have strong advocates inside the Fed now”, and otherwise it has been conspicuous by its absence in recent press reports. The Fed may ultimately decide to move in this direction, but we see little chance that this will happen on Wednesday.

Although not a done deal, we see a high probability that the Federal Open Market Committee (FOMC) will announce further easing steps at the conclusion of this week’s meeting. Several factors argue for action now rather than later. First, the FOMC put in place an easing bias at the last meeting when it said it had “discussed the range of policy tools available to promote a stronger economic recovery … and is prepared to employ these tools”. Our research finds that an easing bias at the previous meeting is a strong signal about action at the following meeting (see Sven Jari Stehn, “The Likelihood of Additional Fed Easing.” US Economics Analyst, September 9, 2011). Second, Fed communication—the August FOMC minutes, Chairman Bernanke’s Jackson Hole speech and a number of press reports—has indicated that easing options will be discussed. Third, the Fed will be technically prepared to use most of its remaining tools. Many of the options likely to be discussed have been around for a while—a change in the composition of the balance sheet was debated as far back as 2003, for instance—, the staff has had time to assess these tools further since the August 9 meeting, and the committee will now have two days to finalize details. Our model-based probability of easing at this week’s meeting is 75%, and we would subjectively put the odds even higher.

Measures of core inflation have recently accelerated—the core CPI reached 2.0% year-over-year in August—but we do not believe this will stand in the way of easing at the meeting. Fed officials have made clear that they expect inflation to cool as the effects of a rise in commodity prices and supply-chain disruptions in the auto sector wane. Moreover, wage growth has been soft, survey-based measures of inflation expectations are stable and inflation breakeven rates in the bond market have actually declined (though in part this may reflect “twist” expectations).

Recent press reports have signaled Fed officials are considering three specific easing options:

1. Change in balance sheet composition. This policy option is the single most likely step at this week’s meeting, in our view. It has been dubbed a new “Operation Twist” after a similar Fed program in the 1960s. We believe the Fed will announce outright sales of short-term Treasuries coupled with purchases of longer-term Treasuries in order to lengthen the average maturity of its securities portfolio. Minutes from the August FOMC meeting signaled that active turnover of the balance sheet—sales and purchases—was the option under consideration, rather than the smaller and more passive step of reinvesting ongoing purchases related to MBS reinvestment further out the curve (though this would likely accompany the “twist”). If the FOMC announced only a shift in the maturity of MBS reinvestment flows we would consider it a significantly smaller-than-expected ease.

While an announcement along these lines appears very likely, we still see considerable uncertainty about the precise size and composition of the “twist”. The Fed owns $266bn Treasury notes and bonds that mature before the end of June 2013—over the period during which it has signaled to keep rates exceptionally low—and another $232bn that mature over the following year. We expect the Fed to sell some portion of these holdings—perhaps $300bn or so—and purchase securities with 7 to 30 years remaining maturity (we believe the purchases will likely have the same face value as the sales, even if dollar cost differs, because of the way the Fed has traditionally accounted for its security holdings). The total amount of sales and the maturity composition will determine total amount of duration risk likely to be removed from the private sector. We expect the “twist” to amount to net purchases of $300-400bn 10-year equivalents (i.e. the same amount of duration risk as $300-400bn of the current 10-year note).

For more detail and conceptual background on how the twist could work, see our two earlier articles on this policy option (“For More Easing, Will Fed Go Big or Go Long?” US Daily, August 15, 2011; and “Doing the Twist.” US Daily, September 8, 2011).

2. Cut in interest on excess reserves (IOER) rate. Although it is a much closer call, we also believe the FOMC will announce a cut in the IOER rate—the rate the Fed pays banks for their excess reserve deposits. As discussed in an earlier US Daily, the decision comes down to a cost/benefit calculation, and to date the Fed has implicitly decided that the modest potential benefits from an IOER cut have been outweighed by potential costs and risks. The costs of this option mostly relate to money market functioning: 1) it could impair the normal functioning of the federal funds market; 2) lower rates may interact in perverse ways with deposit insurance fees; and 3) an IOER cut could make it challenging for money market mutual funds to cover their operating costs (for more details, see “Revisiting the Rate on Reserves.” US Daily, September 13, 2011).

Despite several potential costs and/or risks associated with cutting the IOER rate, we believe a majority of the committee could support it. While the benefit in terms of monetary stimulus would be small, it would complement the Fed’s other easing actions—the 2013 commitment language and the “twist”—and could aid communication. Moreover, many of the problems associated with an IOER cut are longer-term in nature. Having signaled that it is likely to keep rates low for at least two years, the Fed may put little weight on these concerns. In order to mitigate some of the associated costs, we believe the committee would cut to 0.1% instead of zero.

3. Change communication about policy objectives. Another policy option that has received increased attention lately would tie the FOMC’s rate commitment language more closely to economic conditions, in order to bring greater clarity to the central bank’s goals and intentions. For example, Chicago Fed President Evans has proposed a commitment to keep the federal funds rate at its current level until the unemployment rate has fallen to 7%-7.5%, provided core inflation does not exceed 3%. The Wall Street Journal reported this morning that Chairman Bernanke has asked Presidents Evans and Plosser and Vice Chair Yellen to explore the idea further, but that “the issue about clarifying goals is unlikely to be resolved at this week's meetings, if at all, because of the wide range of views at the Fed about how to proceed” (“Fed Ponders Jobs, Inflation Targets.” September 19, 2011).

There are some good reasons why the Evans proposal is controversial (“The Evans Proposal to Rebalance the Fed’s Dual Mandate.” US Daily, September 7, 2011). First, it may be perceived as an increase in the Fed's long-term inflation target, which could raise inflation uncertainty and reduce economic efficiency (these were the reasons Chairman Bernanke argued forcefully against lifting the Fed's long-term inflation objective in his 2010 Jackson Hole speech). Second, higher inflation expectations would almost certainly increase the nominal long-term interest rate. In most economic models, growth and other asset prices depend only on real rates, but in practice there are some good reasons to believe that nominal rates matter too. For one thing, many financial institutions assess a borrower's creditworthiness on the basis of their (nominal) debt service-to-income ratio. This metric deteriorates with an increase in nominal interest rates, even if real interest rates are unchanged.



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Tue, 09/20/2011 - 09:24 | 1688376 rocker
rocker's picture

Why Bother

Who Cares

Tue, 09/20/2011 - 09:42 | 1688430 He_Who Carried ...
He_Who Carried The Sun's picture

Exactly. Until they've all learned to speak Greek, they won't have a clue about what's going to hit anyway!

Tue, 09/20/2011 - 09:44 | 1688436 DormRoom
DormRoom's picture

Uhm.. if you knew someone who was unemployed, or undemployed, and saw the dying of the light in their eyes, you would care.   But to the point, monetary stimulus does not provide jobs.  Fiscal stimulus via direct jobs from the Fed government like the 1920s WPA program does.  But Congress is too dysfunctional to implement what is needed.  So The Fed is using an axe, when Congress should be using a scaple, in policy options.

Tue, 09/20/2011 - 09:48 | 1688451 NeoCapitalist
NeoCapitalist's picture

So you're making the argument that the Fed governmant can and does create jobs, and the WPA and New Deals 1, 2, 3, 4, 5 x 100 worked and were a good idea?  Wow hard to tell you're in "University".. come back and join the big boys if/when you join the real world, or if/when you understand economics. 

Tue, 09/20/2011 - 09:55 | 1688479 DormRoom
DormRoom's picture

you don't need to go back to the New Deal.  You can look at the data after the Japanese bubble burst.  Its economy started to recover once the government started and sustained an adequate amount of fiscal stimulus, supporting aggregate demand, which allowed businesses time to deleverage.  Before then, it was in a vicious deflationary spiral.

Tue, 09/20/2011 - 10:03 | 1688517 LowProfile
LowProfile's picture

Both the New Deal and Japan's intervention stretched the depressions out by decades.

Tue, 09/20/2011 - 10:08 | 1688532 NeoCapitalist
NeoCapitalist's picture

Pretty much my response in a nutshell.. it's not taught that way in the ivory towers, so he cannot see the reality of that statement.  I cannot blame you too much DormRoom, I was once being brainwashed in "University" as you are now... happens to most young men and women in this country. 

Tue, 09/20/2011 - 10:09 | 1688537 NeoCapitalist
NeoCapitalist's picture

And in response to the Japan Asset Bubble, guess you have never heard of the lost decade(s)?

Tue, 09/20/2011 - 10:56 | 1688742 mnevins2
mnevins2's picture

And we can't overlook that Japan's "lost decades" took place while the rest of the global economy was growing strongly.  A fact which is not true today.  Japan is today stuck with a lot of "bridges to no where" and a ton of debt.  FOMC action is the equivalent of sticking the finger in the holes of the dike.  Futile.

Tue, 09/20/2011 - 11:04 | 1688775 Bicycle Repairman
Bicycle Repairman's picture

So the choice is a short deep depression or a much longer more moderate depression.

What's that?  In the short deep depression some of TPTB lose their seats at the table?  Oh well f#ck that then!


Tue, 09/20/2011 - 09:26 | 1688384 Irish66
Irish66's picture

"we believe a majority of the committee could support it"

Thats were we will get the surprise

Tue, 09/20/2011 - 09:42 | 1688429 Roy Bush
Roy Bush's picture

Agreed.  And I don't believe this bullshit about "dissenting views" on the Fed Board.  I think the "dissenting views" are there to boost up "inflation expectations".  (They get all hot and sweaty about these terms!)  I think it's one, big, tight group of satanic-worshipping, blow buddies who are fighting over the chance to gobble down the wet cracker.  They will print until the cows come home.  

Tue, 09/20/2011 - 09:28 | 1688390 gjp
gjp's picture

I bet they do expand the balance sheet - and Goldman is just setting the stage for a bigger surprise since that's what these puppetmasters think they need to engineer.

That these guys haven't been thoroughly discredited by nowis amazing.  Greenspan is back?  Someone shoot me now, I can't take it.

Tue, 09/20/2011 - 09:32 | 1688409 SheepDog-One
SheepDog-One's picture

'expand the balance sheet' is now replacement for promised $3 trillion QE3 playmoney printfest for stocks? Anything short of Bernanke uttering 'Im printing $3 trillion' from his quivering lip falls FAR short of what the markets have priced in so far. 

Man I just love this 'lowered expectations' game, freakin insanity....well good luck to all the gamblers who are betting on this crap, I see only disappointment coming. 'Twist'....'LSAT'

Tue, 09/20/2011 - 09:34 | 1688412 equity_momo
equity_momo's picture

A puked a bit of my Cheerios up when i saw good old Alan disappearing into the Fed building right as theyre discussing market moving policy. And he gets paid by Investment banks and Hedge funds in an advisory role. WTF? seriously.

As for all these banks coming out and saying Twist isnt enough and threatening Bernanke with a market sell off if he doesnt pony up with the Opium. Double WTF.   Fuk the lot of them.

Tue, 09/20/2011 - 09:49 | 1688457 Roy Bush
Roy Bush's picture

"Expand the balance sheet"....what a joke!  What "balance sheet"!?  What exactly balances?  All liabilities and no assets?  Or, in beautiful logic, is it all assets and no liabilities?  Does conjuring up trillions of dollars aid in passing all standard accounting practices tests? 


Tue, 09/20/2011 - 09:28 | 1688391 Central Bankster
Central Bankster's picture

Is it ironic the Ad on the sidebar here is for Lexmark and HP ink printer cartridges?

Tue, 09/20/2011 - 09:47 | 1688449 JohnG
JohnG's picture

Very.  Office depot ad......

Tue, 09/20/2011 - 11:31 | 1688925 Sambo
Sambo's picture

If HP gets replaced by Apple at DJIA ...Dow will head north. HP can focus more on selling ink cartridges leaving the tablets for the bigger boys.

Tue, 09/20/2011 - 09:28 | 1688392 Imminent Collapse
Imminent Collapse's picture

No matter what they do, in the long run, gold soars.  Bring it bitchez!

Tue, 09/20/2011 - 09:49 | 1688462 NeoCapitalist
NeoCapitalist's picture

Stimulus = weaker dollar = gold soaring.  No stimulus = market conidtioned to stimulus now becoming scared the markets cannot function without central planners = gold saors.  You're quite right my friend...

Tue, 09/20/2011 - 09:29 | 1688394 King_of_simpletons
King_of_simpletons's picture

EASING == More Vaseline for the sheep.

Sentence: Yo, I want to ease this plunger up your arse.

Tue, 09/20/2011 - 09:29 | 1688395 SheepDog-One
SheepDog-One's picture

I call bullshit. Now 'QE3' is just a twist, with maybe a LSAT chaser? What was promised was trillions of free play money for stocks since DOW 9,700 back in Feb., WOW talk about lowered expectations!

Lets see how spoiled brat Sweet 16 girl likes her used VW bug unveiled when she was promised a new red Ferrari in front of all her friends. 

This is all such bullshit.

Tue, 09/20/2011 - 09:31 | 1688401 Gandalf6900
Gandalf6900's picture

I admire you comparison

Tue, 09/20/2011 - 09:37 | 1688421 fuu
fuu's picture

SD's been on fire all month.

Tue, 09/20/2011 - 09:40 | 1688425 DirtMerchant
DirtMerchant's picture

I've been waiting for him to stop candy coating all of this and tell us what he really thinks....guess we'll get that version tomorrow...

Tue, 09/20/2011 - 09:29 | 1688396 Tense INDIAN
Tense INDIAN's picture

Gold and Copper are not showing much signs of BIG QE

Tue, 09/20/2011 - 11:43 | 1688975 Troll Magnet
Troll Magnet's picture

Just get ready to buy a lot more PMs if there's no significant announcement by the Fed.

And if they do announce LSAP, um, just get ready to buy a lot less.

Tue, 09/20/2011 - 09:30 | 1688397 Cdad
Cdad's picture

I'm so glad that I live in a binary world created by central bankers, who ironically have destroyed finance and world economies.  I love waking up in the morning after a restless night's sleep wondering if the market will be surging or plunging...with the ES lead always smiling at me and telling me everything is alright...until it plunges during the illiquid hours of the Pacific ocean...all depending on what Ben Bernanke says or does not say.

What a great world.  Thank you Ben Bernanke and Goldman Sachs.


Tue, 09/20/2011 - 09:30 | 1688398 Gandalf6900
Gandalf6900's picture

tomorrow for me is like christmas...I can't wait

Tue, 09/20/2011 - 09:45 | 1688441 SheepDog-One
SheepDog-One's picture

I think we're going to see quite a show of things un-hinging all over the place!

Tue, 09/20/2011 - 09:31 | 1688399 RunningMan
RunningMan's picture

How is #3 an actual option? Communication is important, but talking about something is different than doing something.  I talk about doing work, but I only get paid to actually do work (when there is work to do, which there isn't). True funding costs need to come down alot to stimulate economic activity, but we simultaneously need a stabilization and reversion of credit risk to norms. We have neither condition satisfied, therefore continued depression. Can the Fed actually fix this? Liquidity trap.


Tue, 09/20/2011 - 09:30 | 1688400 lizzy36
lizzy36's picture

Blah Blah Blah.

Greenspan is attending. Will do a full demonstration on how to properly blow a REAL bubble assisted by Charlie Evans.

Second verse same as the first.


Tue, 09/20/2011 - 09:32 | 1688408 Tyler Durden
Tyler Durden's picture

So... there will be easing by the Fed in 2011?

Tue, 09/20/2011 - 09:36 | 1688420 Gandalf6900
Gandalf6900's picture

to be or not to be

Tue, 09/20/2011 - 09:40 | 1688428 Oh regional Indian
Oh regional Indian's picture

Well, there's definitely been a lot of teasing by the Fed in 2011, what's a little T between sheep and master?


Tue, 09/20/2011 - 09:47 | 1688448 SheepDog-One
SheepDog-One's picture

Right Ori, no shortage of QE 'T'easing a carrot and stick out in front of the markets since DOW 9,800 in Feb. 'T'easing!

Tue, 09/20/2011 - 09:34 | 1688414 sabra1
sabra1's picture

he's actually there to push his new line of wrinkle remover!

Tue, 09/20/2011 - 09:34 | 1688416 scatterbrains
scatterbrains's picture

If twist is priced in what's the harm of nibbling a little on TBT ? Selling the news or better yet a surprise where they abandon twist and ramp the printing press.


Tue, 09/20/2011 - 09:35 | 1688418 disabledvet
disabledvet's picture

Don't worry Mr. Evans. Your annihilation of Chicago will make you a HERO FOR ALL TIME!

Tue, 09/20/2011 - 09:38 | 1688422 spanish inquisition
spanish inquisition's picture

I will translate recent press reports choices 1. Cook the books 2. Trim some corporate welfare 3. Lie. If you are going to go with the path of least resistance (i.e. easiest solution) the order will be 3-1-2.

The market has priced in infitine ($) Fed support with unlimited backstopping insurance. That is what the Fed needs to do to save itself, it's shareholders and distribution system (Wall Street). I am guessing the last gasp will be here when $10K is sent to every American.

Tue, 09/20/2011 - 09:49 | 1688458 SheepDog-One
SheepDog-One's picture

Thats really the bottom line, this market has priced in infinite upward move backstopping by the FED, now they have to deliver, and theyre talking about geeky bond rate flipping programs? 

Tue, 09/20/2011 - 09:40 | 1688426 PulauHantu29
PulauHantu29's picture

This may be the even that sends the yellow metal soaring over $2,000.

How Barbaric!

Tue, 09/20/2011 - 09:45 | 1688442 Quinvarius
Quinvarius's picture

I think they will continue to announce nothing while continuing to buy Treasuries hand over fist in whatever timeframes they feel like manipulating.  They have no duty to tell anyone what they do.  So they will only tell their banker buddies how they plan to manipulate things.  The only thing that is certain is that they cannot stop buying US debt.

Tue, 09/20/2011 - 09:59 | 1688500 Vincent Vega
Vincent Vega's picture

Agree, Quin.

Tue, 09/20/2011 - 09:47 | 1688447 Tense INDIAN
Tense INDIAN's picture

we have read Rosenberg and Goldaman....but Tyler....ur views on whats coming and what could be the impact ??

Tue, 09/20/2011 - 09:48 | 1688452 Tense INDIAN
Tense INDIAN's picture

we have read Rosenberg and Goldaman....but Tyler....ur views on whats coming and what could be the impact ??

Tue, 09/20/2011 - 09:48 | 1688454 Tense INDIAN
Tense INDIAN's picture

we have read Rosenberg and Goldaman....but Tyler....ur views on whats coming and what could be the impact ??

Tue, 09/20/2011 - 09:49 | 1688463 SheepDog-One
SheepDog-One's picture

3X fire for effect!

Tue, 09/20/2011 - 09:48 | 1688455 fdisk
fdisk's picture

#1 Dollar is "too high" already, this will translates in

lower corporate overseas profits, unless Benrank shoot BIG to

push dollar lower. Twist will not do much, but I don't think

Bernank is ready to full blown QE just yet.

Tue, 09/20/2011 - 09:52 | 1688471 adr
adr's picture

Why doesn't someone just come out and announce a $600 taget on Apple. I mean at $280 we got the $400 call and it seemed insane. But as it is written so shall it be done.

When do we get the Netflix realization in Autozone and Chipotle? There is no economic model to justify the price, just the hope of more free money to pump into risk assets.

My other question is when do the traders book the gains? Or is that not the point. I guess the point is to keep the trades coming and the price does not matter as long as it goes up. If the price goes down you aren't going to get as many trades.

I just wish I had the inside info before they pump a stock that has traded nearly flat for 10 years to over $300 in just a few months.

Tue, 09/20/2011 - 10:06 | 1688509 fdisk
fdisk's picture

Dude, you have no Idea what are you talking about. Amazon trading at 100 P/E and AAPL 15 P/E So AAPL is barely fairly valued at the lower end. Just watch next Earnings and have calculator ready. 600$ is definitely not out of the picture under normal market conditions. It's not price that matters but EARNINGS! APPLE cheaper today at $400 then in 2009 at $90.


AND AAPL have 75 billion $ CASH on the balance sheet, can buy Greece, if they want to. :)


"flat for 10 years to over $300 in just a few months." Not few month but few years instead

You have to see thier EARNINGS PER SHARE history.

Tue, 09/20/2011 - 10:48 | 1688705 adr
adr's picture

I wasn't talking about Apple going to $300 in a few months. That was Autozone.

Earnings multiples do not matter or else just about every stock that trades at 90 times earnings would plummet when the earnings report comes out and shows that investor optimism was based on nothing but hot air.

Market cap matters more than earnings with long standing corporations like Apple when creating a fair value. Do the assets that Apple holds really make it a more valuable company than Exxon?

Apple's $75 billion in cash just shows how terribl a comapny they really are. The do not pay a dividend and hoard cash like a trol under a bridge. They sell garbage tech at a premium price because their customers believe a name is worth the extra cash. Just like te idiot women that pay $400 for a coach purse made in China for $6.

Tue, 09/20/2011 - 10:02 | 1688515 fdisk
fdisk's picture

WOW finally GOLD showing some legs.

Tue, 09/20/2011 - 10:42 | 1688683 msmith
msmith's picture

We can expect USD strength.  EURUSD weakness  AUDUSD weakness  USDCAD strength and ES weakness

Tue, 09/20/2011 - 11:16 | 1688833 Dingleberry
Dingleberry's picture

Gold cannot be held down. It's the new weeble wobble. Do anyone care if it drops 50 bucks? We know the script now.  Ben has two choices: 


2-Threaten to print


That's it. Anything else, all bets are off. Ben and Alan spent decades feeding the market. Now it's feeding on them. Sad....but true.

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