First thing this morning we tweeeted:
It is early for the Hilsenrumor. Those usually appear in the last 20 minutes of trading
— zerohedge (@zerohedge) September 12, 2012
We were off by 14 minutes, as today's "Hilsenrumor" appeared at 3:26 pm, giving the market its closing oomph.
By now everyone knows that the WSJ's Jon Hilsenrath is spoon-Fed information directly by the Fed. Even the Fed. Which is why everyone expected the Fed to ease last time around per yet another Hilsenrath leak, only to be largely disappointed, invoking the term Hilsen-wrath.
Sure enough, it took the market only a few hours to convince itself that "no easing now only means more easing tomorrow", and sure enough everyone looked to the August, then September FOMC meetings as the inevitable moment when something will finally come out.
So far nothing has, as the Fed, like the ECB, have merely jawboned, since both know the second the "news" is out there, it will be sold in stocks, if not so much in gold as Citi explained earlier.
Regardless, the conventional wisdom expectation now is that tomorrow the Fed will do a piecemeal, open-ended QE program, with set economic thresholds that if unmet will force Bernanke to keep hitting CTRL-P until such time as Goldman is finally satisfied with their bonuses or unemployment drops for real, not BS participation rate reasons, whichever comes first.
As expected, this is what Hilsenrath 'says' to expect tomorrow, less than two months from the election, in a move that will be roundly interpreted as highly political, and one which as Paul Ryan noted earlier, will seek to redirect from Obama's economic failures, and also potentially to save Bernanke's seat as Romney has hinted on several occasions he would fire Bernanke if elected. Here is what else the Hilsenrumor says.
In the past, it has announced programs with big numbers and fixed completion dates — like a $1.25 trillion mortgage-buying program that stretched 12 months through March 2010 and a $600 billion Treasury bond-buying program that stretched eight months through June 2011.
The activist wing of Fed officials, which support aggressive responses to high unemployment, want a large and open-ended commitment to bond buying. For instance, the Fed could announce it would buy at least a certain amount of bonds over a specified time period and signal they could buy more later if the economy doesn’t pick up.
Announcing an opening allotment over several months would blunt the ability of Fed policy hawks, who are skeptical of easing actions, to quickly call for the program to end. The hawks don’t want another round of QE, but if there is going to be one, they would want a small up-front commitment to bond buying and the opportunity to pull the plug on the program if the economy picks up quickly.
A four-month opening allotment would get the Fed past the election and through a Dec. 11-12 policy meeting, at which point it could consider whether to continue. A five month commitment could get it to a January press conference and another round of forecast updates. A seven-month opening allotment would get it through the first quarter of 2013 and to a March 19-20 policy meeting. If it decides to make decisions on a meeting-by-meeting basis, the next meeting is Oct. 23-24, two weeks before the election.
It’s hard to say how big a program the Fed would launch, here are some guideposts:
- The Fed is already purchasing $45 billion in long-term Treasury securities every month through the Operation Twist program and it plans to buy a total of $267 billion by year-end. That marks the lower bound of what Fed purchases will be for the rest of the year.
- If the Fed doubles the size of its current program by matching Treasury purchases with mortgage purchases, that would get its monthly purchases to $90 billion.
- Its controversial QEII program launched in November 2010 was smaller at $75 billion per month.
- Its first round of mortgage and Treasury purchases took place largely in 2009 and was designed to be immense to address the financial crisis. It amounted to more than $140 billion per month, an amount that seems likely to be far beyond the ambitions of what Fed officials are prepared to do now.
–WHAT TO DO WITH TWIST: Officials must decide what to do about the “Operation Twist” program if they launch a new bond-buying program. The Fed is funding the Twist purchases with money it gets by selling short-term Treasury securities. The Fed has two options:
- It could suspend the Twist program and replace it with a new bond-buying program in which it buys both Treasury securities and mortgage-backed securities, and funds those purchases with money that the Fed prints — rather than with proceeds from short-term securities sales. This would be more like the QE programs the Fed launched in March 2009 and November 2010.
- The Fed could continue the Twist program and launch a mortgage-bond-buying program by its side in which it buys mortgage bonds with newly printed money but continues to fund long-term Treasury purchases with sales of short-term securities.
In either case, the Fed would be launching a program which it considers to be more powerful than Operation Twist alone. One question for officials is which of these two complex approaches would be easiest to explain to the public? Another is which approach entails less risk of public backlash? Many critics worry that the Fed’s money printing will someday cause inflation or another financial bubble. Many officials don’t agree, but they’re sensitive to the argument. The second option would involve less money printing and might help to blunt that criticism.
–COMMUNICATION: How the Fed describes its impetus for action, and its criteria for even more in the future, could matter a lot. Is it responding to a darkening outlook? Or has it decided to take more aggressive action because its patience with slow growth and high unemployment is running out and it has a new commitment to changing that?
If it emphasizes the former, it might just depress investors, households and businesses more and backfire. If it emphasizes new resolve, it could spur the public to change behavior in ways that lead to more economic growth but also risk more inflation.
Fed officials have long believed that their communications about monetary policy and the economy are as important as the actions they take, but they’ve struggled to strike the right message.
In a widely debated paper presented at the Fed’s Jackson Hole meeting last month, Columbia University economist Michael Woodford argued that the Fed should signal more strongly that it is committed to an easy money policy until the economy meets benchmarks for more output. The Fed seems to be moving tentatively in this direction. Its discussion about open-ended bond buying is one potential example.
Another: Minutes of the July 31-Aug. 1 policy meeting showed officials considered offering a new assurance that short-term interest rates will stay low even after the recovery progresses.
–WHETHER TO LOWER ANOTHER RATE: The Fed now pays banks 0.25% interest on reserves they keep with the central bank. The Fed could reduce the rate it pays on reserves that aren’t required of banks (known as excess reserves) a little bit to try to give banks more impetus to lend. However many officials are reluctant to do so because they’re afraid pushing the rate any lower would disrupt short-term lending markets. It’s unclear whether the Fed will do anything on this front, especially with so many other hard decisions on the table.