Hilsenrath Speaks: "Fed Prepares To Act"

Tyler Durden's picture

Anyone who may have been harboring doubts that the Fed will pull yet another economically destructive policy out of its bag of genocidal tricks on September 21 can now relax. Jon Hilsenrath has spoken, and while we don't know just what form QE3 will take place (as a reminder any form of duration extension, and hence, artificial risk shit can be reduced to the broad definition of Quantitative, or otherwise, easing), he does give us a menu of three options: i) Operation Twist, as first discussed by Zero Hedge back in May, ii) a reduction in the Interest on Overnight Excess Reserves (IOER) from 0.25% to something... lower, a move that would wreak havoc and completely destabilize money markets, and iii) more jawboning -  a step the would merely make existing promises, such as the ZIRP through mid-2013 even less effective. Bottom line: like it or not, in two weeks we all do the twist.

From said mouthpiece:

Federal Reserve officials are considering three unconventional steps to revive the economic recovery and seem increasingly inclined to take at least one as they prepare to meet this month.

The three options, of which number one is all the matters:

One step getting considerable attention inside and outside the Fed would shift the central bank's portfolio of government bonds so that it holds more long-term securities and fewer short-term securities.

The move—known to some in markets as "Operation Twist" and to some inside the Fed as "maturity extension"—is meant to further push down long-term interest rates and thus encourage economic activity. The program draws its name from a similar 1960s effort by the U.S. Treasury and the Fed, in which they tried to "twist" interest rates so that long-term rates were lower relative to short-term rates.

Anticipation of the move—along with grim economic news and the Fed's public plan to keep short-term interest rates near zero through 2013—has helped push yields on 10-year Treasury notes, above 3% in late July, to around 2%.

Although some consumers and businesses are unable or unwilling to borrow more at any interest rate, several Fed officials believe pushing rates still lower can help on the margin.

"There are still some businesses that at a lower cost of funds are going to make investment decisions and hiring decisions based on an ability to lock in those funds at a lower rate," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview.

He lists the program as one that should be considered. "There are people that will be buying homes or refinancing homes" if long-term rates are lower.

Funny, because this is precisely the fake assertion we refuted earlier by showing the recent move in the 10 Year yields, and the dramatic plunge in MBA refi applications. But that's irrelevant: the Fed will do whatever it will do without regard for actual practicality and/or reality. Also, let's not forget that when the 2s10s hits 50 bps and the Treasury is scrambling to come up with excuses for TARP 2, we will all know what caused the latest and final implosion of BofA.

The other two options which are completely irrelevant, as they will not be used:

A second step under consideration at the Fed, one getting mixed reviews internally, would reduce or eliminate a 0.25% interest rate the Fed currently is paying banks that keep cash on reserve with the central bank.


The 0.25% payment is greater than the 0.196% rate an investor can get on a two-year Treasury. Some officials believe the Fed shouldn't reward banks for holding cash instead of making loans.


"I'm not especially pleased with the way that policy tool is working at the moment," Charles Evans, president of the Federal Reserve Bank of Chicago, said in a recent interview. Mr. Rosengren said cutting that rate could give banks more incentive to lend and would further signal the Fed's determination to get the economy going.


Other Fed officials believe that reducing the rate wouldn't do much good because it is already so low, and might instead disturb short-term money markets.


A third step Fed officials are debating would involve using their words to make their economic objectives and plans for interest rates more clear.


Some officials felt the Fed's August pledge to keep rates low until 2013 wasn't specific enough about what was driving its thinking. They want the Fed to say what unemployment rate or inflation rate would trigger it to boost rates.

And there you have it. The only question remaining is whether or not, as Morgan Stanley suggested earlier, the Fed would act in conjunction with all global investment banks in another round of global easing. Since this is coming from Morgan Stanley, and since gold has indicated there is no way in hell this would happen, we can safely ignore it, but we recreate the report below for those who wish to be entertained.

Lastly, the question of whether plain vanilla LSAP (Large Scale Asset Purchases) will be announced in two weeks is unknown although as was previously discussed the most likely timeframe is for the Fed to convert about $450 billion in 1.5 - 4 year bonds into long term ones, a process which will take about 6-8 months at about $55-$65 billion in POMO per month, at which point the Fed will have to expanded aggressively in monetizing all of the remaining $2.4 trillion in debt to be issued over the next 12 months.

As such we expect LSAP to be announced in March of 2012.

Also as a reminder, for those desperate for more hints even though the gameplan is now well known, tomorrow at 1:30 pm Bernanke speaks at the Economic Club of Minnesota Luncheon, in Minneapolis, Minnesota - an event which may see some local protests. While it is unexpected that he will share anything actionable at this point, the market will most certainly surge by another 10-15 points regardless of what he says. After all there will be headlines, and with Europe closed, this is all that will matter.


Here is the justification for Morgan Stanley's delusions that global concerted easing will finally make that bullish steepener idea reality of 3 years of endless errors.


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navy62802's picture

Gold!! The ultimate hedge against the Federal Reserve.

Ahmeexnal's picture

Option 4:  "Operation Viagra".  Pump the stock markets so they end up with huge erections at the close.

spiral_eyes's picture


Why do you say eliminating interest on excess reserves would wreak havoc in money markets? It's not a long-term norm. It was only introduced in 2008, and then we went through two (or debatably three) programs of QE and all that extra cash — instead of getting loaned to businesses — is sitting there, and the Fed pays interest on it, fuelling the liquidity trap. 

I'm not saying that suspending interest on reserves will solve all of America's problems, but if it's preventing lenders from lending to businesses because it's easier for them to sit on the cash, isn't paying interest on it kind of rigging the market to just sit there and hold cash? Shouldn't the Fed stop it?

Plus, I'd say it was a transfer of wealth from the taxpayer (profit returned to the treasury at the end of the year) to banks...  

Dingleberry's picture

"The Fed will act"

To which I reply, "Gold will act, too"

navy62802's picture

The people are angry. That's the 1000 pound guerilla in the room of which no one dares speak his name. People are angry, and the more economic injustice they are made to endure, the more that anger will grow. There's a tipping point, we just haven't found it yet.

urbanelf's picture

QE3 will come in one of the pre-chosen forms. During the Rectification of the Vuldronaii, QE came as a large moving Torb! Then, during the Third Reconciliation of the Last of the Meketrex Supplicants, they chose a new? form for QE: that of a giant Sloar! Many Shubs and Zulls knew what it was to be roasted in the depths of the Sloar that day, I can tell you!

Cash-NonCash's picture


Thank you so much UrbanElf, that was the best post I've seen all week!

Id fight Gandhi's picture

I choose the stay puff marshmallow man. Idk it just popped in there.

akak's picture

QE3 will come in one of the pre-chosen forms. During the Rectification of the Vuldronaii, QE came as a large moving Torb! Then, during the Third Reconciliation of the Last of the Meketrex Supplicants, they chose a new? form for QE: that of a giant Sloar! Many Shubs and Zulls knew what it was to be roasted in the depths of the Sloar that day, I can tell you!

Having solved our economic woes, our glorious leader will then lead us into war against the blasphemous Engtalian enemy under the banner "The Gostak Distims the Doshes!"

All hail the Gostak!

TradingJoe's picture

Aka for now NO NEW CASH/MONEY etc as in all of the above won't do shit for jobs OR Wall Street ergo.....QEx Not Just Now! maybe later :)))

sun tzu's picture

It won't do shit for main street, but it will prop up wall street and the megabanks.

SheepDog-One's picture

TradingJoe, Im fed up with this crap now that some bond rate hand holding program passes for 'QE3', this is straight up bullshit, 'QE3' has been a couple $trillion priced into every bad piece of news since January.  Operation Carrot and Stick is all theyve got and this is not QE they fall a couple trillion short. 

johngaltfla's picture

Option 1 will result in an inverted yield curve and collapse of about 30% of the nation's regional banks with questionable reserves and weak real estate holdings.

Option 2 only works if the Swedish model is implemented in full with the nationalization of the insolvent institutions and forced consolidation which the Dodd-Frank legislation allows the Fed to pursue.

Option 3 is just more bullcrap.

Thus 3 will probably be the decision as the Bernank ain't got the balls to commit to #1 or #2.

sun tzu's picture

They might monetize and twist at the same time in a coordinated effort with the ECB. The masses will be taxed to save the banks. The tax will be in the form of inflation

DormRoom's picture

your half right about inflation.  There will be a short term rise in inflation expectation, not inflation, but long-run inflation will be mute, if the velocity of money is controlled.


The Fed is doing what the BOJ didn't do in the 90s: keep interest rates low, so households can continue to deleverage.  However for the policy to be effective, it requires fiscal stimulus, to help household rebuild assets. Both sides of the ledger must be acted on, which is why the brinkmanship in Congress, is so destructive for the middle class.

Most of the money the government spends on fiscal stimulus, assuming a moderate multiplier effect, would be recouped from VAT (value added taxes), and income taxes, from increased economic activitiy (think of a multiplier effect as a viral effect--going viral) through-out the nation.  So the NET cost of the fiscal stimulus would be far far less than the initial cost. Moreover, households on the precipice would be able accelerate the pace in which they  can repair their balance sheets.



Bicycle Repairman's picture

"would be recouped from VAT (value added taxes)"


Bicycle Repairman's picture

Orwellian double-speak at it's finest.

whstlblwr's picture

How has it worked so far? Look at gas prices right now. Interest rates low so households can deleverage? WTF you smoking? Many households aren't paying mortagage and get food stamps and benefits. Stop reading your papers and go out in real world to open eyes.

narnia's picture

if fiscal deficits resulted in greater economic activitiy over time, then it would be impossible to have a 100%+ debt to GDP ratio.  actually, it would be impossible to have anything but a surplus over time.  it's more than just a little obvious this whole multiplyer effect is a myth or a selective presentation of data.

fiscal stimulus can provide contract employment for some politically determined output for some period of time.  that output may eventually lead to some productivity in the private sector.  the job experience may benefit those working on the ouput & may be more beneficial to all of us than the same people hanging out on a street corner or melting away in front of a tv.  in the end, though, this spending does not result in a long term sustainable job.  it can have a negative effect on resource (including commodities) markets with artificial demand.  it also has to be paid for by taxation of the private sector, which erodes everyones' quality of life. 

johngaltfla's picture

Monetizaton only works when the funds escape Wall Street and make it to Main Street. As long as insolvent institutions are allowed to park capital at the Fed, collect interest then use those funds to fill black holes on their balance sheets, the process is akin to peeing in the ocean to fill it up with more water.

The insolvent institutions must be shut down and consolidation forced upon the industry. Until this happens none of the programs will work as the money will simple evaporate to reduce losses and maintain bonus structures for high level investors and company officers.

Ned Zeppelin's picture

Really nutty stuff, you gotta admit.  Of course, when you only have a hammer, every problem becomes a nail. 

So I assume the Fed sells its inventory of short duration treasury debt into the market (rates rise as supply increases) - presumably at a loss as the effort gains speed - and use the proceeds to buy from the friendly PDs their freshly acquired, newly minted longer term debt issued by the Treasury (again at a sweet markup). Would this not also have the effect of slightly changing the composition of the national debt towards longer term? 

oogs66's picture

operation twist will be a non event...without flooding the system with money, they won't get the same impact on stocks as qe2

whstlblwr's picture

Except gas, look at gas future today.

This is class warfare. They throw hardworking saver and people need to eat and fill car under a bus to save rich bankers.

no life's picture
  1. One other small hint was the 5 or 7 Fed governors who gave speeches in the last week practically pounding the table for QE3...
oogs66's picture

on the 7th day, MS said let there be globally co-ordinated easing and QE and stimulus, and it was done

chump666's picture

" its bag of genocidal tricks"

hahaha, yep they are genius's at destabilising markets.  No one buys their sh*t anymore, cause it's bad sh*t now

Sequitur's picture

For fuck's sake, can the Fed, for once, NOT act?

zorba THE GREEK's picture

Let's twist again like we did last summer,

Let's twist again like we did last fall,

Do you remember when things were really humming,

Let's twist again til we hit the wall.

Mactheknife's picture

The Federal Reserve is owned by its member banks.  If that's what they want then that's what they'll get.  Anyone who thinks otherwise doesn't know the facts. There are only five countrys on the planet that don't have a cartel owned central bank.

Trimmed Hedge's picture

Could somebody list these 5?


whartman's picture

I understand that one of them is Libya.  Expect that to change now.


Makes you think, hum?

traderjoe's picture

Did anyone seriously doubt that the criminal private banking cabal would do what ever it takes to continue the theft and grift for just a little bit longer? Hyper-inflation is the ultimate end-game.

miker's picture

QE3 will come before March 2012.  The economy is accelerating to the downside.  I see local evidence all around of slowdown and people are running scared.  The Feds will continue their propaganda campaign but it is becoming less and less effective.  People are starting to see through the BS.  I think by the end of 2011, the game will be up.  Perhaps around the holidays; not sure. 

Alpha Monkey's picture

It will be interesting to see the sales data from the holiday season.  Everyone I know is talking about the sour economy, and how it has impacted them.

plocequ1's picture

Thanks ZH. This is the third time i died. Sept. 21 will make it the forth. Even the the ever loving flesh eating maggots are confused

disabledvet's picture

At the rate we're going "there won't be any banks to act in concert with" soon. What if the Fed had a bailout party and nobody came? Obviously the joint "panic" session tommorow is all about "bailout 2.0" of state and local governments so that Obama won't have to be dealing with "Greece: USA style" come election day...or sooner. Sounds like a non-starter already. According to my sources "announces moon colonies/introduces colonists" has piqued some interest however.

adr's picture

One man has while the other has not. 

How can you love what it is you have got.

When you've taken it from the weak hands of the poor.

Liars and thieves you don't know what is in store.

There will come a time when I'll look you in the eye.

You'll pray to the god you've always denied.

Then I'll go out back and get my gun.

I'll say you've never met me but I'm the only son.


Great song by Mumford and Sons...

ShoeShineBoy's picture

1840 down, 160 to go pre-QE3, beyond that, we all know where we are headed

Masquerade's picture

And Gold just went vertical!

X.inf.capt's picture

and i saw people panicing over a $100 move yesterday, 'i should sell' they said. man, if that scared them, wait till WSHTF.

the situation hasnt changed, QE3,4,5 coming, bullish for PM's


PRE65 dimes

and stay cool, boys, SHTF already, its just getting started.

max2205's picture

News Flash: the patient has passed away a few years ago. Time to bury the carcass

buzzsaw99's picture

whatever they do it will only help the wall street bank maggots and hurt main street. book it.

Pike Bishop's picture

The burden of propping up markets and the economy for the next few months thus falls on central banks.

Propping as a concept is fucked.

The negative feedback loop between weak growth and soggy asset markets makes a coordinated monetary policy easing move more likely.

It's not a loop, it's stasis. There is no real growth and the assets are marked-to-Tinkerbell. "Likely" still doesn't mean effective. No matter how many times you wish it to be true.

Such strategic complementarity also exists for EM central banks

Two times stupid, still equals stupid.

However, the interaction between DM and EM centralbanks is one of ‘strategic substitutability’ –

In most courts it's called co-conspiracy. If it's international, it's called a global brain-fart.

LookingWithAmazement's picture

Finally, something might happen. I was already bored about gold and silver not so much exploding, even "correcting", and further looking forward to Christmas, even more so now the euro has been saved for a while. So maybe, maybe, some action. Gold $2000+ shortly? No, not too hastily. In a year or so; the big bankers will keep gold low for a long time more. No spectacle. Boring world we live in.

taraxias's picture

Stop wasting our time and just post "boring world we live in", we'll assume the rest of your troll post.