As Part Of Its NEW QE Q&A, Goldman Warns Of Possibility For $50-$75 Billion "Flow" Program

Tyler Durden's picture

Not like it should come as any surprise that the bank that first among peers "discovered" that flow, not stock matters, implying the Fed may literally never be able to stop monetizing, is expecting the FOMC to "ease monetary policy on June 20", but nonetheless here is the full just released Q&A from Goldman's Jan Hatzius, who just happens to be a Pound and Pence drinking buddy of former Goldmanite Bill Dudley, who just happens to run the New York Fed. Connects the dots. Implicit is that a big dollop of Large Scale Asset Purchases is imminent. That said, if the Fed does disappoint on June 20, and merely extends the maturity of bonds that it will sell as part of a Twist extension from 3 to 4 years, as the bond market appears to be implying (as first warned by Zero Hedge), then all bets are truly off. On the other hand, note where Goldman says: "However, it is also possible that the program would be specified as a "flow" of purchases of perhaps $50bn-$75bn per month." If that happens, gold is going to $2000, $3000, hell, $10,000 very soon, as it means the Fed will not stop printing ever again. Period.

From Goldman:

FOMC Preview: QE or Not QE (Hatzius)

We expect the Federal Open Market Committee (FOMC) to ease monetary policy on June 20, in response to the weaker economic data and increased downside risks from the intensifying crisis in Europe.

The form of the easing is a closer call. Our baseline is a new asset purchase program that involves an expansion of the balance sheet, but an extension of Operation Twist and/or a further lengthening of the short-term interest rate guidance in the FOMC statement beyond the current “late 2014” formulation are also possible.

Q: Will the FOMC ease monetary policy?

A: Probably. Although renewed Fed easing by mid-2012 has been our forecast all year, we felt more uncertain about this view a few months ago given the temporarily better data and the apparent shift of the Fed's reaction function in a more hawkish direction. But at this point, we would be quite surprised if we saw no easing this week.

Q: Why?

A: In her June 6 speech, Vice Chair Yellen listed three alternative criteria for further easing:

…[i]f the Committee were to judge that the recovery is unlikely to proceed at a satisfactory pace (for example, that the forecast entails little or no improvement in the labor market over the next few years), or that the downside risks to the outlook had become sufficiently great, or that inflation appeared to be in danger of declining notably below its 2 percent objective... (emphasis ours).

We believe criterion 1 has been met. As shown in Exhibit 1, we expect the committee to lower its forecast for real GDP growth and raise its forecast for the unemployment rate significantly in the Summary of Economic Projections to be collected at the meeting. If we are right in thinking that the "central tendency" forecast still shows the unemployment rate at 6.9%-7.6% at the end of 2014, many committee members may view this pace of improvement as insufficient, and be inclined to ease accordingly

Exhibit 1: Out Estimates for the Fed's Summary of Economic Projections…

Criterion 2 may also have been met given the deterioration of the European crisis and the tightening of financial conditions of about 30 basis points (bp) since the April FOMC meeting. This tightening is a key reason why our statistical model of FOMC decisions implies that additional easing in June is likely.

Criterion 3 has probably not been met in the committee's view. As shown in Exhibit 1, we expect only the headline inflation forecasts to be revised downward, while the core inflation numbers are likely to be largely unchanged. However, our own view is that there are signs that underlying inflation pressure is actually starting to come off quite sharply, so this criterion may well be met at a subsequent meeting.

In addition, it is important to note that a decision not to ease is tantamount to a tightening. The reason is that the impact of unconventional easing--unlike that of conventional short-term interest rate policy--"decays" over time. This is the implication of our own research, and Figure 9 in Yellen's speech shows that Fed officials have come to the same conclusion. We estimate that this "decay" would push up the 10-year Treasury yield by about 30 basis points (bp) between now and the end of 2013 if no further balance sheet action is taken and the forward guidance is not extended, and Yellen's estimates seem to be similar.

This decay factor kicks in only gradually, so one could argue that it need not be a reason to expect further easing in the near term. However, there are two other reasons besides the decay to believe that the impact of not acting could be sizable even in the near term. First, the market now clearly discounts some probability of easing, so financial conditions would likely tighten if the Fed did nothing. And second, we have found that a small part of the impact of asset purchases on bond yields occurs via the "flow" of Fed purchases than the "stock" of Fed holdings; this implies that very long yields should rise when the purchases stop.

Q: So how will they ease?

A: This is much more uncertain. However, our baseline remains a return to balance sheet expansion, with purchases of mortgage-backed securities (MBS) and Treasuries. There are three reasons why we believe MBS purchases would feature prominently. First, these may be more powerful than Treasury purchases in boosting economic activity on a dollar-for-dollar basis, as MBS yields are not nearly as close to the zero bound as Treasury yields. Second, Fed officials have repeatedly mentioned housing as a key headwind to a stronger recovery, so a policy that directly targets housing would make sense. .Third, there may be more support among the public for MBS purchases because of the implied support for US homeowners as opposed to government deficits.
That said, some Treasury purchases would probably be included as well; after all, the stock of Treasuries is rising much more quickly than that of MBS, and Fed officials may therefore want to provide some additional support for this asset class.

Q: How large will the program be?

A: If it is specified as a "stock" of purchases, we would expect a similar size as in past programs, i.e. $400bn-$600bn over 6-9 months. However, it is also possible that the program would be specified as a "flow" of purchases of perhaps $50bn-$75bn per month. Although there has been little talk about the latter option, it enables the committee to respond more flexibly to changing economic conditions and may be optically more attractive if the committee is worried about a political backlash domestically or abroad against further balance sheet expansion. Economically, the effects of the two options are likely to be quite similar because financial markets are forward-looking; for example, if markets believe that a purchase flow of $60bn per month will be sustained over 8 months, this would be equivalent to a $480bn stock announcement.

Q: Will the purchases be sterilized?

A: This is a tough call, but on balance we think yes. The argument in favor of expecting sterilization--which involves financing a Fed balance sheet increase via term deposits and/or reverse repurchase agreements as opposed to yet more excess bank reserves--is that the cost-benefit analysis looks quite promising. Economically, we believe the choice whether to finance a balance sheet increase via overnight liabilities (bank reserves) or 1-week/4-week liabilities (reverse repos/term deposits) matters very little. However, there is a belief among some investors and commentators that increases in the monetary base are more inflationary than increases in other types of Fed liabilities; if so, sterilization may be a low-cost way of reducing the risk of a rise in inflation expectations or a political backlash against "printing money."

The substantive argument against sterilization is that it would put upward pressure on interest rates at the very short end of the yield curve (because the Fed would borrow additional funds at a 1-4 week maturity). Moreover, there has been relatively little talk about it since a Wall Street Journal article in March that floated the idea, so it is possible that the idea has fallen out of favor.

Q: Are they also likely to extend the forward guidance from the current "late 2014" to "mid-2015"?

A: This is not quite our baseline but very possible, especially if the committee decides against renewed balance sheet expansion (see below). After all, such a shift would roughly restore the forward guidance to the same three-year horizon as at the January FOMC meeting, when the "late 2014" formulation was first adopted. At a minimum, we think that the funds rate forecasts from individual FOMC participants in the SEP are likely to move toward a later exit date (see Exhibits 2).


Exhibit 2: …and the Timing of the First Rate Hike

Q: What if they decide against expanding the balance sheet?

A: The leading alternative to balance sheet expansion is a small extension of Operation Twist, i.e. a sale of the remaining $200 billion or so of Treasury securities with a remaining maturity of 3 years or less, and a corresponding purchase of longer-term Treasuries and/or mortgage-backed securities.

If the committee decides to confine itself to an extension of Operation Twist, this would further increase the probability of a lengthening of the forward guidance from the current "late 2014" formulation to "mid-2015" in order to reduce the risk of doing too little and also to mitigate any upward pressure on short-term rates that might otherwise result from selling yet more short-term Treasuries.

Even so, we believe that an extension of Operation Twist could well be insufficient on its own and could thus be followed by additional easing action before long. Recall from the discussion above that the "decay" of unconventional policy could boost 10-year yields by 30 basis points over the next 18 months. Using standard estimates, a further $200bn twist combined with a lengthening of the guidance would offset only about half of this impact. More than this is likely to be needed eventually.

Q: Could the committee make an extension of Operation Twist more powerful by selling intermediate-maturity Treasuries (e.g. 4-years)?

A: In principle yes, but we do not find strategy very attractive. The main reason is the risk of putting upward pressure on intermediate yields and thereby sending very mixed signals about monetary policy. If the committee wants to do significantly more than implied by a further $200bn twist alone, balance sheet expansion is likely to be needed.

Q: Do you expect a cut in the interest rate on excess reserves (IOER)?

A: No. We believe that the committee views the forward guidance as a better way of mitigating upward pressure on short-term rates than a cut in the IOER because it seems less likely to interfere with money market functioning.

Q: Do you expect additional Fed easing to be effective?

A: Only moderately. While we believe that a sufficiently large program focused on the mortgage market would help, it is unlikely to be very powerful. That doesn't mean Fed officials shouldn't do it, since we view the costs of additional easing as low. The risk of inflation is remote, and even when it becomes less remote Fed officials should be easily able to tighten policy sufficiently.

But it does mean that it makes sense to think about other forms of policy easing. Obvious candidates would be fiscal policy or purchases of non-government guaranteed assets, but these require the cooperation of Congress and are therefore probably not feasible. Instead, a move in the direction of "unconventional unconventional" options holds more promise. These include the Evans proposal of promising not to raise rates until the unemployment rate has fallen to a specific level and a nominal GDP level target. We do not expect these to be adopted in the short term, but they could be more effective than balance sheet action and date-based forward guidance on their own. They may therefore represent the next frontier for Fed policy should the recovery continue to disappoint.

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Paul Atreides's picture

Humanity should warn Goldman of the possability of 50-75 of its top executives could soon be hanging from the gallows.

Troll Magnet's picture

humanity should be warned that goldman is full of shit. they won't announce QE on june 20th. not at current levels. no way. no how.

Comay Mierda's picture

omfg another goldman qe prediction?  mkt prob crashing soon, they are offloading their equity positions on to the muppets.  but dont worry, uncle benny will save you


Colombian Gringo's picture

Yep, I smell pump and dump GS style, raise prices and then shit all over their clients.

nope-1004's picture

Can someone answer this for me?  Can the Fed engage in an asset purchase program (monetize) and not publicly disclose they are doing so?  Seems to me the world can't make it through the next month without ongoing QE, so it's my opinion that they are just simplying hiding the truth.

Any validiity to my suspicions?


fonzannoon's picture

Jim Rogers has been making that case for a few years now, and he is one of the few that I put some faith into.

earleflorida's picture

yeah, the same ole jolly [total shill] roger of the intrepid sorcerer soros', 'quantum fund' - now humbly sharing his lamentation's once again on CNBC, btw is bought and paid for by the TBTF's ,...

fonzannoon's picture

my cynicism goes only so far. Rogers is a good dude. he is getting up there and wants a bulwark against mortality. if i am wrong for listening to a guy telling me to buy real assets i give up

engineertheeconomy's picture

After the Mexican Cartel beheads all the Goldman sacks then we can have them behead all the Central Bankers

ebworthen's picture

No doubt shadow QE, beside the currency swaps and back door operations.

The FED can do whatever they want, they are a private corporation that answers to no one.

Don't let the CONgressional testimony fool you; it is mob underlings pretending to ask the front man of their mob bosses real questions.

"No, we are not roughing up citizens and businesses to pay 'protection' money, that would be illegal."


Jake88's picture

I believe that Bernanke was asked a similar question by congress a few months ago. The question was something like if the Fed bails out Europe are they required to get congress's approval. His answer was approximately that there is no requirement for the Fed to seek congress's approval and no requirement for the Fed to inform congress, but that the Fed would graciously inform congress anyway. Big of him.  It was a rather ballsy declaration of his own power and authority. I was dumbfound.

engineertheeconomy's picture

What he was really saying is that the Dollar will be the future  One Global Currency, and that all other Fiat Currencies will soon be retired. What he is not saying is what he is going to purchase with the 950 Quadrillion Dollars worth of foreign currencies that he will recieve for his newly printed dollars. Global Land Grab?

Marginal Call's picture

They do that all the time.  Like trillions sent to Europe that we don't hear about until years later.  


If they really want to stimulate the economy for $70 billion a month,  they should randomly pick social security #'s from low income earners and give out $500,000 cash to 140,000 people.  But it's got to be to people who are of the ghetto/trailer park variety who'll blow through the whole thing in a year or just put a Brewster's Millions clause to it for middle class earners.  Yeah, it's on a prepaid debit card that expires in 60 days.  All the previous stimulus went straight into Jamie Dimon's pockets and hasn't moved since-and wasn't worth fuck all. 


Filed your taxes last year?  Win cash prizes.  TAX FREE Drawings Every Friday from the FED.  

eclectic syncretist's picture

The Fed exists to enrich the banks at the expense of the people.  The rhetoric about employment and price stability is all smokescreen and mirrors to distract our attention away from this simple truth.

For instance, who does zero percent interest rates benefit most, and who does it hurt most?  It benefits the bankers because they are the only ones who can borrow at zero (= for free), and they then lend it out at 10+%.  It hurts the people who work hard and save for the future the most because they no longer have any interest income for the money that the save and the banks use as collateral for even more loans.

To answer your question, the Fed is not interested in stimulating the economy beyond what would be beneficial to banks, anymore than a parasite is interested in keeping it's host healthy.

mcguire's picture

what is interesting is that GS may be right, and they may annouce a "flow" based QE (QEflow)... 

but the problem is that when the masses see the number, ie $80bil vs. $600billion, it will react negatively!!!

why?  because while "flow" may be important to bond prices, it is "stock" that is important for ES, PMs, etc... 

flow is methadone.  stock is crack.  

earleflorida's picture

did ya ever hear of... or see a 'horse`trader' givin up the poppy for an, 'in the flow' show-place --- and, as far as stock is concerned... the casino's addict only focuses on his habit --- the Quick`Easy is all that he counts

Whoa Dammit's picture

The "Floe" program, making that iceberg they are heading for just that much bigger.

I can't believe the nerve they have to say that buying more of the old MBS garbage from the banks' balance sheets will be more palatable to us. 

And please note the "n/a" under long term inflation in their BLS worthy chart.


CPL's picture

They don't have to announce anything anymore.  All the central banks act as one now.  The US Fed can print for any central bank authority as can any other banking authority can print for the Fed.   Besides the QE has been flowing the whole time, now the problem is keeping the money printing and churning without setting off a short cover on gold and silver.  There is already enough liquidity in the system to have gold sit at 6k an ounce and silver at 450...that agreement was done in Jan while everyone was worried that countries that can't afford coal and diesel want to sign off on NDAA or whatever half demented smoke and mirror show dreamt of that week.


Look at the cost of food, does it look like the TPTB is ceasing the print job?  Silver?  Nope...still rising.  Gold?  Nope...still rising.


The pensions that are owing must be inflated away faster than people can collect them, which means it has to happen FAST because that's money owing that was never saved.  Pretending like pension are in some untouchable lock box is naive, pretending they haven't been printing the whole time is just plain silly.

Beevreetr's picture

Not my cup, not my problem.

SmokeThatHog's picture

That's some classic shit, literally.

Manny's picture

Look who made it to #2 on this list. Although i think should have been #1

You need to go to the slideshow at the end of the article for the list.


sitenine's picture

Congrats Tyler!  You and Max should do another interview ;)


El's picture
Williambanzai7 made it on the list, too, at number 10. :) Congrats, guys and gals.
sitenine's picture

WB7 came in 4th - the slides are out of order.

Wakanda's picture

Rock on ZH!!!!  : - )

blindman's picture

..: " when life looks like easy street
there is danger at your door. " ...r.h.
Grateful Dead - Uncle John's Band
Blair urged by Murdoch to rush into Iraq war
Posted on June 17, 2012 by maxkeiser
re stock and flow. as flow increases
stock decreases, but not with a sovereign.
( the model of stock and flow seems to be
a myopic view of the natural cycles that exist
in nature, the stock being a concept, noun,
the flow being a verbe, but actually the same
thing, meta-conceptually held as a cycle, as
in the hydrologic cycle, the carbon cycle, the
nitrogen cycle, etc..)
that is the beauty of sovereignty and why
fascism is so popular with the private and
public servants and sectors. a sovereign
has all of nature as its stock and manages
the flow. where structure and labour are
required to direct flow there is religion.patriotism.
distribution. and government.
regarding legal tender liquidity as debt in
saturation they just steal what is needed now,
systemically, from the current stock and flow it to
the insiders for the insiders in the fields of
and government.
so in the money creation mechanism, the stock
and flow, "money" is borrowed into existence, to be
paid back at principal and interest in the future.
that done by the individual in collaboration with
the governmental and financial "systems". but
when saturation is achieved the flow, which is
the verbe, terminated, stops. saturation.
nature demands a fall, a fallout, a precipitate
as there is no further solubility. no further
saturation possible, it must rain, it must fall.
but, the con and scam is of the image that this
cannot happen. why? because of derivatives.
they demand the underlying retain their image or
destroy the next level of "money" creation, liquidity,
that the financial world has created out of thin air
(sovereignty hijacked by corporate financial industry).
war maker is back in town. j.t.
the base money being stuffed into the system to
conceal the nature of the system itself and the
transference mechanism at play whereby the global
fiat financial system creates fictitious liquidity
and solvency divorced from the notion of "nations".
we see nation building at a time of the destruction
of the system of national sovereignty. wild shit and
global deception afoot.
that time element is the killer, along with that
interest element. stock and flow.
it is as if the rains in the hydraulic cycle will
not be allowed to fall, ( but we have helicopter
drops on the elect and elite, as if this was
liquidity, and it has been said, "politics is
show business for ugly people." i say economics
is math and statistics and show business for sociopaths,
some being attractive and some ugly.( the condemnation
here is meant only for myself ) i guess you could say
i am a self hating non-jew, i hope that is not anti-semitic. anyway..
the key to fortune has been and remains today
confusing the populations in the present to
steal in some either straight forward way or in
some over time ponzi arrangement, the great fortune
that is typically termed "treasury" or "sovereignty",
to subordinate that from god's creation, the earth, sky
and people, to an alien and foreign idea of collectivist
orientation and distant and foreign control, bringing
into question legitimacy and integrity.
all isms are dependant on ubiquitous conformity
and adherence to same, this for the predictive power
of positioning propitiously. (trust)
we don't have that in any broad or global sense and
never will. they don't care for trust and integrity
anyway, direct control and punishment are their
alternatives. those who think fascism will evolve into
a better, more enlightened state are insane, leadership
by superior paranoia and fear worshipers.
who owns the stock and flow anyway?
economy is impossible when price discovery
is manipulated and systemically opaque.
"so what". miles davis.

f16hoser's picture

This is why I'm a "Stacker!" I'ld rather be two years early than than one day late to the PM's Party.....

CrashisOptimistic's picture

You mean selling your gold?  You want to do that one day before global concerted action imposes a 60% tax on all gold transactions.

This would be done if gold ever becomes significant enough to warrant the action.  Given insignificance, it's not worth thinking about.

bdc63's picture

Windfall profits tax baby ... I mean bitchez ...

nmewn's picture

Suppose corrupt bureaucrats and regulators announced a market and nobody came...just completely ignored them as they sat there stunned with their hands out waiting for their cut.

Why, think of the possiblities ;-)

hamurobby's picture

Sounds like a Greek tragedy..

tmosley's picture

Then why mention it?

Oh yeah, you want to instil as much terror in everyone as you possibly can, so you can sell them your death worship claptrap.  I almost forgot--flimflam men absolutely THRIVE on terror.

Rainman's picture

Nice plan...desperation and Hail Mary far as the eye can't see.

ekm's picture

FLOW matters as long as there is still something to buy. However, if EVERYTHING has already been bought, neither flow has any effects.

I think everything has already been bought by Primary Dealers, hence the only thing to do is engineer a collapse of 1 or 2 primary dealers as they did in 2008 with bear stearns and lehman.


Also, HILSERNRATH just spoke.

Plymster's picture

If everything has been bought, they can just sell it to each other again to jack up the price.  Flow would mean that consumables (food, fuel, and materials) have a constant bid, so that non-consumable assets (equities and bonds, for example) never need drop in value.

ekm's picture

Thx a lot.

I was expecting somebody to provide feedback. I'm having this idea and I'm testing it on ZH. I hope others provide feedback.

Everybodys All American's picture

New debt is being created constantly. Therefore the need for flow. Without new debt creation government spending grinds to a halt. Your hypothesis fails miserably.

ekm's picture

Thx a lot. I appreciate the feedback.

fonzannoon's picture

Hey ekm good for you. No joke. I have floated some of my own hypothesis on here only to have similar feedback. It says a lot to be able to take criticism like a grown up. That to me is more interesting to see than the theory getting debated.

ekm's picture


I am addicted to learning. There is no other way to learn but by imagining something and throwing it out there for criticism.

slaughterer's picture

Uh, this is the same Goldman which has been wrong on nearly all of their 2012 calls, leading their clients to massive losses.  Could it be that they are forecasting the excact opposite of what will happen?  Nowhere do we see better than on Zh how GS fades all of their calls to the detriment of the suckers who take them literally.  

Golden Balls's picture

The fed is busy manurfacturing 350 million blue pills for rapid distribution.

max2205's picture

2% mortgages for all!!!! Let them eat mortgages

Take the I out of P&I

junkyardjack's picture

I'm waiting for -2% mortgages so my house can pay off itself...

nmewn's picture

A negative four percent note does it in half the I'm thinkin about just squatting somewhere just to be radical.

Up twinkles? ;-)

BidnessMan's picture

A 4% 30 year fixed rate, 95% LTV and no PMI, does the same thing when inflation goes to double digits.  Actually tax deductible rent. With inflation at 5%, 10%, 25%, 50%+ a month, won't take long....  The gas for the drive across town to pay off the mortgage will cost more than paying off the mortgage...

bdc63's picture

The FED doesn't act until we catch the Swine Flu from the PIIGS, and our stock market is in freefall.

That's my call and I'm stick'in to it.