Stocks, Precious Metals Spike On Report Fed Considering "Sterilized" QE

Tyler Durden's picture

Update: yup. It's Jon "Mouthpiece" Hilsenrath all right. This is nothing but a test to gauge if the market will ramp on the clarification that future QE may be sterilized. If market ramps regardless, the sterilized clause will be ultimately eliminated. Full story link.


While we have yet to see the actual report, almost certainly emanating from Jon Hilsenrath, it appears that the QE3 rumormill has started, initially with speculation that the Fed's activity will be merely "sterilized" or more Twist-type purchases, unclear however if in TSYs or also in MBS. Via the WSJ:

  • Fed Officials consider "sterilized" option for Future bond buying
  • Operation Twist Reprise, QE Other Options For Fed Bond
  • Still Unclear Whether Fed Will Launch Another Bond-Buy

As a reminder, yesterday we said that according to the EURUSD, the implied market expectation is for a $750 billion QE out of the Fed. However, that is for unsterilized balance sheet expansion. If the Fed goes ahead and does not grow its balance sheet (hence "sterilized"), it may well be EURUSD, and thus risk, and gold, negative, as no new money will enter the market for actual speculation. Which perhaps is precisely what the Fed is planning, as every incremental dollar now goes into Crude first, and everything else later. In other words: this is a very big risk off indicator as no new money will be available to pump up stocks, and all this will do is try to make longer-dated yields even lower, an approach that has proven to be an abysmal failure to date.

This also means that while the ECB is borrowing ever more and more tricks from the FRBNY Goldman team, such as massive Discount Window usage, the Fed is now using the ECB playbook when it comes to selective easing without generating inflation - the US goes German. Of course, there is no such thing as truly sterilized intervention, as ultimately the Fed will merely fund the banks indirectly in some other way, to give them the dry powder needed to sterilize and generate the required ROEs without which their stocks would plunge.

This move may have to be faded:


From the WSJ. INFLATION word count 9:

Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead....The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed's previous efforts to aid the recovery..... If growth or inflation pick up much, officials seem unlikely to launch a bond-buying program because the economy might not need the extra help or because doing more could spur higher inflation. The Fed's approach to a bond buying program matters a lot to many investors. More money printing could push commodities and stock prices higher, or send the dollar lower, if it sparks a perception among investors that inflation is moving higher, said Michael Feroli, an economist with J.P Morgan Chase.


Fed officials have used different types of bond-buying programs since 2008. In each case the aim has been to drive down long-term interest rates to spur investment and spending by businesses and households. In case they decide to act again, they're exploring three different approaches, according to people familiar with the matter. Those approaches are:


• First, they could use the method they used aggressively from 2008 into 2011, in which the Fed effectively printed money and used it to purchase Treasury securities and mortgage debt. The Fed has already acquired more than $2.3 trillion of securities in several rounds of purchases using this approach, widely known as "quantitative easing," or QE.


• Second, the Fed could reprise a program launched last year in which it is selling short-term Treasury securities and using the proceeds to buy long-term bonds. This $400 billion program, known as "Operation Twist," allows the Fed to buy bonds without creating new money.


• Third, in the new novel approach, the Fed could print money to buy long-term bonds, but restrict how investors and banks use that money by employing new market tools they have designed to better manage cash sloshing around in the financial system. This is known as "sterilized" QE.


The Fed's objective under any of these programs would be to reduce the holdings of long-term securities in the hands of investors and banks. The Fed believes that reducing the amount of long-term bonds in the hands of investors drives down long-term interest rates, encourages more risk-taking, and thus spurs spending and investment by households and businesses.


The differences between the three approaches involve where the money comes from and where it ends up. The Fed hasn't literally print more money, but it has electronically credited the accounts of banks and investors with new money when it purchased their bonds under quantitative easing. The Fed has pumped more than $1.6 trillion in new money into the financial system this way, and has also rejiggered it existing holdings, as part of its bond-buying efforts.

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LawsofPhysics's picture

Two words;  "head fake".


It is either that or Bill Gross has been right all along.

strannick's picture

Where are these 'unsterilzed funds' to come from?

I thought that by June, the income from previously bought bonds (twist) wont be sufficient to buy up the newly issued bonds, and that therefore 'unsterilzed' buying (QE) will have to recommence.

Stax Edwards's picture

Jawboning to inflict pain on shorts IMO.  Probably better get used to it.

Spirit Of Truth's picture Ben is both impotent and sterile now?  Maybe that means he'll stop raping the middle class.

Chief KnocAHoma's picture

This is too easy.... release the rumor and watch the suckers flock in. Of course they have no other option than to print, but by giving verbal resistance to the idea, they try to keep inflation in check.

Truth is we're fucked.

tmosley's picture

That just makes him mad, so he'll use a broken broomstick instead.

Hippocratic Oaf's picture

Who gives a shit, Big East Tourney is on. <slight sarc>

Manthong's picture

Interesting that in the case of bankers and the government "sterilization" means preserving toxicity. 

The Big Ching-aso's picture



They sterilize to prevent conception.   In this case they sterilize to promote deception.  

OpenEyes's picture

Sterilized QE  ??   Oh man, now they're just making shit up.

JPM Hater001's picture

Subscriber...solid piece I saw it this morning.

Lost Wages's picture

I think Bill Gross is about to be right all the way to the bank. And to a far lesser extent, PTTRX fund holders. I was suprised to see PIMCO vote against triggering CDS, then bitch about their own vote afterward. Makes me think they know something, playing both sides of the issue like a goldman squid.

trav7777's picture

Gross is levered long on mortgages, right?

LawsofPhysics's picture

ZIRP is QE.  Free money for the PDs and no soup for you.

Stoploss's picture

One word: "perplexed" What happens when we see this word?? Did we see this word in '08? Why, yes, yes we did.

achmachat's picture

are those the algos that react that quickly to rumors?!

dracos_ghost's picture

Yup. Except the headline parsers just read FED CONSIDERS QE. Damn quoted adjectives like "Sterilized" don't get included in the linguistic context.

Cognitive Dissonance's picture

Gotta love the rumors. After a selling day like yesterday the Ponzi welcomes any "help" it can get.

Divided States of America's picture

I thought too much risk taking and people living way beyond their means was what got us into this mess in the first place...and the Fed is promoting this? Wow, we're royally fucked.

Cognitive Dissonance's picture

Not too loud son or the natives might hear ya.

Dr. Engali's picture

The fed has been promoting it for 100 years. They have just been turning up the dial.

The Big Ching-aso's picture



"My risk is different than your risk. All I ask from you is to take a risk on my risk. Someday I'll let you know what that risk is."

B.S. Bernanke

Divided States of America's picture

Crap, my shorts will have to wait till June for another triple digit down day. I heard this phenomenum only occurs once every quarter now. Thank you Benny and Timmy and Bammy.

exi1ed0ne's picture

Nah, sterilization is where they make 10 louder with a cold sore. 11 is coming though.

downrodeo's picture

yeesh, my head is starting to hurt from it all

GeneMarchbanks's picture

"Sterilization" is an ECB trademark, please pay up.

ghostfaceinvestah's picture

Thanks Benocide, you sure helped my oil position, it was looking a bit weak until this news broke.

AccreditedEYE's picture

Look at the other benefit too... we practically filled the gap down/up on market indicies and volatility in 1 morning. This is developing nicely....

Marge N. Callz's picture

Wow a 20 point drop in S&P yesterday and we need a QE rumor rally.  Somebody must be real nervous...

SheepDog-One's picture

Theyre totaly screwing themselves by not allowing even a bit of reality into the one with any real money is going to buy into this crap ever again!

Chief KnocAHoma's picture

Bank stocks took it in the teeth on Tuesday. We can't have that shit! Our banks are too fragile to allow their stock valuation to melt.

Moneyswirth's picture



slewie the pi-rat's picture

slewienomics indicates that t: "sterilization" is always and everywhere a temporary monetary phenomenon

it is the economic equivalent of the physical science relativity principle which i shall incorporate here for the thankless fuking task of enlightening those who dwell in fiat darkness, to wit:

imagine a big turd of printed fiat shit-money speeding toward the rotary oscillator at a relatively constant velocity: Vturd

now the "sterilizer" grabs the fan and moves it opposiotionally away from the approaching fiat turd and a velocity which, due to utter hypocrisy and lies + a fat bankster ass, can appraoch, but never equal the appraching monetary mud-pie of fiat stink

then, zeno, the sterilizer holding the fan and "moving" it at Vz < Vturd, realizes that in this dimesion, you cannot outrun yourself, as peterSellers knew so well, and yes, BiCheZ, the shit eventually hits the fan, because that thought, being real, actually stops zeno b/c he really knew it, all along

no shit, sherlock!  gold and silver are really pretty good money for the money, BiCheZ!

Scalaris's picture

If v< vturd  then the oscillator will eventually be excrement-stricken. Got it.  

Appreciate the shit slinging mechanics tutorial.

kito's picture

more rumors!!!! hopium abounds!!!!! pms pump and dump here we come!!!

JPM Hater001's picture

Market up BS.

GoinFawr's picture

It's not QE until you say its kuey.

Comay Mierda's picture

just like i said earlier this morning - the bernank is fueling up his helicopter

spx is just doing a fibonacci retracement on yesterday's move.  it will prob come up to 1355ish.  it will continue trading in a downward channel

stormsailor's picture

maybe the fib lines work on a down-channel,  not much luck with it on the last 90 day up trend

Alea Iactaest's picture

Then maybe a leg down tomorrow, just to hit 23.6% at 1,335 (12/19 - 3/1)? I can't see 38.2% at 1,310. We are sitting at SMA200 on the hourly. Otherwise a lot of noise. (Alternative is to revisit the trendline from 10/3 and 12/19-20 which was confirmed with the Thanksgiving dip at the end of November?)

SheepDog-One's picture

Hey big boy! Is that another fake QE rumor in your pocket or are you just happy to see me?

Cdad's picture

Proving once again that the entire market is a complete abomination.  Just ridiculous.  

rufusbird's picture

So ultimately, all this talk about economics and what is really driving the titanic Fed is all about managing perceptions?