Wall Street's Knee Jerk Responses To Hint Of More QE

Tyler Durden's picture

We shared our thoughts on the implication for more possible QE, sterilized or not, earlier, as did the market: why is risk higher, and with it the threat of inflation, if the Fed is doing perfectly innocuous sterilized easing? Maybe because it does not matter if the Fed intervenes sterilized or unsterilized, as long as the Fed intervenes, period? Now we present the knee jerk reaction of several Wall Street experts, all of whom are about as confused about this development, which is neither here nor there in terms of actually achieving any of the Fed's goals, as we are.

Via the WSJ:

David Ader, CRT: I think this is apropos as BOTH a sense of what the Fed is considering vis a vis QE3 and keeping that hope alive and to acknowledge they’re still musing the topic. As such it’s a heads up that we should expect nothing on this score in next week’s meeting and indeed to suggest they will acknowledge the economic improvement again. But it’s also a heads up that if QE3 is coming they’ll make efforts to limit the negative side, inflation fears. Curiously this could be a bit of a risk-off angle, certainly for commodities.

Fidelio Tata, Societe Generale: It appears that the Fed wants the market to think about the potential of further bond-buying programs, which contradicts the notion that QE3 is off the table.

Brett Rose, Citigroup: I don’t see that this breaks any new ground on QE thoughts. However, it does address the lack of mention of QE in HH last week which several markets reacted negatively to.

Jason Evans, NineAlpha Capital Management: The more specifics that make it into the press and the WSJ the greater the probability of enactment of policy – Fed letting us know that it has more tools at the ready if the oil shock / Iran / Europe becomes an issue.

Carl Lantz, Credit Suisse: The market has been backing off expectations for fresh bond purchases so the Hilsenrath story should be bullish to the extent it signals that the Fed is still actively exploring the options. Sterlized QE would be effective although it raises questions about how the Fed views reserves. If high reserve balances are not a problem why drain those created from a new purchase program? If they are a problem why only drain the incremental reserves while leaving the current large balance in place? The answer seems to be that the Fed doesn’t view reserves as an issue – and I agree – but is worried that some investors have a different point of view and so the Fed is willing to make some concessions to “conventional monetarists”.

Sterlized QE would also tend to push up short-term rates including the Fed funds rate itself potentially further confusing the message. At the end of the day the balance sheet would still growing and stimulus increasing. Its unlikely that long-run inflation expectations would behave much differently under a sterlized or unsterlized program, in my view. The best argument for sterilization may be that it allows the Fed to demonstrate the effectiveness of its reserve-draining tools. This may win over a minority of skeptics that doubt the Fed’s ability to pull back from stimulus down the road.

Joseph Abate, Barclays Capital: I’m a little puzzled with the point of sterilization — however accomplished, either via term deposits, reverses or asset sales. I’m not quite sure what the logic is behind keeping the level of bank reserves constant — other than the fact that the Fed might have some concern about the ability to drain balances when the time comes to raise interest rates. But with $1.6trn in reserves does an additional couple hundred billion dollars really increase the marginal cost of draining them at some point in the future?

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death_to_fed_tyranny's picture


markmotive's picture

So is this bullish for precious metals or whatt? Aren't we were addicted to QE...

Here's Sprott's John Embry on silver:


Silver Bug's picture

There of course is going to be more QE! It is QE to infinity. They have NO choice!



RaymondKHessel's picture

Aren't knee-jerks healthy? That's what my doctor told me.

Alea Iactaest's picture

Except this is more like a circle jerk

LowProfile's picture

They are...  Unless they catch you in the balls.

AC_Doctor's picture

Bernanke's printing - on the record or not.  He's gotta keep up with the ECB!

GeneMarchbanks's picture

Gene Marchbanks, Narcotics Anonymous Capital Management: Long overdue man, I need another hit and puff, puff, pass is taking forever.


LowProfile's picture

Crackheads don't pass the pipe, you have to wait for them to collapse and then snatch it from their twitching hands.

battle axe's picture

It is simple, Iran war starts and we will get QE3.

Tsar Pointless's picture

Bring it on! Let's see some nuclear bombs detonating already!

Anything to rid this stupid world of us humans. The only sure way to quit something is cold-turkey.

JPM Hater001's picture

We will more likely get World War III

Marge N. Callz's picture

All crackheads eventually die a horrible death.

ArkansasAngie's picture

It's the transparency stupid ... or not.

Just another red herring to throw folks off

yet ... maybe they'd like to be able to say later ... we told you we'd do it ... if the economy warranted it. 

It's all Greek to me ... although I don't own a blessed Greek bond

Cdad's picture

...just complete debauchery...perversion of the markets...one episode after another.  Rather than continued attempts to print money to raise the notional value of the Russel, one might think that the Fed would ponder the disasterous effect of perverting the market to the point where no one is interested in it anymore...kind of like the last two years.

But oh yeah...that is why they keep wanting to print...because Average Joe just doesn't give a rip about the obviously perverted market anymore...as evidenced by citizens relentlessly taking money out of the markets.

Virtuous circle.  Way to go Ben!

Cdad's picture

...oh, and in an unrelated note...let me guess?  The Blowhorn [CNBC] is too wrapped up in the iPad3 to even bother to analyze this latest Fed Zepplin...right?

SheepDog-One's picture

OK everyone put down your old junky IPad2....get in line and consume IPad3 RIGHT NOW get in line peasants CHOP CHOP!

barliman's picture


Rhetorical question of the day

What has the Fed been doing about QE3 since last July?

Jawboning. It has proven super effective! They keep talking about the possibility and the HFT's keep using the headline to prime the algo pumps.

Take away question:

How much QE would the Fed have to do to offset a disorderly Greek default?


ebworthen's picture

Two Trillion, currency swaps to the moon, and 0.05% FED backdoor lending window ad infinitum.

My teeth hurt.

bugs_'s picture

so much that they know they can't.  thats why this has dragged out so long.

barliman's picture


Bing! Bing! Bing!

We have a winner!


ebworthen's picture

FED obfuscation and reaction testing.

firstdivision's picture

"Fed letting us know that it has more tools at the ready if the oil shock / Iran / Europe becomes an issue."




What are they going to do, stomp their feet and whine?

A Man without Qualities's picture

QE has broken the traditional relationship between treasuries and equities.  It has allowed equities to rally while keeping yields low.  If you find yourself stuck, when you cannot stimulate more, owing to inflation risks, there is the nightmare scenario of falling equity prices and rising yields.  

Fact is, QE has been self-sterlized already (as can be seen by the growth in reserves deposited by the Fed), so the other thing is this puts securities back into the market for the sake of the repo markets.

It demonstrates to me that the Fed knows it's backed itself into a corner and has very limited scope for manoeuver, but it's clear that they know that even if there is a "recovery", they have no exit strategy.

Assetman's picture

Thank you so much for your comments, as it seems that you are one of the very few that is at least trying to think through what will happen in a "sterilzed QE" scenario.

While I think you lend yourself a solid of conclusions, I do disagree that QE has been a self-sterilized process.  Why is that?  Because the simple matter is that banks DO have the ability to take those excess reserves and multiply it through the finanical system via loan growth.  Of course, there is very little of that happening because demand for loans just hasn't been there.

We don't call it a "deleveraging process" for nothing.

So... what would happen if the Fed went into deploying $700b in sterilized asset purchses using a reverse repo process?

1) Banks wouldn't have these as reserves, and could not multiply them through the financial system-- keeping at bay the fears of a supply of money velocity explosion.  Such a move would likely keep inflation expectations (oil) in check.  It would also likely keep the dollar strong against currencies with more outright monetization strategies (pound sterling, Euro, yen, etc.)

2) Short term interest rates (Fed Funds, LIBOR, CPs, short-term CDs etc.) would actually move higher, as the new supply of reverse repos will actually be deterined at market rates.  MMMF's would actually have something incremental to buy, besides commercial paper and bank CDs.  The new RRPs would also help drain liquidity from banking system.

3) Banks cost of funds will likely be higher-- so either banks will raise their own interest rates on loans (hard to do with weak demand)-- or eat the incremental spread.  As such, bank profitability would likely be compressed.

4) The increased competiton from short term instruments may bring back investors who have been sitting in cash-- and/or move them out of risker asset classes, like high yield bonds, or.... stocks.  The "broken relationship" that you mentioned between treasuries and equities would at least approach an incremental degree of normality-- and that should be the main take-away with this sterilization.

5)  Most importantly, from all this it is increasingly apparent that the reverse repo plan IS the main exit strategy the Fed is going to employ once inflation becomes more persistent-- and they are forced to drain liquidity from the system.  And quite frankly, it really hasn't been tested on a large scale.   If the Fed wanted to still increase bank reserves and still sterilize the purchase of securities, they could simply increaase the interest on reserves (IOR) that is charged banks (now at 25 bps).  There's a reason why this isn't being considered... IOR's won't drain money out of the system.

If this does become the next round of QE, it will be interesting to see how the various markets will react.  I think many people have become so ingrained with the effcts of outright debt monetization, that they can't distingush QE from sterilized QE.  The Fed may well be in the early stages of embarking on funding long-term asset purchses with short-term instruments that are determined at a market rate.

I think there's money to be made here... 

kito's picture

I'm confused, I thought in the story of Pinocchio it was the puppet that lied, not the puppeteer.........Seems ben has re-written the story........

Taterboy's picture

I wish Benny would print money on those mimeograph machines from decades ago. I remember how nice the ink smelled.

crawl's picture

My guess is there has to be a plan to keep liquidity sloshing around, just in case there is an attack on Iran or a run on banks, whichever comes first.

RSloane's picture

If you can't dazzle them with intelligence, baffle them with bullshit. Ladies and Gentlemen, prepare to be baffled - a lot.

Atomizer's picture

Keeping Hope Alive.... hahahahahahahahahaha

SheepDog-One's picture

70 point bounce, not much of a knee-jerk reaction really. And after it sinks in that there will be no play money for stocks in the usual 24 hour digestion period, look out below.

navy62802's picture

In a financial universe that revolves around central bank action, we shouldn't be surprised at this. The only way to profit off of this market is to accurately predict what the central bank is going to do next. Long term, it's easy to predict ... they'll just print money. But short term, it's more difficult. Fundamentals are overridden by central bank action. After all, that's pretty much what central bank action is designed to do ... counteract the natural progress of the free market. So if you can accurately predict where and when the next cash infusion is going to come from, you will profit. Thus, you end up with trades that are based on rumors of a hint of a rumor. It's this type of craziness that is scaring away the traditional investors.

Arvo Particleboard's picture

If you were a friend/client of Larry Meyer, you would know already what the central bank is going to do next...and when.


Sakka's picture

The Fed is controlling "inflation" by controlling "de-leveraging", i.e., they are keeping a relative balance between the collapse of the economy and the amount of liquidity that is being allowed into the system.

The net result is that America is becoming impoverished to the benefit of the parasitic system, Bernanke plans to keep this going until we are all slaves.

Lets pray Greenspan was right and the derivatives monster that he created becomes an overwhelming collapse event and we are freed from this system.


Gold, Guns, Gas, Grain, Ground

SheepDog-One's picture

They all should be arrested, given a 1 hour trial, and taken out and shot for all this.

ES-Sniper's picture

Fed is clearly testing the reaction, so when the market implodes tomorrow on Greece,

they can control the burn with some additional QE3 chatter.


SheepDog-One's picture

SPR tap rumor and QE(sterile) rumor gets em barely 70 DOW points? Not too impressive really.

Christoph830's picture

At a certain point, actions will speak louder than words.  Even algos will figure this out eventually...

alien-IQ's picture

It appears that the Fed is now taking it's talking points directly from Captain Conundrum's Book of Impenetrable Obfuscations and Economic Psychobabble. (personally...I'm waiting for the movie version).

Bansters-in-my- feces's picture

The USA Federal Reserve System

The most CORRUPT Terrorist organization on the face of the earth,and yous allow it to stay standing,and use the name "Federal"....


Is Star Search that good.???

I would not no,Ihave not watched a television in over 20 years....

alien-IQ's picture

Yeah after Welcome Back, Kotter, it was all down hill. Gabe Kaplan: A Jew with an Afro...gotta love it

q99x2's picture

Me: The PPT needed a cover to ramp DOW up 75 points.

Clowns on Acid's picture

So Missus Market (alas Benny has turned Mr into Missus...actually we are in the midst of the sex change operation / sterilization) gets a pop....but IMHO Missus Market will start thinking...."lets sell and call Benny;'s bluff".

Will Benny just print willy nilly...or will $6 / gal gas keep him jawboning...?

walküre's picture

$50 per lb. ground beef by the end of the year.

Without cheap gas and diesel, the cost of ranching and food production in general will become astronomical. Adding hyper inflation into the mix when fiat goes bust and you have signs of malnutrition across the peasant population which has no means of supplementing their grocery bills.

Imagine if we had to feed the world with the way we farmed over a century ago. Impossible! And yet, it will be the No. 1 challenge going forward. Forget commuting, forget air travel. When cheap oil resources are depleted and prices for gasoline and diesel and other distillates double or triple in price, the shocks will be mostly felt in your grocery bills.

FED and ECB have opened Pandora's Box. They lit the fuse to hyper inflation with financial weapons of mass destruction. Faith in fiat is about to disappear. It starts right here with a few of us who are understanding that you cannot print currency ad infinitum without dire consequences. Yes, theoretically you can but only as long as nobody pays attention to it or nobody has a means to prove it. They're doing it in broad daylight and it worked for a few years now but the effects are dull. The longer they do it, the more people educate themselves and find out what happened.

Nothing is backing the currencies. They know it. They pretend they don't and they say they don't like gold or silver but at nights, they're visiting the local coin shops and stocking up. They're lying. They've pulled the biggest lie since mankind with the events surrounding the 9/11 false flag and they either don't care about what the world knows, or they are truly idiots! The whole thing was a big manufactured lie. I sleep much better knowing that they lie because it defines who they are and what they're capable of doing. They lied about 9/11 and are directly responsible for the death of 3000 Americans and thousands of Iraqis and Afghanis. That blood is on their hands and they know it! But they don't care!

What do you do when you realize that your government is a group of self serving, arrogant liars with the tendency to be a psychopath? When you know that, how do you trust them? You simply can't. When you know that and you know that many other Americans out there know that and yet, nobody wants to admit it and talk about it.. how do you go on?

Be prepared. Be on the lookout. Not for government as they wish to make you their spies. Be on the lookout for government to come to you and steal whatever you have left in your posessions or to take you way and kill you. They will fabricate lies and make it a conspiracy and with the power of their media and their propaganda they will convince people that it was right.

America is in a state of denial. The day of reckoning will come when the fiat they print is so much soiled with lies and manipulation that nobody will want to accept it as currency. Everyone knows it for crying out loud. The nation ought to be ashamed of itself and ashamed of the murders that were orchestrated in the name of America. The equivalent to Nuremberg Trials should be held and those responsible tried for high treason and mass-murder.

It's on you to make the difference and break the silence.

taurran's picture

What's a few hundred $billion in the grand scheme of things???  It's just paper.  Right? Fire up the presses!

Zola's picture

More than the message, more than his greater than life story, Ron Paul illustrates one very important point. ONE MAN CAN MAKE A DIFFERENCE. Never let ANYONE discourage you or tell you otherwise.

puck's picture

No vasiline this time

Nobody For President's picture

It is sure nice to know all those really smart fucks don't know a god-damned thing more than us really dumb fucks.

GernB's picture

I clearly am missing someting. How is this any different than it was yesteday. Prior to this the Fed stance has been they will use QE3 if necessary to meet fed goals (i.e. maintain 2% inflation.) Today this statement is saying they will use QE3 if necessary to meet Fed goals. Does all of wall street have a reading comprehension problem or what? I feel lilke we're dealiing with a bunch of 3 year olds that giggle when you mention IBM. You mention QE3 if only to re-iterate exactly the same thing you have several times in the past and wall street jumps.

The takeaway message everyone should get is that as long as the market remains good there will be no QE3 so as long as it's priced in it won't be needed and won't happen.