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What Will The Fed Do Next Week? JP Morgan Answers

Tyler Durden's picture





 

The question of what the Fed will do next week in response to what effectively amounts to quantiative easing by the SNB, the BOJ and, as of today, the SNB, is preoccupying everything with a passing interest in finance. Here is the answer of JPM's Michael Feroli, who has recently surged to the league tables of least worst Wall Street economist (even if, for whatever reason, his Goldman competition still sets policy with merely one recommendation).

From Michael Feroli -FOMC Preview

Next week's FOMC meeting will be more about policy actions rather than statement language. It seems fairly obvious that the growth description will be downgraded quite a bit. Regarding policy actions, we think there is almost no chance that the Fed initiates another round of large-scale asset purchases. However, we do believe the Fed will change communications to indicate that the current policy of reinvesting principal payments will be maintained for an extended period. In addition, we also feel, though with less conviction, that the reinvestment policy will be altered to extend the average maturity of the Fed's securities portfolio. Finally, we don't see them lowering the interest on excess reserve rate, though we would not be shocked if they did this as well. Below we discuss the pluses and minuses of each of these policy options, though we should warn up front, Bernanke never promised us a rose garden: none of these options is likely to provide a powerful kick to the economy. Here it may be helpful to recall Bernanke's own assessment of Japanese monetary policy in the lost decade: "Why isn't more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn't absolutely guaranteed to work." With that, here are the possible experiments, no guarantees:
 
Changing statement language on reinvestment policy: Bernanke has emphasized that the first step in the multi-step Fed exit strategy is to halt reinvestments of principal payments of securities on the Fed balance sheet. If this first step doesn't begin until after an extended period, then the timing of the whole sequence of steps leading up to a rate hike should get pushed back. One commonly-heard objection to this is that the market already has priced in very little Fed tightening. While that is true now, in the event that we actually do get some better data, as sure as the sun rises the market will price in more Fed hikes, thereby tightening financial conditions and slowing the pace of the recovery. By emphasizing just how extended the extended period language really is, this policy option would avert any potential tightening due to a misperception of the Fed's reaction function. Arguably a potential cost of this option would be a loss of flexibility of the Fed to respond to changing economic conditions. We don't see this as a strong criticism; as is the case with the extended period language regarding fed funds rate policy, the conditionality on economic conditions gives the Fed an out to quickly change policy. Indeed, in the Q&A after the last FOMC meeting the Chairman seemed to agree with the logic for communicating with regard to the prospects for the Fed balance sheet and we don't see the hurdle for taking this action as particularly high.
 
Extending the maturity of reinvestments: The weighted average maturity of the Fed's holdings of Treasury securities is currently around 6.1 years. In the second half of this year the Fed will be probably be reinvesting close to $20 billion per month in principal payments. If one believes the logic of the portfolio balance effect, then increasing the average maturity of reinvestments could remove more duration from the market, thereby exerting more downward influence on longer-term borrowing rates. Consistent with this, our rates strategists estimate that if the Fed increased the average maturity of their reinvestments out to 15 years, this could lower fixed-rate mortgage rates by around 5 to 10 basis points. As alluded to above, this is probably not a big shot in the arm for the housing market, but better than nothing. The argument against this policy option is that it will make the eventual exit from accommodative policy a little bumpier: after the reinvestment policy is halted, with less short-dated securities rolling off the Fed balance sheet, it will take longer for the Fed balance sheet to passively contract, implying eventually more active selling of securities. We think this counter-argument may have appeal to more than just the hawks on the Committee, and so we don't think this option is a slam-dunk. Nonetheless, we do think it probably has better than even odds of being enacted.
 
Lowering IOER: Before looking at the benefits of lowering IOER, we should ask what are the perceived costs that led the Fed to choose this rate in December, 2008 rather than something lower. At that time, there had been little experience with ultra-low interest rates in the US and there was concern that if the money fund business model suddenly became unprofitable there could be a rapid and disorderly deleveraging in short-term fixed income markets. Since that time, the institution of the FDIC assessment fee, in conjunction with particularities relating to the fed funds market and IOER has meant that short term interest rates available to non-depository institutions such as money funds -- which don't have access to reserves -- has already moved quite low. Arguably, this could mean that the cost of lowering IOER is less, as the money funds are already having to deal with very low interest rates. In terms of the positives of lowering IOER, one might be that it is a signalling device, reinforcing the view that the Fed will be accommodative for a very long time. In addition, the perception that some banks may be sitting on reserves to earn the arbitrage returns from funding for less in capital markets might reinforce the case for cutting IOER. Even so, we think the odds are probably tilted away from this action being taken, as there are still some residual risks to market functioning that may not be worth the modest benefit from an IOER cut.

 


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Fri, 08/05/2011 - 15:56 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

Kitchen Sink, bitchez!

Fri, 08/05/2011 - 17:15 | Link to Comment Highrev
Highrev's picture

The Fed will do nothing more than what it's done the last 2-3 months, which is to simply telegraph its intentions to bring commodity prices down and stimulate productive assets.

Is that so hard to understand?

And they couldn't be saying it more clearly.

GET WITH IT.

 

Fri, 08/05/2011 - 19:06 | Link to Comment Al Gorerhythm
Al Gorerhythm's picture

Obfuscation, slutz.

Fri, 08/05/2011 - 19:44 | Link to Comment asteroids
asteroids's picture

If the FED is smart it should do absolutely nothing.

Fri, 08/05/2011 - 15:58 | Link to Comment Doyle Hargraves
Doyle Hargraves's picture

Watch it sink, Bitchez!

Fri, 08/05/2011 - 16:01 | Link to Comment Overpowered By Funk
Overpowered By Funk's picture

We've become a nation beholden by a QE3/Financial heroin addicted market run by the head dope dealer Ben Bernanke. What we really need is Keith Richards advice - cold turkey. Not easy, but the alternative is worse. Do we as citizens have the guts?

Fri, 08/05/2011 - 16:10 | Link to Comment GiantWang
GiantWang's picture

Leverage is the heroin.  QE is methadone.

Fri, 08/05/2011 - 16:05 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

For a bunch of people who say the Fed is dead, we sure do spend a lot of time talking about the Fed. Let's all stop empowering the Fed. Please?

#WishfulThinking

Fri, 08/05/2011 - 17:27 | Link to Comment Problem Is
Problem Is's picture

CD: Like you don't keep watching NASCAR waiting for bouncing blonde boobs in the stand and that monster 8 car pile up fire ball crash...

Fri, 08/05/2011 - 16:10 | Link to Comment Ghostbusters
Ghostbusters's picture

we're so royally phukt.  you have to ask yourself though what comes next and you'd be naive to think that TPTB don't have some end goal in mind.  we can talk about global currency and things but what that really means, nobody knows, but more war, more "terrorist attacks, more QE, more austerity, and more of the 1% (or less) dominating the rest of us until....what?  are we going to let "them" take the whole map or are we, the people, at some point going to revolt?  This is the question.  The political climate is still cool even in the wake of the debt ceiling debate, QE by every major central bank, global austerity, and there arent many policy tools left but people don't seem to care as long as they get their "check," football season is around the corner, and as long as war stays out of sight out of mind, why would we care?  We should care because our country is a lie but we don't so are the globalists going to condition the masses to conformity or will we get up stand up? 

Fri, 08/05/2011 - 16:21 | Link to Comment alien-IQ
alien-IQ's picture

here are some well written thoughts on that question:

"The steady impoverishment and misery inflicted by the corporate state on the working class and increasingly the middle class has a terrible logic. It consolidates corporate centers of power. It weakens us morally and politically. The fraud and violence committed by the corporate state become secondary as we scramble to feed our families, find a job and pay our bills and mortgages. Those who cling to insecure, poorly paid jobs and who struggle with crippling credit card debt, those who are mired in long-term unemployment and who know that huge medical bills would bankrupt them, those who owe more on their houses than they are worth and who fear the future, become frightened and timid. They seek only to survive. They accept the pathetic scraps tossed to them by the corporate elite. The internal and external corporate abuse accelerates as we become every day more pliant."

"The creation of a permanent, insecure and frightened underclass is the most effective weapon to thwart rebellion and resistance as our economy worsens. Huge pools of unemployed and underemployed blunt labor organizing, since any job, no matter how menial, is zealously coveted."

"There will be sectors of the society that, as the situation worsens, attempt to rebel. But the state can rely on a huge number of people who, for work and meager benefits, will transform themselves into willing executioners. The reconfiguration of American society into a corporate oligarchy is conditioning tens of millions not only to passively accept state and corporate crimes, but to actively participate in the mechanisms that ensure their own enslavement."

Read the full article here...it's quite good:
Happy as a Hangman
http://www.commondreams.org/view/2010/12/06-0

Fri, 08/05/2011 - 17:11 | Link to Comment Conax
Conax's picture

That's true, but watch 'The gangs of New York'. It simplifies all that.

Some asshole heard of the rioters coming but he wasn't that worried.

He said, "We'll just hire half of them to kill the other half."

I was shocked at the simplicity and TRUTH of that statement.

Rich pricks taking it all?

A tough nut to crack. Money really is POWER, and they have it all.

Fri, 08/05/2011 - 16:17 | Link to Comment Milton Waddams
Milton Waddams's picture

$250,000 check cut to every American citizen with one requirement, the money must first be applied to paying off debt.  Boom, instant recovery.  All TARP and other investments held by Treasury to be equally divided among citizens and deposited into savings accounts.  Assets cannot be liquidated for x years or in the event of medical emergency or for education purposes.  All citizens still on welfare programs must enroll and attend retraining programs to receive additional assistance.  Non essential government employees must also attend retraining programs.  Boom, instant recovery.

Fri, 08/05/2011 - 16:38 | Link to Comment mayhem_korner
mayhem_korner's picture

Flaws:

1) Proof of citizenship

2) Rewards irresponsibility and reinforces unaccountable spending

3) Creates just a wee, tiny, little bit of INFLATION

4) Completes the transition to statism

5) Is really stupid

Non essential government employees

Redundant

Fri, 08/05/2011 - 16:55 | Link to Comment Vincent Vega
Vincent Vega's picture

6) $250,000 x 330,000,000=$82.5 Trillion

Fri, 08/05/2011 - 17:21 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Yeah, and that is not even HALF the derivatives market.  Oh wait, so the corporate elites already stole this?

Fri, 08/05/2011 - 17:10 | Link to Comment ddtuttle
ddtuttle's picture

Even better, just say all the debt in the USA is null and void.  It's called a Jubilee, and has happened many times in the past.  Your solution creates a lot of money, and in a debt free world all that extra money circulating would cause inflation.  Repudiated debt deflates the money supply, which is too big anyway.

Sat, 08/06/2011 - 09:57 | Link to Comment Hayabusa
Hayabusa's picture

You should be running for office as this appears to be a politician's solution which in fact rewards those who live and continue to live beyond their means.  I'm a taxpayer who lives within my means (even below them) and I'm not willing to bail out others with $250,000 of my hard EARNED tax $$.  In the end it boils down to "the best predictor of current behavior is past behavior"... after your "big government" money and ideas expire we'd be right back where we started.

 

My solution:  Cold Turkey!

Fri, 08/05/2011 - 16:27 | Link to Comment buzzsaw99
buzzsaw99's picture

That's it? A great big nothing sandwich? HAHAHAHAHAHA!!

Fri, 08/05/2011 - 16:58 | Link to Comment Precious
Precious's picture

This piece has zero credibility for one because there was no "lost decade" in Japan.  The author has probably never been to Japan.  People who think there was a "lost decade" in Japan have their heads up their ass.  Go to Japan and look around.  Japan spend this so-called "lost decade" building their country and going into trade with China, which they are familiar with for hundreds of years.  Only mainstream propaganda swilling rags adhere to the "lost decade" fallacy.  People who know better, know it's a giant crock of bullshit.

Fri, 08/05/2011 - 17:24 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Hhmm.  Been to Japan many times.  Everytime I go it gets more expensive by a factor of 10 and the quality of life for my colleagues over there is no better, most of their children left and never looked back.  Beautiful country, but then there is that whole ring of fire issue and a serious energy crisis gripping the country.

Fri, 08/05/2011 - 17:34 | Link to Comment Sledge
Sledge's picture

 

 

  Lets see what the BOJ does when the asian markets re-open. The $XJY went back up today to 127.50 from 125.37 as the euro ramped. This partially negates what the BOJ was trying to achieve with their easing from $XJY 130.22 on Wed.  They must not be very happy about this. If they do nothing the Nikkei will plummet again.

  If they intervene with more easing to save the Nikkei, expect Godzilla to hit the US Markets again Monday, like yesterday. If that happens then their might be incentive to announce "QE3". But I still doubt it because oil, commodities and unemployment are still too high. All resulting from QE1-2 imho.  Next Tuesday is too close a date for a QE announcement. September might be a different story. But who knows really?

Wed, 09/14/2011 - 04:50 | Link to Comment chinawholesaler
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