Confused what the Fed may or may not do in 3 weeks? Join the club (although the answer at this point is a definite nothing especially with food prices soaring not only in the US but around the world). There are those - banks - who as we have said repeatedly are in desperate need not of promises of further easing, but of cold, hard, free, electronic reserves. Then there is everyone else who doesn't care what the Fed does because it will have no impact on the economy, but at least it may raise 201(k)'s for a little longer, preserving the myth that asset values may still increase, and feed the illusion of wealth. At least until the impact of the latest Fed (non) intervention fizzles. Then there is Art Cashin, who deserves to be heard, if for no other reason, than because he is the true Chairman (of the fermentation committee).
From UBS Financial Markets
From The Folks Who Brought You 1.5% GDP Growth And 8.3% Unemployment – It looks like the Fed's frustration may be growing palpable. They have cut interest rates virtually to zero (and pledged to keep them there for years to come).
They have run three separate quantitative easing programs. They have engorged the U.S. banking systems with excess free reserves to the tune of nearly $2 trillion.
And all that has left the U.S. economy sputtering just above stall speed and employment virtually frozen.
The Fed's problem is that all the newly created "money" has gone unspent and unlent. To repeat an analogy I have used to explain why there is no inflation – it is as though Bernanke dropped $10 million in newly printed bills on your lawn – and you are so worried you hid them in the garage.
That's the Fed's frustration. They have made trillions of dollars available but no one wants to borrow any of them or spend them. More correctly, no one with a good credit rating wants to borrow them or spend them.
We think Eric Rosengren articulated that frustration and hinted at there next initiative to address it. We think Bernanke may flesh it out in coming weeks and certainly at Jackson Hole.
Traders (both here and Chicago) think it may be an aggressive Operation Twist in mortgage backed securities (the original source of the problem).
The goal would be to drive margin rates to dramatic lower levels not seen in history. The strategy would be to make mortgage money so cheap that folks would virtually have to refinance. Others, seeing such low rates might be induced to buy other bargain basement priced housing and maybe rent it as income property.
It would be a kind of end run around the traditional banking system, which has huge free reserves and a log-jammed lending system. The next couple of weeks could be interesting.