In what should be news to precisely nobody (especially our readers, for whom we laid out the next Easing steps [5]very clearly on the day QEternity was announced, including the continuation of Twist after December 31, 2012 at which point the Fed would merely monetize long-dated paper without selling short-end, i.e. unsterilized), the just released FOMC minutes indicated that "a number" of FOMC members favored more (infiniter) QE after the end of Twist. In other words, the Fed will have to continue monetizing the long-end of the Treasury issuance in lieu of other willing buyers. Recall that the Fed is currently buying up all the 10 Year+ gross issuance. To assume that this can change in some way is ludicrous. It also means that going forward, anything less than $85 billion in monthly flow from the Fed will be seen as tightening. Apparently, this update was big news to the algos (and the BIS FX traders) in charge of daytrading the EURUSD, which ramped by 30 pips on the news. Stocks, however, are oddly enough, the rational instrument today, and have barely budged on this news, once again indicating (as shown during yesterday's Yellen comments), that the Fed has priced itself and its future decisions out of the market, also exactly as we predicted would happen [6]minutes after QEternity was announced.
For those who still don't get it, here it is in under 140 characters, from long ago:
To the market "only" $85 billion in flow a month is no longer enough to sustain euphoria
— zerohedge (@zerohedge) October 24, 2012 [7]
From the minutes:
Looking ahead, a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market. In that regard, a couple of participants noted the likely usefulness of clarifying the range of indicators that would be evaluated in assessing the outlook for the labor market. Participants generally agreed that in determining the appropriate size, pace, and composition of further purchases, they would need to carefully assess the efficacy of asset purchases in fostering stronger economic activity and consider the potential risks and costs of such purchases.
There were some rational voices...
Several participants questioned the effectiveness of the current purchases or whether a continuation of them would be warranted if the recent moderate pace of economic recovery were sustained. In addition, several participants expressed concerns that sizable asset purchases might eventually have adverse consequences for the functioning of asset markets or that they might complicate the Committee’s ability to remove policy accommodation at the appropriatetime and normalize the size and composition of the Federal Reserve’s balance sheet. A couple of participants noted that an extended period of policy accommodation posed an upside risk to inflation.
But fear not, they were promptly drowned out.
As for those still confused, this is how the [5]Fed's balance sheet will look over the next 2 years:
[8]
Full report (link [9])