Could this be the proverbial first step removing the trillions in excess Federal liquidity? Per Bloomberg:
Central bank officials are discussing plans to use so-called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That’s where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system.
Or maybe this is just yet another red herring, while the true liquidity pump continues until the bubble blows up under its own weight. Knowing the Chairman, everyone's money is on the latter. And in confirmation of just that:
There’s no sense that policy makers intend to withdraw funds anytime soon, said the people. The central bank’s challenge is to decrease the cash without stunting the economy’s recovery and before it sparks inflation. Fed Chairman Ben S. Bernanke said in a July Wall Street Journal opinion article that reverse repos are one tool to accomplish that goal without raising interest rates.
Alas taking liquidity from PDs will be harder than weaning heroin addicts using metric ton injectable portions of methadone.
“One thing the Fed has to figure out is if they can launch pilot programs without spooking the market and creating the perception that they are about to tighten,” said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that specializes in government finance. “They are discussing things like accounting issues, and updating the governing documents to the volume of reverse repos the dealer community could absorb.”
Looking at this market where downticks over the past month can be counted on one hand, it is unlikely that the market will be too happy if it were to be taken away its main bubble creating toy which is then translated into persistent block ramps using various algorithms in the absence of any real trading.
Yet there was no market hesitation today, as the S&P closed once more at year highs, without even a breather of hesitation, with tomorrow's FOMC unlikely to be even remotely surprising. As the table below shows, inflation expectations are only for show: nobody believes the Fed will have any response to the commodity price inflation that Americans may be witnessing. The real deflation is here to stay. Also the amount of people expecting a rate hike by December is now 5%, compared to the 59% at the market's lows in March. Which makes sense looking at Treasuries. However, to understand equities, feel free to call your friendly neighborhood PD, and also loop in whatever collocation boxes accept collect calls around your primary exchange. Don't worry, thanks to flash VoIP the boxes will already be expecting your call.