The Central Banks Are Fast Running Out of Bullets


Yesterday we worked through the illusion to reality for the ECB’s unlimited bond purchases, the end result being that the ECB:


  1. Didn’t announce anything new
  2. Is implementing the same policies it’s tried twice before with no success
  3. Is implementing policies that neither Spain nor Italy will go for


And finally…


  1. Has solved nothing due to the fact that of the two mega-bailout funds, one has only €65 billion in firepower left and the other has yet to be ratified by Germany


Today we turn our attention to the US’s Federal Reserve where the whole world expects the Fed to announce QE 3 at its FOMC meeting this Wednesday and Thursday.


There is a small problem of math with this. The Fed currently owns all but just $650 billion of the outstanding 10-30 year Treasuries. At this point, even a $200-300 billion QE program would create serious liquidity problems for the financial system.


Of course, the Fed could potentially implement another agency/MBS QE program. But that would be a very political move with the Presidential election so close. This, combined with current food and energy prices, makes it unlikely the Fed would want to do this.


Indeed, we’ve seen some striking admissions from the Fed recently. St Louis Fed President James Bullard:


“I am a little – maybe more than a little bit – worried about the future of central banking,” said James Bullard, president of the Federal Reserve Bank of St Louis, in a Financial Times interview at Jackson Hole. “We’ve constantly felt that there would be light at the end of the tunnel and there’d be an opportunity to normalise but it’s not really happening so far.”


The biggest worry on display at Jackson Hole was whether these bureaucrats, sitting at the heart of every mature economy, still have the power to influence demand now that interest rates cannot fall much further. Lurking behind many debates was this question: if central bank policies are so effective, why is the global economy not growing faster?


Here’s a Fed official, not only openly admitting that Fed policies aren’t working, but even calling the future of Central Banking into question. Take note: underlying realities are beginning to be asserted by officials at Central Banks around the globe. They’re running out of bullets.


So where does this leave us? Well, it’s highly unlikely the Fed will actually implement anything major this week. What we could see is a large, but hollow promise for action, much like the ECB’s promise of “unlimited” bond purchases based on certain “conditions” being met (an empty promise if ever there was one).


If this kind of empty promise is made, look for the market to top soon after.


And if the Fed fails to deliver this week… buckle up.


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Graham Summers


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