Anyone who may have been harboring doubts that the Fed will pull yet another economically destructive policy out of its bag of genocidal tricks on September 21 can now relax. Jon Hilsenrath has spoken, and while we don't know just what form QE3 will take place (as a reminder any form of duration extension, and hence, artificial risk shit can be reduced to the broad definition of Quantitative, or otherwise, easing), he does give us a menu of three options: i) Operation Twist, as first discussed by Zero Hedge back in May, ii) a reduction in the Interest on Overnight Excess Reserves (IOER) from 0.25% to something... lower, a move that would wreak havoc and completely destabilize money markets, and iii) more jawboning - a step the would merely make existing promises, such as the ZIRP through mid-2013 even less effective. Bottom line: like it or not, in two weeks we all do the twist.
From said mouthpiece:
Federal Reserve officials are considering three unconventional steps to revive the economic recovery and seem increasingly inclined to take at least one as they prepare to meet this month.
The three options, of which number one is all the matters:
One step getting considerable attention inside and outside the Fed would shift the central bank's portfolio of government bonds so that it holds more long-term securities and fewer short-term securities.
The move—known to some in markets as "Operation Twist" and to some inside the Fed as "maturity extension"—is meant to further push down long-term interest rates and thus encourage economic activity. The program draws its name from a similar 1960s effort by the U.S. Treasury and the Fed, in which they tried to "twist" interest rates so that long-term rates were lower relative to short-term rates.
Anticipation of the move—along with grim economic news and the Fed's public plan to keep short-term interest rates near zero through 2013—has helped push yields on 10-year Treasury notes, above 3% in late July, to around 2%.
Although some consumers and businesses are unable or unwilling to borrow more at any interest rate, several Fed officials believe pushing rates still lower can help on the margin.
"There are still some businesses that at a lower cost of funds are going to make investment decisions and hiring decisions based on an ability to lock in those funds at a lower rate," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview.
He lists the program as one that should be considered. "There are people that will be buying homes or refinancing homes" if long-term rates are lower.
Funny, because this is precisely the fake assertion we refuted earlier by showing the recent move in the 10 Year yields, and the dramatic plunge in MBA refi applications. But that's irrelevant: the Fed will do whatever it will do without regard for actual practicality and/or reality. Also, let's not forget that when the 2s10s hits 50 bps and the Treasury is scrambling to come up with excuses for TARP 2, we will all know what caused the latest and final implosion of BofA.
The other two options which are completely irrelevant, as they will not be used:
A second step under consideration at the Fed, one getting mixed reviews internally, would reduce or eliminate a 0.25% interest rate the Fed currently is paying banks that keep cash on reserve with the central bank.
The 0.25% payment is greater than the 0.196% rate an investor can get on a two-year Treasury. Some officials believe the Fed shouldn't reward banks for holding cash instead of making loans.
"I'm not especially pleased with the way that policy tool is working at the moment," Charles Evans, president of the Federal Reserve Bank of Chicago, said in a recent interview. Mr. Rosengren said cutting that rate could give banks more incentive to lend and would further signal the Fed's determination to get the economy going.
Other Fed officials believe that reducing the rate wouldn't do much good because it is already so low, and might instead disturb short-term money markets.
A third step Fed officials are debating would involve using their words to make their economic objectives and plans for interest rates more clear.
Some officials felt the Fed's August pledge to keep rates low until 2013 wasn't specific enough about what was driving its thinking. They want the Fed to say what unemployment rate or inflation rate would trigger it to boost rates.
And there you have it. The only question remaining is whether or not, as Morgan Stanley suggested earlier, the Fed would act in conjunction with all global investment banks in another round of global easing. Since this is coming from Morgan Stanley, and since gold has indicated there is no way in hell this would happen, we can safely ignore it, but we recreate the report below for those who wish to be entertained.
Lastly, the question of whether plain vanilla LSAP (Large Scale Asset Purchases) will be announced in two weeks is unknown although as was previously discussed the most likely timeframe is for the Fed to convert about $450 billion in 1.5 - 4 year bonds into long term ones, a process which will take about 6-8 months at about $55-$65 billion in POMO per month, at which point the Fed will have to expanded aggressively in monetizing all of the remaining $2.4 trillion in debt to be issued over the next 12 months.
As such we expect LSAP to be announced in March of 2012.
Also as a reminder, for those desperate for more hints even though the gameplan is now well known, tomorrow at 1:30 pm Bernanke speaks at the Economic Club of Minnesota Luncheon, in Minneapolis, Minnesota - an event which may see some local protests. While it is unexpected that he will share anything actionable at this point, the market will most certainly surge by another 10-15 points regardless of what he says. After all there will be headlines, and with Europe closed, this is all that will matter.
Here is the justification for Morgan Stanley's delusions that global concerted easing will finally make that bullish steepener idea reality of 3 years of endless errors.