As widely expected, the FOMC will “continue through the end of the year its program to extend the average maturity of its holdings of securities.” Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 yrs to 30 yrs at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 yrs or less.” The $ amount will be $267b by the end 2012 vs the $400b of what is expiring at month end. The thought of shifting twist to the MBS did not happen but the Fed will continue reinvesting principal payments from its MBS holdings into agency MBS. They also said they are prepared to “take further action as appropriate…” Lacker dissented and wanted to end Twist. Bottom line, from a market perspective, sell on the news as we got what most expected. From an economic standpoint, the operation is irrelevant as the bond market has already lowered rates for them. Negatively, the Fed is tying their own hands by extending the duration of its portfolio, thus making it more interest rate sensitive and subject to losses when they want to exit in the yrs to come by selling Treasuries. I just don’t get the benefit relative to the growing risks they continue to take with their balance sheet and putting aside the daily misallocation of capital that their policy encourages with the artificial cost of money.
Category: MacroNotes
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
The Fed has no need to ever sell its position in Treasuries. More importantly, by increasing the yield on its holdings the Fed is withdrawing interest income from the private sector. According to BofA, the Fed may not even have $200 billion remaining of Treasury securities with maturities 3 years and below. Lastly, I think this extension puts the Fed on hold for further action (namely QE) until after the election (http://bit.ly/N9GLe9).
The FED is trying to crush oil prices as its “QE”. Nothing more or less. This actually confirms it. They probably feel the rebound in the auto’s gives them some breathing room.
The Fed may certainly have a need to sell the securities it has purchased to stimulate the economy. This would be normal Fed open market operations to remove funds from the banking system when economic growth returns to historical levels (or higher) and the velocity of money accelerates in the banking system and the economy. As Mr. Boockvar has eluded to, there is substantial interest rate risk that the Fed is assuming by dramatically lengthening the duration of their balance sheet.
If the situation in the EU continues to deteriorate resulting in defaults by Spain/Italy, etc., etc. and usurious interest rates, which will certainly have negative consequences for the U.S. economy, The Fed will not wait for November elections to further use monetary policy to offset the EU.
The FOMC has been quite clear it wants Congress to deal with the direction of the economy via its fiscal policy rather than await the FOMC to work around DC dysfunction. This is why there was no Q3. As I expected, OpTwist was extended to adhere to their accommodative stance to combat the stubbornly high unemployment rate.
It was quite important for the FOMC to keep some powder dry in case there’s a bank run in Europe. But it is also a case of watchful waiting. Albeit TRI has upgraded Y2012 & Y2013 with each monthly update since Aug/2011, there has been a sea change in its animal-spirits-plus module in the past few days. This likely reflects the cumulative effect of weeks of poor domestic and int’l news.
At this time, TRI is forecasting Sept/2012 (Q3) will be the worst month for real GDP since July 2009. Whether it is a trough or a presage is yet to be determined…
TRI charts: http://trendlines.ca/free/economics/RecessionIndicatorUSA/USA-TRI.htm
“BS risks grow”…the scary fact is the Fed can never, by definition of being the “lender of last resort” that “can print money” can never (technically) “go broke”…what it is that in fighting deflation, it devalues everything else.
“BS risks grow”…the scary fact is the Fed can never, by definition of being the “lender of last resort” that “can print money” can never (technically) “go broke”…what it is DOING IS that in fighting deflation, it devalues everything else.