An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Wednesday, June 17, 2009
Fed Weighs Using FOMC Statement to Damp Rate-Rise Speculation
What a joke the Fed has become.
If Bernanke wanted rates to come down he has the power to do that. There aren't enough speculators in the entire world who can fight a central bank's desire to keep rates at zero! He doesn't understand that???
Now the Fed is going to issue a "statement." Gee, I wonder what it's going to say..."You bad speculators better quit it, or, or...we'll have to issue another statement."
Meanwhile the market is stalling out and that probably means the economy is as well. What a joke. Same as last year with Lehman. We were improving then they let Lehman fail.
This entire Administration, plus the Fed: Just a bunch of people with a deep, deep, fear of success and a belief that we have sinned as a nation; that prosperity is a sin...and we must atone for our sins.
Mike,
ReplyDeleteBack in Dec 2008 the Fed statement included: "the Committee instructed the Desk to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS by the end of the second quarter of 2009. Members agreed that they should not specify the precise timing of these purchases, but that they should leave discretion to the Desk to intervene depending on market and broader economic conditions."
Since then, they have increased the ultimate MBS purchases to a target of $1.25T by year end 2009.
Looking at the H.4.1 reports of late; as of week ended May 20, 2009, they had purchased $430B, and as of the last report the amount was DOWN to 427B. So net, over the last 3 weeks they have SOLD MBS! How are they going to get mortgage rates down when they are net selling MBS? No wonder mortgage rates have backed up a bit over the last 3 weeks. They have 2 more weeks to meet just their initial goal of $500B by "mid-year" so thats $70B of net purchases over just a few weeks, if they conduct these operations, there could be an MBS rally over the next several weeks.
My guess is either for the convoluted reasons you have been pointing out, the Fed thinks it needs the political cover of more bad economics news to proceed; or they are somewhat satisfied with the results of their program so far, and plan on stepping up these purchases over the next few months if things get worse.
Things are far from clear!
Resp, Matt
I think it's a combination of both reasons, however, there are deficit/inflation hawks among the members and they have apparently gotten to Bernanke.
ReplyDeleteIt's a disastrous situation. Moreover, Obama's announcement that he intends to limit the Fed's discretionary lending indicates that his political advisors (David Axelrod, etc) believe more political capital can be gained from a fiscally conservative stance as opposed to further attempts to create jobs. The latter would require more spending (along with a concommitant increase in the deficit), and they're would be a lag time before any job gains were seen, so I guess they're opting instead to score with the fiscally conservative stuff. This tack might also help them get some Republican support, which they might need in order to pass health care reform.
Mike,
ReplyDeleteIve had some time today and looked into this further.
The Feds March minutes said:"The Desk is expected to purchase up to $200 billion in housing-related GSE debt by the end of this year. The Desk is expected to purchase at least $500 billion in GSE-guaranteed MBS by the end of the second quarter of this year and is expected to purchase up to $1.25 trillion of these securities by the end of this year."
So the NY Fed is under orders to do at least the full $500B by this month; AND THEY HAVE; as of last week the NY Fed has purchased $556B, the trades just havent settled yet and hence the new reserve balances are not showing up in the H.4.1. The H.4.1 is only showing $427B as settled. Ive been adding up the weekly purchases by the NY Fed here and my total is $556B.
The last time this (settlement delay) happened back in March, the Fed ended up creating $157B of new reserve balances (MBS only) in less than one week here.
So they basically credited the bank accounts of then former MBS holders with $157B of brand new reserves (almost instantaneously) and in short order the 10 year Treasury had its biggest 1-day rally in 40 years on March 18. I made a mental note that if NY Fed trades ever reached the point where they were ahead of settlements by $150B again I would consider a long position in the 10-year Treasury, thinking that we were due for a flood of reserves when the MBS trades finally settled. As of last week, the settlements are behind by $129B (556 minus 427). We're getting close.
Resp,