Tuesday, April 3, 2012
Keystone Cops at the Fed!
Just reported on CNBC that the Fed is running out of short-term securities to sell.
As you know, the Fed has been selling short-term securities as part of Operation Twist (and buying long-term securities).
Where does the Fed get short term securities in the first place?
It gets them when the Treasury sells T-Bills every week. Then the Fed goes and buys back those same bills from the public as part of their normal monetary operations/interest rate setting activity.
Actually, the purchase of T-bills by the Fed is the same thing as the government having never sold them in the first place. (Think about it…the government sells them, then the Fed buys them. It's like the gov't never sold them in the first place.)
Anyway, if the Fed runs out of short-term securities it could just very easily step aside and let the Treasury sell the bills and not worry about it. It’s the exact same thing as the Treasury first selling them, followed by the Fed buying them, followed by the Fed selling them AGAIN. (It’s even simpler, right?)
But, no, they don’t want to do it that way because of the PERCEPTION that if the Fed only bought long-term securities and didn’t sell short-term securities, then somehow that would constitute “printing money” and everyone would jump all over them for that.
In other words they either can’t or are AFRAID to explain the simple mechanics of what is going on. They prefer to go through this whole exercise in obfuscation and I wouldn’t be surprised if they actually even create some new “Fed bond” which will cause the whole world to wonder what is going on, in order for them to avoid having to explain to people how the whole system works.
It’s the Keystone Cops…literally.
If it were not for the fact that these people are in charge of our economy, the whole thing would be hilarious. Instead, it’s just pathetic!
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8 comments:
And watch what happens when they create that "Fed bond," which I am sure they will. The whole world will be screaming, "The Fed is out of money!"
Funny how they get upset about the thing they can't run out of - dollars, but not about the Treasury bills that they can.
Is it simple a matter of the Fed hasn't purchased enough T-Bills in the open market to keep pace with the rate at which they're selling them? Looking at that view, it would seem like the market for the T-Bills has stabilized and given the rates involved nobody is really looking to buy or sell, but rather just hold.
Funny how they have to keep this scary stuff secret.
Mike, what now?
they can't (thanks God) justify an other QE, so what are they going to do, they have ran out of options concerning rate curve setting shenanigans.
Only fiscal operations can now avoid a disruption of the economy (well only fiscal operations could before too, but market retarded perception that QE achieved something... was there).
FED need a big market drop and probably recession for QE to happen, sell off in a couple of months?
They're not authorized by law to issue Fed bonds, however they get around that by letting banks buy at auction 1 month Fed CDs via the Term Deposit Facility.
http://www.frbservices.org/centralbank/term_deposit_facility.html
Because the Fed pays 0.25% IOR and only bank can buy the CDs, you won't be surprised to learn the rate clears at 0.26% (1 month T-bills are at 0.07%).
I believe the Fed's current policy with the "operation twist" is to keep the size of their balance sheet the same size and just sell some of the shorter dated stuff and buy some longer dated stuff in more or less equal amounts.
So naturally they may "run out" of the shorter dated stuff that they are selling as they started with a finite amount.
Anything they are selling, they seek the highest prices they can get, so, in their moron fashion, they can "get a good deal for the taxpayers". I believe they did a lot of the selling of the shorter dated stuff at first when it started in Oct. 2011. That is when interest rates went to zero and there was talk of actual negative rate auctions. The Fed was selling their short dated stuff at high premiums which drove the short end rates down at that point.
Now lately they are adding to their positions on the longer end as Mike has recently reported here:
http://mikenormaneconomics.blogspot.com/2012/03/explaining-recent-spike-in-interest.html
You can see the pattern in the Bloomberg chart starting in October, first in went down as they sold and lowered rates at the short end, and now recently they have added the longer dated positions and raised rates on the longer end.
When they buy, in their moron way, they want to get the lowest price so they can "get a good deal for the taxpayers" again. So now you see a bit of a back up in rates on the longer end and they have stopped the rally on the long end cold.
This is moron monopoly price setting 101 by the Fed.
This is how morons operate: They say they want to lower rates, so they proceed to raise rates.
imo the bond rally will continue once the Fed (if ever) gets out of the marketplace.
Resp,
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