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Nothing unexpected in today's Fed release. It was Operation Twist, with about $400 billion in Treasuries being rolled into the longer end of the curve from 6 to 30 years.
The Fed will be rolling over its Agency debt as it matured.
There was no decrease in the payment on Reserves as some had expected.
There is no additional expansion of the Balance Sheet which would be called QE3.
The only surprise was the statment of 'significant downside risk' to the economy which is a new emphasis. It is this statement which triggered a slight selloff in equities, but I would wonder how much of that is just a reallocation of capital into Treasuries which rallied sharply.
There were the same three dissenters: Fisher, Kocherlakota, and Plosser, who did not feel that economic conditions warrant additional accomodation at this time.
So in summary there is no outright expansion of the Balance Sheet, which is what people refer to when they say 'QE3.' The Fed is lengthening the maturity of its portfolio, which is rather large already, which will put downward pressure on the longer dates, most particularly the ten year note. And it will not be shifting its Agency debt to other investments or off balance sheet, but will reinvest them to target mortgage rates.
I might agree that the Fed's conventional policy action are reaching the limits of their effectiveness, and that additional legislative and fiscal policy actions are required. However, that does not mean that the economy would improve without them, or that they are no longer needed.
The next step will be for the Fed to consider less conventional, never before used policy actions, and perhaps a QE3. I doubt very much that they will do nothing as the economy continues towards a return to recession, or perhaps a deepening of the recession from which it never really recovered.
Personally I think the onus is on reform and fiscal policy, and as a regulator the Fed could do more in this area than it has otherwise done so far.
Federal Reserve Board
Release Date: September 21, 2011
For immediate release
Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased.
Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.
Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.
This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.
Every country has an industrial policy of some sort, ranging from active mercantilism to laissez-faire. Even no policy is a policy. But through its tax code, regulations, investments, and monetary activity each country shapes to a great degree the posture of its economy vis-à-vis the rest of the world.
For at least the last thirty years the industrial policy of the US has been to stimulate domestic consumption through encouraging and promoting the growth of the single owner housing industry. There are a number of domestic policy reasons for this, some of which Stiglitz highlights in the video below.
Other countries tend to not encourage domestic consumption, favoring an export policy to attract hard currencies. Since the US owned the world's reserve currency since the Bretton Woods agreement, it was to its advantage and even its obligation to engage in a debt based consumption.
These trends are playing out. One can only aggressively net export and engage in vendor financing through currency manipulation until their customers are rendered insolvent, and build houses and create debt until the financial system collapses and the balance sheets of the nation are in shambles.
Now the US, and by consequence the rest of the world, is engaged in a great reset, the establishment of a new international trade and financial exchange system.
One of the great unanswered questions is the role of the sovereign nation in this brave new world. Although they rarely mention it, economists have long known that unless it can control its own currency and trade environment, no nation can be truly sovereign in its fiscal, and thereby policy, decisions.
On a micro level we see this clearly in the Eurozone, where to a large extent Germany shapes the continent's trade and currency policies to support their export industries, certainly to the disadvantage of the consuming nations of the south.
So too, the trade regime and the gaming of the currency exchanges especially since the 1990's have placed the US in a difficult position. Can a nation choose to have a 'green' environmental domestic policy with reasonable healthcare for all, a democratic and educated people, while competing in a rigged system with a feudal country that cares not for the environment, the people in general, and for freedom?
This is why I have observed that the great story of this generation will be the reconsideration of the position of the individual and their relationship with the State. And one of the great variables in this discussion will be the resolution of the trade and monetary systems, since a modern person is by nature a transactional being. I consider the libertarian phenomenon a nostalgia for a past, of rugged individualism and ideal independence, that is utopian; it probably never really existed.
I am not presenting any answers here. What I am trying to highlight is the great macro trend that is driving the world at this time, which is the establishment of a new system to take the place of the crumbling grand agreement that served between the end of the Second World War and the end of the Cold War. The end of this global accord is marked roughly by the collapse of the former Soviet Union with the Asian currency crisis, and the entry of China into favored nation trade status with the rest of the world through the auspices of the US under Bill Clinton.
That is the backdrop, the great slate, the tablet if you will, on which history is being written.
Chart courtesy of CalculatedRisk
Elizabeth Warren on the election circuit in Massachusetts.
She left out any discussion of the financial bailouts, probably in the interest of simplicity and brevity. But she ought not to do so.
Thanks to DailyKos
There are high expectations ahead of the Fed's September announcement tomorrow afternoon.
Traders are betting the Fed will cap rates in Operation Twist. There are also even odds that the Fed will cut the rate it pays on bank reserves which it holds. The thinking is that it will give banks more incentive to lend. The downside is the view that if it becomes too close to zero, people will stop making markets in the shortest term Treasuries.
If they do lower this rate, I will view it as justification for the view I put forward over the past two years that the Fed interest payment on reserves acts as a bit of a drag on commercial activity by drawing funds out of the marketplace, in addition to being a tool for managing short rates around the zero bound.
Nice bounce in gold today, but notice it still has not broken the short term down trend. I expect that situation to be resolved one way or the other around 2:30 tomorrow afternoon. But that is the short term paper market. The broad sweep of the global physical market is another story altogether.
"...For what it is worth, this [leased central bank] gold goes right into an Asian vault and it is gone from the West permanently. This is having the effect of transferring Western solid assets over to the East, in size. This has the appearance of desperation because in the end this is really an attempt to save the too big to fail banks that are on the wrong side of a derivative play yet again. That is the reason this is being done.
Western central banks don’t really want that gold to disappear like that, they don’t want to sell that gold. They had to raise dollars in a hurry to pump liquidity into the system, but in the end, as I said, the gold is gone. In the old days the gold would be floating around the LBMA system, there would be a little bit of erosion, but today that gold is being sucked into the East.
This price action has had the effect of creating bearish sentiment, but meanwhile the physical buyers are just sitting there and constantly accumulating physical gold. There are massive orders for tonnage of gold, incredible amounts between $1,715 and $1,760. This has the effect of putting a physical floor under the price of gold. If they make a push to the $1,715 level that would be suicide in my opinion. There are simply too many massive orders for physical gold down to that level for that to be breached.
During this quarter this leased gold is supposed to be paid back, but how? As the central banks come to grips with the reality that the leased gold is gone, there may be a religious experience to the upside in gold and you will see the gold price break the $2,000 level."
London Trader: Massive Physical Floor Under Gold as Asia Buys What West Offers - KWN
This scenario tracks with my charts to an almost uncanny level. But let's see what happens. We still have to get past the FOMC monentary decision tomorrow and the Comex option expiration next week.
