Fed Tapers QE by $10B

What was expected happened.  The Fed cut rates by $10B/ month.

As Ben Bernanke said:

Reflecting cumulative progress and an improved outlook for the job market, the committee decided today to modestly reduce the monthly pace at which it is adding to the longer-term securities on its balance sheet.”

 According to Bloomberg Bernanke said:

 "The steps that we take will be data dependent,” Bernanke said. “If we’re making progress in terms of inflation and continued job gains, then I imagine we’ll continue to do, probably at each meeting, a measured reduction” in purchases. If the economy slows, the Fed could “skip a meeting or two,” and if the economy accelerates it could taper a “bit faster,” he said.

 As for borrowing costs:

 At the same time, the Fed reinforced its assurances that it’s a long way from raising borrowing costs, saying that its benchmark rate is likely to stay low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.

 

Four Charts to Track Timing for QE3 Tapering: Calculated Risk

From what is quite possibly the most informative blog site on many economic issues, Calculated Risk updates it's analysis on the four issues that it believes the Fed is looking at when making it's tapering decision.

As a quick update the 4 charts are:

1. Unemployment rate - declining but there is concern that the participation rate is dropping as well (although it improved in the November report).
2.  GDP - is set to meet or exceed expectations.
3. PCE prices - Are not increasing as expected.
4. PCE core inflation - Are not increasing as expected.

For more info click on the link.

There is an obvious concern that inflation is not anywhere near the 2% where the Fed wants it to be.

Unless the Fed Goes Cold Turkey on Us, Expect a Bountiful Economic Harvest for Thanksgiving 2014 (Econtrarian)

Interesting post by Paul Kasriel on his blog site "The Econtrarian."

It pertains to the tapering of QE and what affects he believes the tapering affect will have on credit within the economy.

Here is an excerpt.

Now, I do not view the point forecasts of nominal Gross Domestic Purchases as the Gospel. But I do believe that the projected rising trend in the growth of the sum of Fed and depository institution credit does portend a rising trend in the growth of nominal Gross Domestic Purchases. Moreover, I believe that my growth projections of the sum of Fed and depository institution credit are very conservative. Given the capital-raising campaigns undertaken by U.S. depository institutions in recent years, given the diminished uncertainty about future regulatory capital requirements and given the rising trend in residential real estate prices, I believe that depository institutions are more able to step up their credit creation. Lastly, if I have erred in my projection of Fed credit, I suspect I have erred on the side of restraint. It is not a done deal that the Fed will commence a tapering in its securities purchases in the December 2013 or January 2014, as I have assumed, especially given how low consumer inflation is. For example in the three months ended October, the All-Items CPI increased at a compound annualized rate of 0.8%; the CPI ex Food & Energy at 1.5%. If the Fed were to delay its initial round of tapering until March 2014, it also would likely delay its second round of tapering – i.e., initiating an additional amount per month of reduced securities purchases – until after July 2014.

Fed Funds Target to Stay Low Even After QE Taper

Ben Bernancke said yesterday that the Fed will hold down the fed funds rate for a considerable time after the QE taper takes affect.

From Bloomberg:

“The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after” the jobless rate breaches the Fed’s 6.5 percent threshold, Bernanke said yesterday in a speech to economists in Washington. A “preponderance of data” will be needed to begin removing accommodation, he said.

 In deciding when to wind down open-ended purchases of bonds, Fed officials are weighing both the “cumulative progress” since they began the program in September 2012 as well as “the prospect for continued gains,” Bernanke said. The labor market has shown “meaningful improvement” since the start of the program.

Mauldin on ZIRP

In his latest "Thoughts from the Frontline," John Mauldin berates the Fed and their intentions of keeping rates at or around zero for quite sometime.  While laying into the Fed he does bring up an interesting point that cannot be forgotten. 

There is no question in my mind that many of my friends in the hedge fund and investment world will see an extended zero interest rate policy as a gift horse. If you tell a rational investor that he or she will be able to borrow money at very low rates for four or five years, then you are inviting all manner of financial transactions to take advantage of low borrowing rates. If, as an investor, you can borrow at 3% and get a 6% return, then a modest four times leverage gets you a 12% return on your capital. The financial engineering made possible by guaranteed low rates is really rather staggering. Whole books could be (and probably are being) written about all the ways to take advantage of such an environment. But also, the overall return from risk assets will be reduced as investors look to create carry trades and leverage up. So the very policy of encouraging investors to move out the risk curve in fact reduces the returns on the risks taken, especially for the average investor who can't take advantage of the financial engineering available to sophisticated investors. Wall Street makes a bundle, and Main Street gets stuck with higher risks and lower returns.

Keep investing in solid financial companies and the larger the better.

Read the whole article here.

Summers on Stagflation at IMF Economic Forum.

Interesting presentation by Larry Summers at the IMF Economic Forum.  Is Stagflation going to be an issue that will be with us for quite some time?





Some interesting additional comments from Paul Krugman in his blog.

Janet Yellen Prepared Testimony

As she begins her confirmation process, Janet Yellen has released her prepared comments before tomorrow's hearing with the Senate Banking Committee.  For those who hope that she will reign in the Fed, don't hold your breath.  For more click here.

Confessions of a Quantitative Easer

Interesting opinion piece by a gentleman named Andrew Huszar.  Mr. Huszar is a former Fed official who was actually responsible for the $1.25 trillion dollar QE bond buying that occurred in 2009.

As Mr. Huszar states in his piece:

My part of the story began a few months later. Having been at the Fed for seven years, until early 2008, I was working on Wall Street in spring 2009 when I got an unexpected phone call. Would I come back to work on the Fed's trading floor? The job: managing what was at the heart of QE's bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months. Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in U.S. history.

 This was a dream job, but I hesitated. And it wasn't just nervousness about taking on such responsibility. I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street. Independence is at the heart of any central bank's credibility, and I had come to believe that the Fed's independence was eroding. Senior Fed officials, though, were publicly acknowledging mistakes and several of those officials emphasized to me how committed they were to a major Wall Street revamp. I could also see that they desperately needed reinforcements. I took a leap of faith.

It didn't take long for Mr. Huszar to see that nothing changed as he states:

 It wasn't long before my old doubts resurfaced. Despite the Fed's rhetoric, my program wasn't helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn't getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.

As for the results:

 And the impact? Even by the Fed's sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn't really working.

The most interesting part of the article is towards the end of the piece where he states:

 As for the rest of America, good luck. Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy. Yes, those financial markets have rallied spectacularly, breathing much-needed life back into 401(k)s, but for how long? Experts like Larry Fink at the BlackRock investment firm are suggesting that conditions are again "bubble-like." Meanwhile, the country remains overly dependent on Wall Street to drive economic growth.

I for one am still on the fence trying to figure out which side of the argument is valid.  Did QE help our economy or  has it put us in quite a bind right now.  My suspicion is that it could be a bit of both.  there is no question in my mind that as rates bumped against the zero lower bound the Fed was forced to try something a lot more exotic in order to try to help the economy.  Many people say that the best thing the Fed could have done would have been to significantly increase inflation rate targets in order to show that the Fed would not be getting in the way of a recovering economy even if it hit that 2% target but since that wasn't on the table QE was a valid option.

The big problems with QE are threefold:

1. Since the big winners in the QE extravaganza are the banks that caused this mess in the first place has the Fed placed it's credibility in doubt with the general public?
2. Will the Fed be able to time the "taper" correctly and allow market forces the necessary time to adjust?
3. How ugly will the market adjustment be when the Fed tries to mop up the liquidity?

All good questions.  I keep searching for answers.

Fed Taper and Thresholds

Calculated Risk  has a post which shows that the Fed may begin to taper while changing the thresholds or guidelines they use for raising the Fed Funds rate to a lower unemployment rate (6% or lower) and a higher inflation rate (2.5%).

Fed's Bullard on CNBC this Morning

St. Louis Fed Pres James Bullard was on CNBC this morning and he had some interesting things to say about the Fed and tapering.  Info from Calculated Risk.

Reducing Noise in Your Trading

Good article by Barry Ritholtz on Wapo related to how to minimize the unnecessary noise currently in your trading practices.

Attached is an excerpt:

“Signal-to-noise ratio” is an engineering concept that focuses on the amount of useful information being received compared with false or useless data. This is an especially important concept to investors.
Over the past few years, I have been reducing the meaningless distractions in my investing process. You should, too. You want less of the annoying nonsense that interferes with your portfolios and more of the significant data that allow you to become a less distracted, more purposeful investor.

What the Fed Needs to See to Consider Tapering in December?

According to Calculated Risk.

There are many key releases right at the beginning of December, and we know the Fed is "data dependent".  So here is what the FOMC would like to see to start tapering: 1) the unemployment rate fall to 7.2% in the November report, 2) Employment up about 2.2 million year-over-year in November, 3) inflation increasing toward 2% target, and 4) some sort of fiscal agreement by Dec 13th.  All possible.

There are many key releases right at the beginning of December, and we know the Fed is "data dependent".  So here is what the FOMC would like to see to start tapering: 1) the unemployment rate fall to 7.2% in the November report, 2) Employment up about 2.2 million year-over-year in November, 3) inflation increasing toward 2% target, and 4) some sort of fiscal agreement by Dec 13th.  All possible.
Read more at http://www.calculatedriskblog.com/#HsJ3gZBZ78yu5te6.99

There are many key releases right at the beginning of December, and we know the Fed is "data dependent".  So here is what the FOMC would like to see to start tapering: 1) the unemployment rate fall to 7.2% in the November report, 2) Employment up about 2.2 million year-over-year in November, 3) inflation increasing toward 2% target, and 4) some sort of fiscal agreement by Dec 13th.  All possible.
Read more at http://www.calculatedriskblog.com/#HsJ3gZBZ78yu5te6.99

There are many key releases right at the beginning of December, and we know the Fed is "data dependent".  So here is what the FOMC would like to see to start tapering: 1) the unemployment rate fall to 7.2% in the November report, 2) Employment up about 2.2 million year-over-year in November, 3) inflation increasing toward 2% target, and 4) some sort of fiscal agreement by Dec 13th.  All possible.
Read more at http://www.calculatedriskblog.com/#HsJ3gZBZ78yu5te6.99

There are many key releases right at the beginning of December, and we know the Fed is "data dependent".  So here is what the FOMC would like to see to start tapering: 1) the unemployment rate fall to 7.2% in the November report, 2) Employment up about 2.2 million year-over-year in November, 3) inflation increasing toward 2% target, and 4) some sort of fiscal agreement by Dec 13th.  All possible.
Read more at http://www.calculatedriskblog.com/#HsJ3gZBZ78yu5te6.99

There are many key releases right at the beginning of December, and we know the Fed is "data dependent".  So here is what the FOMC would like to see to start tapering: 1) the unemployment rate fall to 7.2% in the November report, 2) Employment up about 2.2 million year-over-year in November, 3) inflation increasing toward 2% target, and 4) some sort of fiscal agreement by Dec 13th.  All possible.
Read more at http://www.calculatedriskblog.com/#HsJ3gZBZ78yu5te6.99

There are many key releases right at the beginning of December, and we know the Fed is "data dependent".  So here is what the FOMC would like to see to start tapering: 1) the unemployment rate fall to 7.2% in the November report, 2) Employment up about 2.2 million year-over-year in November, 3) inflation increasing toward 2% target, and 4) some sort of fiscal agreement by Dec 13th.  All possible.
Read more at http://www.calculatedriskblog.com/#HsJ3gZBZ78yu5te6.99

What the Fed Said

After the conclusion of the 2 day FOMC meeting yesterday the Fed released it's statement.

For immediate release

Information received since the Federal Open Market Committee met in September generally suggests that economic activity has continued to expand at a moderate pace. Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Over the last 2 days the market has taken the above statement to mean that the Fed's move to taper QE is coming sooner than expected.  It's interesting that the Fed specifically calls out fiscal policy as a huge anchor weighing down the economy and that  with inflation low and unemployment no where near where it should be the market interprets this statement as a negative.

My first impression of this event is that there has been a huge run up in prices since the government solved it's mess (kicked the can down the road) in mid October and nervous traders looking for an excuse to take profits found one.

Comments on Fed Meeting.

C'mon big Ben.  Don't quit now.  Keep backing the economy with liquidity and more importantly keep putting the pressure on Congress to forget ideologies and focus on fiscal policy which will help jump start the economy.

Further Thoughts on the Fed Move

As the Dow is down 400+ points today, I can't help but sit and wonder about the Fed decision yesterday and what it really means.  The lead Republicans of Congress had the mindless yet ballsy idea to send a letter to Bernancke on Monday stating that he should abstain from doing anything to monetary policy.  They took it a step further and said that by doing anything else the Fed president would risk hurting the economy.  I'm sure Bernancke would have gotten a chuckle out of this letter if the economy wasn't in such fucking terrible shape no thanks to the theatrics that these men have been responsible for, what with the debt ceiling fiasco and subsequent downgrade of US debt, along with their lunacy laced thoughts that now is the time for government to pull back and take care of its books at the expense of the citizens of the country.

In my opinion, it wasn't so much what Benancke did in implementing Operation Twist 2.0 that should be the headline of yesterday's events but what was said in the statement after the meeting.  In this statement the Fed changed its wording about downside risks when compared to the August 9th meeting.  In yesterday's statement the Fed said:

...there are significant downside risks to the economic outlook, including strains in global financial markets.

While back in August the excerpt in the section of the announcement read:

...downside risks to the economic outlook have increased.

The increased clarity that the Fed provided yesterday with this statement is not common as their intentions usually are not to rattle markets.  It almost seems as if Bernancke is throwing in the towel and saying look I've done all I can do, it is up to you jokers in Washington to stop bullshitting, put politics and party aside, and start worrying about the country that you've been elected to serve.

Based on today's market reaction I think it's safe to say that investors around the globe are saying we're screwed.

Fed Decision

Fed to buy $400B in long term treasuries and to sell $400B of short term treasuries.

Their efforts are focused towards getting the longer time frames of the yield curve down thus lowering rates for mortgages even further but even more importantly than that attempting to force investors of all types to invest funds into more risky assets as opposed to the safety of treasuries by squeezing the spreads between short term and long term risk free rates.  This will be done at the expense of the dollar which can further hurt bond holders.

The program will last until June 2012.