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Archive for the ‘quantitative easing’ Category

What is the Fed Really Buying?

Posted by Larry Doyle on November 8th, 2010 7:41 AM |

Quantitative easing is merely another tool to adjust monetary policy, correct? Perhaps. The question begs, then, after an initial round of a trillion-plus quantitative easing failed to stimulate the economy why should we expect any differently this time. Great question. Let’s navigate.

Quantitative easing involves the purchase of Treasury and mortgage securities by the Federal Reserve in an attempt to inject liquidity into the system, prop asset prices, and spur consumer demand. Or so they say. Well how is the overall level of credit in our economy trending?

The downward slope in the graph is an indication of both lessened credit availability and also lessened credit demand. The quantitative easing should directly address this reality, correct? I am not so sure about the “directly” aspect of that statement. In fact, I will go a step further and say I think the Fed is being less than forthright with the nation. If the Fed truly wanted to inject liquidity and capital into our economy and allow it to flow through to small businesses directly there are much better ways of doing it than by purchasing overvalued Treasury and mortgage securities. (more…)

Tags: Alan Greenspan, Ben Bernanke, Bernanke Attempts to Soothe Doubters, Commercial Bank Credit, conference organized by Federal Reserve bank of Atlanta and Rutgers University, creating inflation, credit availability, credit demand, credit trends in economy, E. Gerald Corrigan, Fed summit in Georgia, Federal Reserve Bank Credit, Federal Reserve monetary policy, QE2, quantitative easing, swapping Treasurys for other assets, transparency within the Federal Reserve, what assets does the Federal Reserve purchase via quantitative easing, what is the federal reserve really buying
Posted in General, quantitative easing | 5 Comments »

The Hidden Costs of Quantitative Easing or “As An Actuary You Are Having Sleepless Nights”

Posted by Larry Doyle on October 6th, 2010 9:03 AM |

When central banks hint at implementing further quantitative easing and risk-based assets (commodities and equities) rally and interest rates fall (meaning, bonds rally as well), this is all good, right? If that is the case, is it even better when the hints become an outright statement of plans for more quantitative easing as was the case yesterday with The Bank of Japan? (WSJ: Central Banks Open Spigot; October, 4, 2010)

Clearly, the global central banks are launching these new volleys of quantitative easing in an attempt to forestall deflationary pressures at work underlying our global economy. That said, while asset markets are rising, we need to be aware there are very real costs to this ongoing financial experiment. What are the costs? (more…)

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Posted in General, quantitative easing | 5 Comments »

Fed Doves Promoting More Socialized Housing

Posted by Larry Doyle on October 14th, 2009 4:17 PM |

Could the S in USA be changing from ‘states’ to ‘socialist?’ Maybe that is overly aggressive, but why do I ask?

If the markets are an indication of an incipient rebound in economic health, then why would certain Federal Reserve governors want to increase the Fed’s quantitative easing program? Is that accurate? Is the Fed actually looking to inject even more capital and liquidity into our housing market over and above the $1.25 trillion commitment they have already made? Recall that the Fed informed the markets that it would extend the current purchase program of MBS (mortgage-backed securities) until the end of the 1st quarter 2010, while not increasing the dollar commitment.

Also recall that there had been an increase in Fed-speak by certain Fed representatives (Kevin Warsh, Thomas Hoenig) about the need for an increase in rates ‘sooner rather than later,’ along with the need for a defined exit plan by the Fed from its massive injection of liquidity into the markets.

Well, take those comments with a large grain of salt. Why? Today we learn that there are ‘doves‘ within the Fed who believe the Fed should commit even more money to support our housing market. Bloomberg provides insights on this topic by writing, Fed Says Some Officials Were Open to Buying More MBS:

Some Federal Reserve policy makers were open last month to boosting the central bank’s $1.25 trillion mortgage-backed securities purchase program to stimulate the economy amid concerns the recovery may fade.

“Some members thought that an increase in the maximum amount of the committee’s purchases of agency MBS could help to reduce economic slack more quickly,” according to minutes of the Federal Open Market Committee’s Sept. 22-23 meeting released today in Washington. One member said the improvement in the outlook could warrant a reduction in purchases, the minutes said, without identifying the policy maker.

Having read and reviewed more Fed statements than I care to remember, each and every word in a Fed statement is very carefully chosen. Why? The Fed is attempting to manage market expectations. The fact that the Fed chose to release these comments about mortgage purchases is an indication that the Fed will not only keep the liquidity spigot on for an ‘extended’ period but also may increase the flow of liquidity into the economy via increased purchases of mortgage securities. What does that mean? They view the economy as still having real weakness, especially in housing. And what does that mean? Little concern of inflation in general and likely deflationary pressures within housing.

To fight the deflationary pressures, the Fed will continue to pump liquidity. Are there any costs to this increased liquidity? The equity markets are rallying so it must be good. Well, not so fast. Actually, the costs are in the form of ongoing weakness in the dollar. The U.S. Dollar Index moved lower by another .65% today.

When you truly look at the economy and the markets, think of things in terms of purchasing power. The dollar is now down approximately 7% on the year. I would encourage people to more actively assess the value of the dollar in terms of asset returns and incorporate that into the cost of products.

Those dollar weighted returns and dollar weighted costs in the context of a global market and global economy are truly the proper perspective.

Tags: decline in value of dollar, deflation, dollar, doves, exit plan, Fed, Fed doves, Fed Says Some Officials Were Open to Buying More MBS, fed statements, Fed's quantitative easing, Federal Reserve, FOMC meeting September 22-23, housing, Housing Crisis, injection of liquidity, kevin Warsh, market expectations, MBS, quantitative easing, Thomas Hoenig, U.S. Dollar Index
Posted in Federal Reserve, General, Home Loan, Housing Crisis, quantitative easing | No Comments »

Bernanke Conundrum

Posted by Larry Doyle on June 8th, 2009 7:27 AM |

Overnight markets indicate that Treasury prices are lower and interest rates subsequently higher (remember the inverse relationship between bond prices and interest rates). 2yr Treasury notes are trading at 1.33% and 10yr Treasury notes are trading at 3.85% (both are .03% higher from Friday’s close).

If interest rates are higher, clearly that move must be an indication that economic activity is improving and equity markets should be higher overnight, correct? In “normal” economic times, perhaps that line of reasoning would hold water, but in the Uncle Sam economy, we need to go deeper.

Equity futures indicate our stock markets will open lower by approximately 1%. What’s going on? Welcome to the Bernanke conundrum! What is the riddle wrapped inside our economic enigma? How can Fed chair Ben Bernanke nurse our economy back to health while at the same time maintaining the necessary fiscal independence, integrity, and discipline of robust Fed policy?

Big Ben has used aggressive measures to backstop a wide swath of our markets. In the process, he has created a fair amount of stability but with an effective government guarantee “insurance” policy as the cost of stability. Some of these policies have lessened in size as certain sectors have normalized. However, the major Fed programs remain in place. What are these?

1. quantitative easing: commitment to buy $1.3 trillion in total of Treasury and mortgage-backed securities in an attempt to keep these rates down. Then why are rates rising? More on this in a second.

2. commitment to provide necessary liquidity as needed to support the “wards of the state” including Freddie Mac, Fannie Mae, GM, AIG, Citigroup.

These programs in conjunction with the massive deficit spending programs undertaken by the Obama administration have ballooned our expected funding needs in calendar 2009 to upwards of $3 trillion, a fourfold increase over prior years.

In my opinion, interest rates are moving up much less on any real signs of economic improvement than on these funding needs and very real signs of a monetary printing press malfunction. What’s that? With the Fed Funds rate at 0-.25%, the Fed is literally flooding the economy with cash. Where is that cash going? Is it flowing through to the economy? Not really.

The cash is pouring into the banking system to cushion and support financial institutions from the ongoing losses connected to rising defaults on credit cards, residential mortgages, commercial real estate, and corporate loans.

The market is now very clearly sending a signal to Bernanke, Geithner, Obama and team that if they want to continue their programs as designed (and they do and will), the price, that is the rate of interest, is going up. Why?

The market is very concerned that the flood of liquidity will lead to inflation if not rampant inflation and potentially hyperinflation. How does Bernanke head that off?

Withdraw the very liquidity that he has found so necessary to pour into the financial system. How does he do that?Two ways.

1. increase the Fed Funds rate: that is, make borrowing more expensive.

2. reverse the quantitative easing program so that the Fed actually sells Treasury and mortgage-backed securities into the market and takes liquidity out in the process. What are the impacts of both those maneuvers? Higher interest rates.

In fact, interest rates are moving higher already in anticipation of Bernanke being forced to make these moves. Can Bernanke “thread this needle?” What will happen if interest rates move higher?

Slow the economy, especially housing given higher mortgage rates, and lower earnings especially for financial institutions. To wit, our equity markets are lower overnight.

Nobody said this was going to be easy.

Tags: Bernanke conundrum, bonds and stocks both decline, chances of hyperinflation, deficit funding, fed Funds rate, Fed raising rates, federal deficit, funding the deficit, government support of AIG, government support of Citigroup, government support of Fannie Mae, government support of Freddie Mac, higher interest rates, how much deficit funding, how will Fed raise rates, impact of higher interest rates, increase in interest rates, increasing interest rates, Inflation, interest rates and the economy, prospects of hyperinflation, quantitative easing, unwinding quantitative easing, what about Treasury rates, when will Fed raise rates, why will interest rates increaseates, will Fed raise rates?
Posted in Ben Bernanke, Federal Reserve, General, hyperinflation, Inflation, quantitative easing | 2 Comments »