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HomeQuantitative Easing? Welcome to Vegas!!
Posted by Larry Doyle on March 19th, 2009 9:07 AM |
The Federal Reserve has ZERO room to maneuver on its interest rate policy given the fact that its interest rate tool, the Fed Funds Rate, is currently set at 0-.25%. Could that rate be set at a negative level? Well, let’s just say that it has never happened with any central bank in the world. With no more arrows left in its interest rate quiver, what is a Federal Reserve to do to manage an economy? Let’s enter the world of “quantitative easing.”
Quantitative easing by any central bank is a policy in which that bank grows its balance sheet to purchase assets (government bonds, mortgage securities, government agency debentures, etc). The purpose of purchasing these assets is to drive the prices for these assets higher which in turn brings the interest rates on these assets lower (bond prices and interest rates on those bonds have an inverse relationship). The hope the Federal Reserve holds is that in bringing rates down (government rates and mortgage rates dropped by .3% to .5% yesterday) consumer and institutional demand for money will go higher and spur the economy in the process. (more…)
The Fed Levers Up
Posted by Larry Doyle on March 18th, 2009 6:30 PM |
When the economy experiences a massive delevering process, the void in the economy needs to be filled. There has been and will continue to be ongoing debate about the effectiveness of the stimulus plan, Obama’s proposed budget, ongoing government bailouts of a variety of industries, and moves made by the Treasury and Federal Reserve. Has enough been done? Is too much being done? Are our global partners pulling their weight? Are protectionist measures likely to exacerbate our economic problems? The answers to these questions will not be known for years.
Today’s action, Fed’s New Steps Shake Up Markets, is a sign that as everybody is delevering (selling assets purchased with borrowed money), the Federal Reserve is levering up. The Fed has indicated they will purchase billions more than previously advertised in U.S Treasury securities, mortgages, and consumer related assets. Why? By making these purchases, the Fed will attempt to drive the rates for these products lower and reignite consumer and institutional demand for credit. The market responded in startling fashion as 10yr government rates dropped an unprecedented .50% !! Equity markets responded by moving higher by 1-2%. (more…)
Economic/Market Highlights 11/20/08: D-E-L-E-V-E-R-I-N-G !!
Posted by Larry Doyle on November 21st, 2008 7:55 AM |
There were major forced liquidations on the parts of hedge funds, asset managers, and insurance companies that went through the markets Thursday. Laszlo Birinyi, a noted market tactician whom I follow quite closely, indicated today that given the market price action that making investment decisions now is “strictly guesswork”.
Equity markets traded down another 5.5% to 6.5% Thursday with much of that selloff occurring in the last hour which is an indication that orders from asset managers and mutual funds built into the close. The delevering process (the selling of assets purchased with borrowed money) continues!! Volume on the NYSE was 8.8bln shares, 44% above average. Clearly a strong indication of massive liquidations. Oil and copper were down 6% and 4% respectively given continued expectations of economic weakness. When does OPEC come out and announce aggressive cuts in production?
Government bonds rallied by 30basis points in the 10yr (a huge move) in a “flight to safety” trade.
While the safest bonds rallied, bonds with a risk component (high grade corporates, mortgage-backed bonds, high yield) either did not move or in the case of high yield traded down in sync with equities. (more…)
Tags: delevering, delevering process in markets, economic and market highlights 11/20/08, economic commentary Sense on Cents, Greg Mankiw, Sense on Cents, Sense on Cents view of economy and markets
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