Peter Stella is an experienced IMFer on a crusade to champion base money understanding in a world of hard money obsessives who refuse to listen to reason.
From his latest blog post this week:
Bank reserves are demand deposits held at the central bank. Individual banks can and do transfer deposits among themselves constantly during business hours through electronic large value transfer systems (LVTS). Among the universe of LVTS, the largest are FEDWIRE and CHIPS in the US, CHAPS in the UK, BOJNET in Japan and TARGET2 in the Eurozone. From an individual bank’s perspective, reserves are “ultimate” liquidity—available instantly in real time to satisfy payments obligations to other banks.
The Fed’s December transcript reveals some interesting foresight by Philadelphia Fed president Charles Plosser in discussions about how the Fed should communicate its regime shift (i.e. that it was moving away from targeting the Fed Funds rate towards using base money, balance sheet and other quantitative measures as its primary tools).
In the transcript, Plosser refers to the fact that near-zero rates and unconventional policy will eventually have to be overturned, and that this could be a tricky challenge for the Fed when the time comes. Nevertheless, he also notes that when it comes to the Fed’s balance sheet, the introduction of interest on excess reserves (a.k.a a floor system) means the Fed can in theory continue to control rates without shrinking its balance sheet at all for some time. Read more
Further insights into the Fed’s financial-crisis priorities by way of the December 2008 FOMC meeting transcript, released this Friday. This time we refer to their discussion about the possible unintended side-effects of zero-lower bound policy and in particular the spike in Treasury fails that was occurring at the time.
It’s worth reminding that at the time, only a few market commenters really understood the implications and severity of a spike in Treasury fails to deliver/receive. Read more
This is a guest post by Manmohan Singh, a senior economist at the IMF. Views expressed are his own and not those of the IMF.
Some central banks (Fed, Bank of England) have become large repositories of good collateral as a result of their QE policies. But excess reserves at central banks are not the same thing as good collateral that circulates through the non-bank/bank nexus. Read more
On Monday, the Office of the Comptroller of the Currency and the Federal Reserve issued “enforcement actions” against JPMorgan, which makes it sound a lot more exciting than it is.
The slaps on the wrist for the “London whale” trades, and failures concerning anti-money laundering procedures, come with no fines and no admission or denial of any wrongdoing. The Fed does, however, reserve the right to take further action and the UK’s Financial Services authority said it’s still looking into it. Read more
Central bankers in the US and Europe may think they’re engaging in policies accommodative to economic growth, but two can play in this game of acronyms! The team at Morgan Stanley fights letters with letters, in a note released on Friday (emphasis ours):
Global central banks have done all in their power to rescue the financial markets from the doldrums. Markets have clearly noticed their unwavering intent to “do whatever it takes” and the open-ended nature of the response. Notwithstanding this central bank resolve and despite QE, OMT, et al., we remain strategically cautious. Our stubbornness is quite simple – fundamentals. On the other side of QE and OMT are IP, PMI, and GDP, which continue to look worse, not better. As such, the key to our call is very simple: we think poor fundamentals will trump central bank action. Time will tell. Read more
The wait is finally over (well, not entirely — the new Statement of Economic Projections will be out later and we’ll have much more during US Markets Live starting at 2:10pm), and the headline news is that Operation Twist has been extended through the end of the year.
We’ll also have rolling updates to this post, but for now: Read more
Yep, nearly time to start talking about the next FOMC meeting, a two-day affair that begins this Tuesday.
Any big decisions regarding further quantitative easing are more likely to be taken later, closer to when Operation Twist is scheduled to end in mid-June. (Expect to see more stories using the “wait-and-see mode” formulation.) But on the schedule is the second iteration of the individual participants’ federal funds rate projections, and that could be interesting. Read more
The man who did the Fed’s buying will – by coincidence – leave the NY Fed pretty much the minute Operation Twist finishes in June.
Full release below: Read more
The Fed isn’t the only central bank grappling with flaws in its communications policy amid problems with its traditional policy transmission mechanisms.
Everyone is well aware of the ECB’s non-traditional measures to this point: the three-year LTRO’s, the extraordinary expansion of its balance sheet and thereby the monetary base, the acceptance of a wider range of collateral for repo with the central bank, etc. Read more
FT Alphaville has outlined how securitisation is getting back to its roots lately, allowing banks to reduce capital holdings at a time when fresh capital is hard to come by.
Basically, they buy protection on slices of their own assets, paying out handsome coupons to hedge funds and other investors to take on the assets’ risk. Ergo, less capital needs to be held by the bank to back this risk. Read more
The airwaves are once again aflutter with tales of the “shadow banking” sector, owing to the chief of the relatively new Financial Stability Board.
As the FT’s Tracy Alloway also recently reported, the sector was already back to its pre-crisis size at the end of 2010 at a healthy $60,000bn of assets. Read more
The US Federal Reserve said the economy is doing a little better but noted significant downside risks from the eurozone crisis and kept monetary policy firmly on hold, the FT reports. Its statement on Tuesday, little changed since November’s, means that the rate-setting Federal Open Market Committee will hold fire on any further easing and await developments in the new year. The FOMC is caught between stronger economic data in the US and uncertainty about what will happen in Europe. Recent data on consumption and business confidence has raised hopes of stronger growth next year but much depends on whether Congress extends a 2 percentage point reduction in payroll taxes into 2012. The Fed is taking advantage of a quieter period to work on changes to its communication policy including the possible adoption of an explicit numerical objective for inflation.
Go back to watching Mario. See you in 2012.
Not quite, of course, but as expected, there’s nothing to see in the December FOMC statement. Rates remain the same and Twist continues. The doveish Charles Evans again dissented. Read more
The US Federal Reserve considered a new round of quantitative easing as an option at its September monetary policy meeting, suggesting that “QE3” is still possible if the economy weakens further, the FT reports. “A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted,” say minutes of the meeting, released on Wednesday. At the September meeting the Fed launched “Operation Twist” – a $400bn programme of selling short-dated and buying longer-dated Treasuries – in an effort to drive down long-term interest rates and support a failing economic recovery. But the minutes suggest there is still an appetite on the rate-setting Federal Open Market Committee for more measures to support growth. While three of the 10 FOMC members voted against Twist, the minutes reveal that two other members thought that the outlook supported stronger action, and voted for Twist only because “it did not rule out additional steps at future meetings”.
“Are foreign central banks rejecting Operation Twist?”
That’s the provocative question asked in a note by RBS strategists this morning — and while the answer is “no”, the rationale for it is both intriguing and touches on some interesting developments happening around the globe. Read more
The US Federal Reserve on Wednesday launched “Operation Twist”, announcing it would buy $400bn of long-dated Treasuries, financed by the sale of an equal amount of bonds with three years or less to run. However Asian stocks tracked Wall Street lower as investors took fright at the sentiment in the Fed’s statement, which referred “significant downside risks to the economic outlook”. The FT reports the Fed also sprung a surprise by pledging to reinvest any early repayments from mortgage securities back into debt issued by mortgage financiers such as Fannie Mae and with a strong focus on buying 30-year Treasuries. Such a big move suggests that Ben Bernanke, Fed chairman, is alarmed by the slowdown, and has decided to override opposition on the rate-setting Federal Open Market Committee and provide as much stimulus as easily practical. The purchases will run until June 2012. Market interest rates moved, but not enormously, suggesting that a large “twist” was already priced in. There are also continued doubts about how much households will respond to lower interest rates at a time when they are trying to pay down debts left behind by the financial crisis.
The US Federal Reserve launched “Operation Twist” on Wednesday in a bold attempt to drive down long-term interest rates and reinvigorate the faltering economy, reports the FT. The central bank said that it would buy $400bn of Treasuries with remaining maturities of six to 30 years and finance that by selling an equal amount of Treasuries with three years or less to run. “This programme should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” said the Fed. The policy is named after a similar attempt to “twist” the shape of the yield curve in the early 1960s. The Fed also sprung a surprise by pledging to reinvest any early repayments from mortgage securities back into debt issued by mortgage agencies such as Fannie Mae and with a strong focus on buying 30-year Treasuries. “We got a double twist,” said Diane Swonk, chief economist at Mesirow Financial in Chicago.
… some sort of easing, again.
He had already set it at Jackson Hole and the August 9 FOMC, and mostly confirmed by the minutes of that meeting. Read more
The chatter on Friday in response to the stomach-punching payrolls is that we’re headed for Operation Twist Part Deux — number 13 on our list of Fantasy Fed options — though not outright QE3 in the form of large scale asset purchases. At least not yet.
But that was already our guess after the last minutes were released. We had been expecting the debate to have already moved beyond the timing of the New Twist and toward its form. Read more
The US Federal Reserve’s FOMC meeting on Tuesday will be the most difficult and divisive in a year, the FT says. Sharply weaker economic data in recent weeks, a new peak in the eurozone debt crisis, and a downgrade to the triple A credit rating of the US have shaken confidence in a way that could spiral towards a new recession. The Fed will be forced to consider fresh stimulus in response, and abrupt changes of direction are often a struggle for the 17-member committee. To make matters even more difficult, much has happened since the Fed entered its pre-meeting purdah on August 2, so FOMC policymakers have had no chance to signal any change in views. The meeting will be unpredictable.
The Wall Street Journal reports that the Federal Reserve Bank of New York is once again facing scrutiny over stockholdings held by a senior official during the 2008 financial crisis. Then-New York Fed President Timothy Geithner is said to have issued a waiver that allowed William Dudley—executive vice president of the regional Fed bank’s markets group—to work on the controversial bailout of American International Group (AIG) even though he held shares in the company. The New York Fed, one of the most critical entities when it comes to buying and selling government securities, played an important role in shaping Washington’s response to the crisis, according to congressional audit report released Thursday. The paper says the waiver allowed Dudley, a former Goldman economist who became New York Fed president in January 2009, to also work on issues involving General Electric, another company that received US assistance, even though he also held shares in that company.
Chart via RBC Capital Markets:
The minutes from the US Federal Reserve’s June meeting show there is some interest in monetary stimulus if economic growth remains weak, marking the Fed’s first serious discussion of easing since the US economy hit a “soft patch” in the spring. “Some participants noted that, if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate, and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation,” the minutes said. Further monetary action would be likely to mean more quantitative easing, aimed at driving down long-term interest rates. However the minutes also show a deep divide among the FOMC members. While some thought that weak growth might create a need for further easing, others thought that slower growth and higher inflation suggest “that there might be less slack in jobs and product markets than had been thought”.
Banks are offering easier credit terms to hedge funds in an increasingly fierce competition for their business, the FT reports. The Fed’s poll of 20 of the largest securities dealers, launched last year in an attempt to fill in information black holes that stoked the crisis, also found a rebound in their clients’ leverage. None of the dealers, who the Fed said provided nearly all the financing for hedge fund purchases of securities, tightened terms in the period from March to May. Eleven said they eased financing terms to hedge funds and private equity firms. Of the lenders that eased terms, nine said more aggressive competition for hedge fund business was a cause. Eight said the improved strength of their counterparties was a factor and seven said their own institution’s willingness to take on risk was a factor.
The Federal Reserve will remain the biggest buyer of Treasuries, even after $600bn second round of quantitative easing ends this week, Bloomberg says. The Fed will continue to buy Treasuries with proceeds from the maturing debt it currently owns to keep interest rates low, which could mean purchases of as much as $300bn of government debt over the next 12 months without adding money to the financial system.
Worries about slowing global growth rejoined simmering Greek debt concerns to deliver a downbeat session on global markets, the FT reports. The FTSE All-World equity index was down 0.5 per cent, commodity prices are lower, while the dollar and US Treasuries were in demand. To some investors’ minds, this traditional “risk-off” scenario came courtesy of the US Federal Reserve, which on Wednesday said the world’s biggest economy faced slower than expected growth and higher inflation. During a press conference, Fed chairman Ben Bernanke said that “incoming data” would determine the pace of the exit from its ultra-loose monetary policy, but declined to lay out a more specific forecast. He said the extended easing might last for at least another two or three meetings. And so S&P 500 futures suggested Wall Street would add a loss of 0.5 per cent to the previous session’s 0.7 per cent decline, all of which came after Mr Bernanke’s comments. News out of China was also adding to the perception that the monetary authorities are prepared to be a bit tougher in their attempts to guide growth and normalise policy.
The US Federal Reserve gave a downbeat assessment of the world’s largest economy on Wednesday, pointing to slower than expected growth and higher inflation, the FT reports. In the most significant change to its policy statement, the rate-setting Federal Open Market Committee stripped out all reference to “subdued” measures of underlying inflation and said the economy was growing “somewhat more slowly than the committee had expected”. The Fed cut the centre of its forecast range for 2011 growth from 3.2 to 2.8 per cent. It also trimmed its 2012 forecast from 3.85 to 3.5 per cent. Policy will stay frozen after the completion of the Fed’s $600bn “QE2” round of asset purchases that it will complete on schedule at the end of June. FT Alphaville wonders if Bernanke’s reference to “different ways” of structuring security purchases hints at the possible use of derivatives in the future.
The US Federal Reserve gave a downbeat assessment of the world’s largest economy on Wednesday as it pointed to slower than expected growth and higher inflation, reports the FT. In the most significant change to its policy statement, it stripped out all reference to “subdued” measures of underlying inflation and said that the economy is growing “somewhat more slowly than the Committee had expected”.