The Fed’s 2008 transcripts offer an impressive insight into the state of the repo markets in 2008, not least the shortage of safe US assets, which it turns out was a key area of concern in Fed gatherings.
We’ll have more on some of the other repo elements, but in the meantime — given that we’ve raised the idea that China might be inclined to repo its UST stock with the Fed if it needs short-term dollar liquidity (or is possibly doing so already) — it’s worth noting the following exchange from the October 2008 transcript in which the committee wondered about the nature of collateral they should accept for emergency dollar swap lines with foreign central banks.
Rather than collateralising with their own currency the idea was raised that they should pledge their UST stock instead. Voila, an open precedent for sovereign-level repo arrangements with the Fed so as to ease the shortage of safe asset problem in the West whilst at the same time flooding dollar liquidity to foreign markets. Read more
New era, and all that. Click the image to read Janet Yellen’s full prepared testimony for her appearance on Tuesday before the Committee on Financial Services, U.S. House of Representatives.
Here’s a rough sketch of the variables influencing US inflation, which has been remarkably low for two years running:
1) The remaining labour market slack, including a staggering and resilient long-term unemployment problem. The amount of slack remains tough to know given the difficulty of measuring the cyclical vs secular components of the fall in the labour force participation rate. Much more on this later.
2) The output gap. This isn’t a well-defined idea, we know, but few people would argue that the US economy is producing at potential. The US economic recovery does appear to have accelerated in the final two quarters of last year (the December jobs report notwithstanding), and the conditions for growth look better than they have in years. If the nascent acceleration proves sustainable, then the labour market may well tighten up and push wages higher. Obviously this is related to the first point about labour market slack, and plenty of caveats are needed given the head-fakes of the last four winters. Read more
Credit Suisse takes a look at the big December testing:
As expected, the end of the year brought the large-scale test of the Fed’s reverse repo facility, and the surrounding operations have dwarfed prior tests. In our view, the Fed needed to get some larger-scale tests under its belt to develop full confidence in the program’s capacity for both policy makers and the market. The year-end results seem to have delivered such a result. Read more
Justin Fox at the Harvard Business Review has collated some interesting extracts from a conversation he had with Alan Greenspan late last year.
What’s striking, as Fox himself notes, is that Greenspan (generally pigeon-holed as a free-market loving Ayn Randian type) is getting pretty Keynesian nowadays. Indeed, having understood that the 2008 crisis revealed a “flaw” in his world view, rather than getting bitter about it, Greenspan appears to have spent the last few years trying to understand where he went wrong.
A period of honest self-reflection has led to some major reversals in his thinking. Read more
At last December’s FOMC meeting, Ben Bernanke announced the new Evans Rule (forward guidance thresholds) framework at least one meeting before most observers had expected it.
This year, market participants and Fed reporters have differing predictions for what the same meeting will bring, but they aren’t ruling much out. Even if markets are probabilistically favouring certain policy moves over others, it’s unlikely that any announcement in particular will qualify as a surprise.
Here’s a summary of potential changes, each of which could be announced in isolation or in combination with others (and do note that “none of the below” is also very possible): Read more
The market vogue is to obsess about how the Fed is suppressing long-term rates.
But for years now, FT Alphaville has been trying to explain why, in reality, Fed intervention is as much focused on propping up short-term rates (preventing them from falling through zero) as it is about keeping longer-term rate expectations anchored. Read more
At some point in the great collective peyote dream that was last month’s debt ceiling crisis, we asked you to imagine the Fed buying defaulted US Treasuries.
Fortunately, the US central bank was thinking about it too. Read more
Click to read. No taper any time soon?
Some prominent Fed Reserve Board staffers recently put out two weighty papers in advance of the 4th Jacques Polak Annual Research Conference which is hosted by the IMF starting on Thursday (today).
Paul flicked one paper up yesterday — The Federal Reserve’s Framework for Monetary Policy –Recent Changes and New Questions — and the second — Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy — is here. Read more
The Federal Reserve’s Framework for Monetary Policy –Recent Changes and New Questions. Click to read the full doc.
Fresh from having made $1bn impeccably timing the putative US recovery in the first half of this year (and Japan, natch), Andrew Law of Caxton Associates – one of the world’s most successful macro traders – has now turned bearish, and in quite a big way.
Caxton, a hedge fund named after the printer (its now-retired founder Bruce Kovner is a billionaire bibliophile), believes the Fed will keep running its presses:
We have been expecting the US economy to reach escape velocity led by housing and corporate capital expenditure… but for whatever reason that just hasn’t happened…tapering is off the table for the foreseeable future.
Caxton is long across the US yield curve (the debt debacle has been a good buying opportunity, if nothing else). Mr Law has spoken extensively with us about his view on the global economy and the state of the hedge fund industry. Tree-based publishing issues mean those thoughts came in truncated form. Below are some extended excerpts from him. Read more
The FT’s Tracy Alloway and Michael Mackenzie report on Thursday that banks are making contingency plans to deal with the potential impact on the $5tn “repo market” of the US government missing a payment on its debt.
Which basically means determining when we should start treating a US Treasury Bill as a potentially defaulted security. Currently, you could say, the T-bill’s status exists in a quantum state. It could be the best collateral in the world, but then again it might not be. Which one it is depends entirely on an externality, and to some degree how we choose to observe it.
This is probably welcome news given that the role played by distressed collateral and repo markets back in 2008 is still poorly understood. Read more
Every Federal reserve bank shall have power…
…To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.
– Section 14.2(b)2, Federal Reserve Act
Now, reading that carefully…
Does that mean the Fed can’t buy defaulted US government debt? Read more
Ah, how we love the smell of US debt-ceiling drama in the morning.
In a note out on Monday, analysts at Bank of America Merrill Lynch give the chances of a US government shutdown this coming quarter a 30 per cent probability. They add that if it was to occur, it would probably be short-lived with minimal economic repercussions. Also, it’s not like a shutdown hasn’t happened before: it happened once in 1990, as well as once in 1995/1996. It wasn’t the end of the world then, and thus shouldn’t be the end of the world this time either. Read more
Click to enlarge the updated dove-hawk breakdown from Credit Suisse. Read more
You’ve seen those who were (ahem) surprised by the US central bank’s decision not to start tapering this month… now read the words of one who got it right: BNP Paribas’ Julia Coronado, the bank’s chief North America economist and ex-forecaster at the Fed.
And interestingly, BNP think even December is in doubt: Read more
Our glass house location duly noted. But still, one immediate casualty of Fed non-action has been investment banking prose.
From M&G’s Bond Vigilantes… Read more
Barclays asks clients what they think every few months and the latest batch of answers from 799
dart throwing interns global investors show that they are ready, set and already yawning over the prospects for tapering by the Fed this week.
In the UK, however, who knows? Consensus came there none. Read more
A letter lands from the 12 Presidents of the Federal Reserve, led by consistent money market fund critic Eric Rosengren. Reform has been a marathon and they are going to run along behind the SEC waving a big stick until it is finished: Read more
Miles Kimball, economics professor at the University of Michigan who blogs at Confessions of a Supply-Side Liberal, is fast becoming the poster child for the movement to introduce an e-money solution to overcome the ZLB problem.
He’s not the first to have raised or promoted the idea, but he’s doing a very fine job at spreading the word on account of his objective reasoning. Read more
Which part of future Fed tightening “is now completely up in the air”?
The answer (according to Societe Generale) is in the useful table below… click to enlarge: Read more
The Fed is his to lose, so here’s a useful service by Barclays rates analysts — quotes from Larry Summers on monetary policy, all the way from December 1986 to August 2013, all in one place. Click to enlarge.
This is is a guest post from Philip Pilkington, a writer and research assistant at Kingston University.
Over the past few years some quarters of the financial commentariat have taken to describing the Federal Reserve’s asset purchases as the monetisation of US national debt, something which has given rise to all sorts of misguided fears about inflation and much else.
While the Fed certainly have been purchasing extensive amounts of government debt in the secondary markets it is perhaps misleading to assume that these markets would not otherwise be buoyant without such intervention. Read more
The great chart above comes via Mark Perry of AEI. Read more
Here’s a list from the Federal Reserve of good and bad practices by bank holding companies tasked with planning how to stay capitalised under its stress tests and big forward-looking capital reviews. (Ergo: “…designing an internal capital planning process that simply seeks to mirror the Federal Reserve’s stress testing is a weak practice“.)
It doesn’t name names. More’s the pity. Read more
FT Alphaville presents a guest post by Stephanie Kelton, chair of the Department of Economics at the University of Missouri, Kansas City. She is also editor-in-chief of New Economic Perspectives. She tweets under @deficitowl.
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There is a time for everything, and a season for every activity under the heavens:
a time to be born and a time to die,
a time to plant and a time to uproot…
a time for the Fed to take unrealised gains and a time for the Fed to absorb unrealised losses,
a time for the state to support the economy and a time for it to stay away.
We make this point because of the following chart knocked up by Scott Minerd, Global Chief Investment Officer at Guggenheim Partners: Read more
Not that we needed more convincing, but…
With the exception of certain commentators who get paid ostensibly to act like inveterate morons, nobody has doubted Janet Yellen’s record of analytical prescience in the past decade. Read more