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.
____________________________________________________ Read more
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
The ECB, BOE and Fed all meet this week, though expectations vary about what will emerge from each:
– The Fed: The FOMC seems unlikely to announce anything major regarding its possible tapering strategy until September, though as always its post-meeting statement will be scrutinised for changes regarding the committee’s outlook for the economy. Some private sector strategists think the Fed could introduce a tapering schedule as soon as this week’s meeting without actually beginning to taper. But given the obviously unanticipated and unwelcome market reaction to Bernanke’s comments about tapering in the latest meeting, we doubt it. If anything, the minutes to this meeting will probably be more interesting than the statement itself. Then again, the FOMC has surprised us before, so we could turn out to be wrong. Read more
Larry Summers has his haters, and Tuesday’s report from Ezra Klein that Summers is now the frontrunner to replace Ben Bernanke as the next Fed chair has doubtless set them off.
On this particular issue, I’m not really one of them. Some of the mistakes of his past, such as his role in deregulating derivatives (the Brooksley Born episode) or the Harvard interest rate blowup, don’t really tell us much about his capacity to guide macroeconomic stabilisation policy. Read more
The New York Times ran a big piece on the ongoing commodity shuffle this weekend. The one FT Alphaville (and others) have been writing about for a long while now, and which applies to both metals and energy markets.
The story followed a Reuters article reporting that the Fed was now “reviewing” a landmark 2003 decision that first allowed regulated banks to trade in physical commodity markets. It was this, we always noted, that allowed for the emergence of a so-called physical loophole for a number of top Wall Street institutions active in commodity markets. The fact that they were swap dealers with physical exposures ensured they were eligible for exemptions (on such things as position limits) whilst other financial institutions were not. Read more
An interesting point to ponder this weekend courtesy of Barclays’ Joseph Abate:
What is fed funds now measuring? Alternatively, there is a deeper question – does the fed funds rate accurately measure unsecured bank funding costs? After repeat rounds of asset purchases, bank reserves now exceed $2trn and all banks are massively long liquidity. No institution needs to borrow reserves in the market in order to satisfy its reserve requirements. So the only trades going through are originated from a handful of forced sellers who prefer to sell cash into the reserve market rather than leave it un-invested at the Federal Reserve for no return. And the volume of this activity is probably light as proportionally more of this cash is leaking into the repo market. Indeed, although there is no public information on the volume of daily fed funds transactions, based on several recent papers, we estimate that activity has shrunk from about $250bn/d before the financial crisis to probably less than $50bn/d currently. Read more
Tim Duy, professor of practice at the department of economics at the University of Oregon, is confusing Brad DeLong, professor of economics at Berkeley, with his observation that the Fed seems to be striving to change the mix but not the level of outright accommodation. This, at least, seems to be the motivation for taper talk.
We’re less confused, and quite like what Duy is saying.
Note the following (our emphasis): Read more
Click for the C-Span feed for Ben Bernanke’s last appearance before the House Financial Services Committee, live at pixel time. They’re trying to fix the audio feed. But sadly not the House Rep preening.