Fed wants to exit QE but keep long-term rates low - page 2
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no, i did n't write it while waiting for FOMC
Larry Levins take on Tapering this morning
Twas the Morning Before...
'Twas the morning before the Fed Meeting, when all through the house
Not a trader was trading, not using their mouse.
The talking heads were weighing their words with care,
When trying to decide if Santa Ben would dare;
The HFTs were nestled all snug in their beds,
While visions of algos danced in their heads;
And the prop traders in their 'kerchiefs’, and the analysts in their caps,
Had just settled down for a mid-day nap,
When across the tape there arose such a clatter,
We sprang to our computers to see what was the matter.
Away to our desks we flew like a flash,
Logged on to the trading account and added our cash
The screen saver image was of the new-fallen snow
Giving that computer monitor a weird iridescent glow.
When, what to our wondering eyes should appear,
A Fed Governor sent a cryptic message that inspires good cheer
More rapid than eagles his coursers they came,
And he whistled, and shouted, and called them by name;
"Now, Forbes! now, Bloomberg! now, BNN and Fox!
On, Bloggers! on Pundits ! On CNBC Squawk Box!
To the top of the charts! to the top of the wall!
Now dash away! dash away! dash away all!"
So off to the races the HFTs they flew,
On a no-Taper rumor and some other news too.
And then in a twinkling, the markets hit the roof
The bulls went away and hit sell with their hoof.
As we entered our order, it was turning around,
Down the chimney St. Bernanke came with a bound:
He was dressed in a black suit, from his head to his foot,
And his policies were all tarnished with ashes and soot;
A bundle of billions was flung on his back,
And he looked like a peddler just opening his pack:
The spending-- how he tinkered! his fantasies how merry!
His dreams were full of roses, his nose like a cherry!
His droll little mouth was drawn up like a bow,
And the beard of his chin was as white as the snow;
The stump of a pipe he held tight in his teeth,
And the smoke it encircled his head like a wreath;
He had a broad agenda and a little round belly,
That shook, when he laughed like a bowlful of jelly.
He was meticulous and persistent, a right jolly old elf,
And we laughed when we saw him, in spite of ourself;
A wink of his eye and a twist of his head,
Soon gave us to know we had still more to dread;
He spoke not a word, but went straight to his work,
And filled all the coffers; then turned with a jerk,
And laying his finger aside of his nose,
And giving a nod, up the markets they rose;
He sprang to his sleigh, to the governors gave a whistle,
And away they all flew like the down of a thistle.
But I heard him exclaim, ere he drove out of sight,
"Happy Fedmas to all and to all a good night "
The Federal Reserve meeting: Five things to watch for
The Federal Reserve's last chance this year to reduce a key stimulus program comes Wednesday when central bank policymakers wrap up a two-day meeting and Chairman Ben S. Bernanke holds his last scheduled news conference before stepping down next month.
Recent upbeat economic data and a budget deal that promises to avoid another government shutdown in January have analysts speculating that the Fed could announce it will taper its $85 billion in monthly bond purchases.
But most observers put the odds of a Fed pullback Wednesday at about 50-50. That makes the meeting's outcome a bit of a cliffhanger.
Here are five things to watch for as the Federal Open Market Committee releases its policy statement at 11 a.m. PST and then Bernanke holds court with the media one last time, starting at 11:30 a.m., before his term as chairman ends.
1. Is it taper time?
The key question is whether Fed policymakers stick with the pace of bond purchases, begun in September 2012, or decide the economy is strong enough to start reducing them with a goal of ending the program several months later.
The surprisingly strong November jobs report indicates that the economy has been adding an average of 204,000 net new jobs over the past four months. That's the sustained level of job creation Fed officials have said they wanted to see before tapering the purchases, which were designed to push down long-term interest rates.
The unemployment rate also dropped to 7% last month, the level Fed policymakers have said they were aiming for when the stimulus program is to end.
So by that measure, the bond-buying already has done its job in substantially reducing the unemployment rate, which was 8.1% when the program began.
"The Fed has a checklist, and they pretty much fulfilled it," said Diane Swonk, chief economist at Mesirow Financial.
But if Fed officials are checking their list twice, they'll see that inflation has been running below the level they'd like.
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Hilsenrath’s Four Takeaways From December Fed Meeting
FED REDUCES BOND BUYING TO $75 BILLION
The Fed reduced its bond purchases from $85 billion per month to $75 billion per month, something it described as a modest move. Moreover, officials said they would likely reduce the program at future meetings in “measured steps.” The Fed said the move was made “in light of cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions.” More reductions are expected “in measured steps” at future meetings. But it depends on the economy living up to the Fed’s expectations and it is not on a preset course.
INFLATION IS THE CAVEAT
Fed officials have become a little more concerned about the outlook for inflation, which has been running below the Fed’s 2% objective for months. In October, the Fed’s preferred measure of inflation was up just 0.7% from a year earlier. Earlier in the year, the Fed said it expected inflation to start drifting back up toward the 2% goal, a point that was reflected in its policy statement. Today’s statement includes a shift. “The [Fed] recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward it objective over the medium term.” In other words, if inflation keeps undershooting its target, the Fed might have to alter the policy course it set out today. How would officials react to persistently low inflation readings? Stay tuned for Fed Chairman Ben Bernanke’s press conference.
FED STILL SEES SLOW RISE IN SHORT-TERM INTEREST RATES
The vast majority of Fed officials doesn’t expect the central bank to begin raising short-term interest rates until 2015 and three think the Fed won’t get started until 2016. The majority thinks that rate increases in 2015 will be modest and that the benchmark fed funds rate will remain below 1% by the end of that year. The majority also expects the fed funds rate to remain below 2% in 2016. These low rate expectations persist even though the Fed sees the unemployment rate falling below 6.5% next year. That 6.5% rate is the Fed’s threshold for when it will begin talking about rate increases. The forecasts show officials expect to keep rates low for a while even after that discussion begins. That point is reflected in a new line in the policy statement. The Fed expects that it likely to keep the fed funds rate near zero “well past” the time when the jobless rate reaches 6.5%.
FED’S FORECASTS BROADLY CONSISTENT WITH TAPER GUIDANCE
The Fed is largely sticking to the forecast for 2014 that it laid out in September for a modest improvement in growth next year, continued declines in unemployment and a modest pickup in inflation. They see growth in gross domestic product next year between 2.8% and 3.2%, the jobless rate falling to between 6.3% and 6.6% and inflation as measured by the personal consumption expenditure price index between 1.4% and 1.6%. The growth and inflation forecasts are slightly lower than they were in June when Fed chairman Ben Bernanke said that if the economy evolved in a way that was “broadly consistent” with the Fed’s forecasts it would begin reducing its bond buying program before year-end. With today’s action, he and his colleagues appear to think the economy cleared that hurdle.
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The Hidden Motives Behind The Federal Reserve Taper
"The powers of financial capitalism had (a) far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland; a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank... sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world." - Carroll Quigley, member of the Council on Foreign Relations
If one wishes to truly understand the actions behind private Federal Reserve policy, one must come to terms with a fundamental reality – everything the Fed does it does for a reason, and the most apparent reasons are not always the primary reasons. If you think that the Fed simply acts on impulsive stupidity or hubris, then you haven't a clue what is going on. If you think the Fed only does what it does in order to hide the numerous negative aspects of our current economy, then you only know half the story. If you think the Fed does not have a plan, then you are sorely mistaken...
Central Bankers and their political proponents espouse a globalist ideology, meaning, they are internationalists in their orientation and motivations. They do not have loyalties to any particular country. They do not take an oath to any particular constitution. They do not have empathy for any particular culture or social experiment. They have their own subculture, with their own “values”, and their own social hierarchy. They are a kind of “tribe” or “sect”; a cult,if you will, that views itself as superior to all others. This means that when the central bankers that run the Fed act, they only act with the intention to support and promote globalization, not the best interests of America and Americans.
The process of globalization REQUIRES the dissolution of the U.S. economy as it exists today. Period. There is no way around it. America can no longer remain a superpower in the face of what globalists call “harmonization”. The dollar can no longer maintain its petro-currency status or its world reserve status if total centralization under a new global currency is to be achieved. Globalists believe that America must be sacrificed on the altar of “progress”, and diminished into a mere enclave, a feudal colony of a greater global system. The globalists at the Fed are no different.
Once this driving philosophy is understood, the final conclusion is obvious – the Fed exists to destroy the U.S. financial system and the U.S. currency mechanism. That is what they are here for.
This is why the dollar has lost 98% of its value since the Fed was established in 1913. This is why the Fed deliberately engineered the derivatives bubble crisis through the implementation of artificially low interest rates. This is why their response to the crisis was to create yet another massive bubble in stocks and bonds through QE stimulus. This is why the Fed is cutting stimulus today.
How does the taper play into the long running program of dollar destruction and globalization? Let's take a look...
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Man, if only half of this is true, it is horrible
Fed Seen Tapering QE in $10B Steps in Next Seven Meetings
The Federal Reserve will probably reduce its bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, economists said.
The median forecast in a Bloomberg survey of 41 economists matches the $10 billion reduction announced two days ago as the Fed began to unwind the unprecedented stimulus that has defined Ben S. Bernanke’s chairmanship.
The Federal Open Market Committee said in a statement it will slow buying “in further measured steps at future meetings” if the economy improves as forecast. The Fed may taper its buying by about $10 billion per gathering, Bernanke said at a press conference in Washington on Dec. 18.
“If we’re making progress in terms of inflation and continued job gains, then I imagine we’ll continue to do, probably at each meeting, a measured reduction” in purchases, Bernanke said, calling $10 billion in the “general range” for a “modest” reduction. If the economy slows, the Fed may “skip a meeting or two,” and if the economy accelerates it may taper a “bit faster.”
Such predictable increments would extend Bernanke’s push toward greater transparency and openness at the Fed, said Dana Saporta, an economist at Credit Suisse Group AG in New York.
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After the Taper: The Fed’s Non-Plan Is Unchanged
As an economist, it is getting more difficult to understand the logic underlying current monetary policy in the U.S. There are two main channels by which economists think monetary policy can influence growth and employment. The first is to lower interest rates to spur investment and consumption spending. The second is to induce inflation so real wages drop, spurring output and employment.
Since 2008, the central bank has reduced interest rates to almost zero with little to show for it. You can bring a horse to water in a trough, pond, or lake, but you cannot make him drink. Most of the added liquidity has found its way into excess reserves. Banks are not lending because they have few creditworthy customers who want to borrow. The household sector is still deleveraging and has less appetite for more debt, and the business sector is careful about making future investments in a financial and economic environment on unstable footing. Businesses are keenly aware of the malinvestments never cleaned up after the last bubble and of the price distortions of current monetary policy. Why would businesses stick their necks out if they suspect a painful adjustment is around the corner?
Since the first channel has failed, only the second channel remains. Economists are generally in agreement, however, that there is no long-run trade-off between inflation and unemployment. The Keynesians and monetarists believe that there may be a short-run trade-off. If people have adaptive expectations, (based on the recent past) then monetary policy that creates inflation will reduce unemployment by lowering a worker’s real wages. Of course, once a worker realizes he has been fooled, he will demand an increase in nominal wages to bring his real wages back up to previous levels. The gain in employment is only temporary. If, instead, people base their expectations rationally and are not fooled, the neo-classical position, there is no short- or long-run trade-offs between inflation and unemployment.
In a capitalist economy, relative prices play a crucial role in sending information to producers about what society wants. When one price goes up and another goes down, these are signals that tell producers to make more of the first good and less of the second. It is a complex system of signals with price changes reflecting the urgency of the needs within the reality of the law of scarcity. The most important aspect of a price system is the information it conveys to guide production.
Inflation causes an “information extraction” problem. When all prices are going up by different degrees, it is very difficult for an entrepreneur to distinguish between a relative and an absolute price change. Is a rising price a reflection of greater demand or inflationary pressure? That is, does it reflect a society’s changing needs or simply reflects a changed measuring stick (i.e., the value of money)? The same information extraction problem holds true with the prices of resources and labor. We have different labor markets with a wage gradient established along the production process. The printing of money interferes with this wage gradient and the information it conveys about the right proportion of capital and consumption goods to produce. Overall employment may initially improve but the gain is not worth the cost from the adjustment that must occur once the printing stops.
Looking at historical evidence, inflation leads to higher, not lower, unemployment. This should not be surprising. Inflation is like a wrench thrown into the workings of a capitalist system.
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Bernanke Stole Yellen's Thunder, Condemns Fed to Weak Leadership
I had been one of those analysts that did not expect the Fed to announce tapering this month. There were two arguments that we had found compelling. The first was inflation, as measured by the Fed's preferred metric, the core PCE deflator, was low and falling. The second was that the shift toward forward guidance would be more compelling if it was delivered by the person who would actually be there to implement it.
I was wrong. The Fed announced that tapering would begin next month. The immediate market reaction was the best officials could have hoped for. US interest rates were largely steady and the stock market rallied.
A couple days after the tapering was announced, the US reported a sharp upward revision of Q3 GDP to 4.1%, the strongest in several years. Although inventories rose sharply, the 2.5% increase in final sales was notably strong. Household consumption appears to have accelerated in Q4.
Yet, I remain concerned about the longer-term cost of the Fed's action. In particular, it undercuts the ability of Janet Yellen to provide strong Fed leadership at a particularly important moment for the country and for the Federal Reserve itself.
The $10 bln of tapering that was announced starting in Jan, bring the Fed's continued balance sheet expansion to $75 bln a month is not material from a economic or financial point of view. Indeed, arguably, with a reduction of Treasury supply due to stronger tax revenues and spending cuts, the portion of Treasuries the Fed buys (in the secondary market) may actually be a bit larger the previously.
The Fed could have waited six weeks, by which time, Yellen would be the new chair and maybe another governor (or two) would have been nominated by President Obama. The advantage of the Yellen Fed announcing the tapering is that it would have 1) undermined arguments that she is a super-dove, 2) shown her as a independent and strong leader, and 3) would have boosted the credibility of the forward guidance.
Now Yellen will be perceived to be following the course that has been more or less outlined by the Bernanke Fed. Bernanke effectively slashed the Yellen's degrees of freedom that are necessary for strong leadership and without securing much benefit. If the Fed had not tapered, the statement could have lowered the bar to tapering in early 2014.
Yellen's ability to lead may also be undermined if President Obama nominates, as press reports suggest is likely, Stanley Fischer, as vice-chairman of the Board of Governors. Stanley Fischer, until recently the head of the central bank of Israel, is a bit of a rock star among economist. He was the Ph.D thesis adviser for Bernanke and Draghi (and Mankiw). Fischer has also co-authored work economic papers with Dornbusch and Blanchard, among others.
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How Far Is The Fed Going To Let This Run?
"Investors have been bidding up money market yields since the Fed started tapering, and conversations with hedge fund investors suggest that many of them expect the market to challenge the Fed’s forward guidance."
That's Steven Englander, Citi's global head of G10 FX strategy.
He's referring to yields on 3-month eurodollar futures contracts, which continue to rise today, as they have in every trading session since the Federal Open Market Committee announced last Wednesday that the Federal Reserve would begin winding down its quantitative easing program of large-scale asset purchases.
For whatever reason, the FOMC has decided it no longer wants to own a third of the bond market. Instead, it wants to rely on "forward guidance," which consists of individual Committee members' prognostications on the most likely path of short-term interest rates, to continue delivering monetary stimulus to the economy.
The "dot chart" below shows the FOMC's current forward guidance, updated at last Wednesday's meeting. The median Committee member forecasts short rates at 0.75% by the end of 2015 versus current levels around 0.25%.
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The Fed Taper: Dances With Wolves
In case it wasn’t obvious, Fed Chairman Ben Bernanke had to initiate “the taper.”
Why? Not just because Uncle Ben initiated the QE game to get us out of the economic maze Alan the Alchemist (turning low interest rates into financial Armageddon) got us lost in. Not because Ben the Benevolent also wanted to be the one to lead us out of the extended maze he traipsed us through.
The taper had to begin with King Ben’s last last breath because Lady in Waiting Janet Yellen is supposed to be a lamb. And markets would have freaked if any time early in her reign Janyell proved to be a wolf in lamb’s clothing.
It doesn’t matter that the Fed knew the latest GDP numbers had been pumped up into the plus four range where everyone would see and say, “ahhh liftoff speed at last.” It doesn’t matter that the headline unemployment numbers are getting down to where the Fed said their dual mandate (manipulating a steep yield curve for bank profitability and manipulating unemployment data as cover for stuffing banks with even more money) would be reason for them to begin tapering. None of that manipulation mattered.
The taper was coming at Ben’s goodbye party because markets were only a twerp or two away from record highs and enough shorts had gathered and lathered themselves up to shave year-end profits down to make a short squeeze rally a good possibility.
And that’s where the Dances With Wolves thing comes in.
By tapering now and painting future guidance in a purple haze of endless zero interest rate manipulation on the short end, the outgoing Fed administration presented the incoming administration with a gift that will keep on giving.
It just looks like there will be a taper, which some people mistakenly believe will be the end of Fed interference in free markets finally correcting excesses they stuffed us with.
It’s just a dance. There are no wolves ready to rip apart the lambs running the Fed.
The markets got it immediately. The unmistakable emphasis on zero interest rate forward guidance into infinity (a la the decades old Japanese model, which we know worked so well) said to market players, go ahead, leverage up, long live financial assets!
Me, I’m not a good dancer. But I’ll keep moving and grooving to the upbeat tempo of rising equity prices as long as the lambs are keeping the wolves from the door.
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