A chart from hussman showing the 'shadow' inventory of labor http://www.hussmanfunds.com/wmc/wmc100222d.gif
As I understand the Fed's bloated balance sheet presents a problem only to the extend that a banking lending boom happens leading to a rapid growth in M2, as opposed to the informal target of 5% M2 growth(3% GDP growth plus 2% in inflation) This is not happening currently, and it looks like it will take quite a while to get there as bank lending standards are currently stagnated at their lows and bank outstanding credit is collapsing(originations are not keeping up with debt paydowns). So the current level of Fed Senior Survey supply and demand is consistent with bank credit collapsing, its important to keep this in mind because it will take quite a bit of easing of standards just to keep bank credit flat M2 is up 2% yoy(0.6% from 6mo, -0.9% 3mo)so there is still a buffer left in order to reach the 5%. Meanwhile actual inflation is low and dropping(only headline CPI is high, core CPI, PCE, median CPI, 16% TRIM CPI are all low and going down/flatish) So the only scenario where the fed exits is when inflation expectations explode with actual inflation going down in the middle of a credit crunch with a fed that is quite willing to talk hawkish when people get worried, anything other than that Fed stays pat for a long time. How can guys like Greenlaw not see its pretty darn unlikely that will happen?
"If we were to follow our standard approach of selling securities to raise interest rates, we would have to sell off many hundreds of billions of dollars of securities to reduce the supply of reserves enough to have any chance of pushing rates higher." - Fed's Yellen This is a good point by yellen, its quite possible that excess reverses would have to drop by a massive amount in order to get the equilibrium fed funds rate to rise above 25bps. This is important because if the exit choice is reverse repos, Fed CD's or UST SFP this will impact the settlement fed futures contracts and eurodollars differently than if they increase IOR
Michael Petis does a great job of dispelling many myths about China. Two of the biggest are (1) that China's reserves represent some huge bank account which they can use for any purpose they choose, and (2) that China can somehow dictate American policy through threats to dump their US gov't bond holdings. Here's his latest ... http://mpettis.com/2010/02/what-the-pboc-cannot-do-with-its-reserves/
The purpose of the UST SFP was always monetary policy related, given that Bernanke and Geithner are good friends, its likely Bernanke 'approved' a $200b withdraw of monetary base from the system in order calm down exit fears http://www.ustreas.gov/press/releases/tg560.htm This is hawkish move, quite hawkish
It appears that the fed wants to sterelize the rest of its MBS purchases and is using the UST, saying 'we decided to stop asset purchases' would be a bomb in the markets. Then the UST plays ball and claims the program is coming back because the debt ceilling was raised, right, but the program was set up in the first place for monetary policy purposes and the fed always had a degree of control over it. Does the UST really believe that participants will accept that they decided to throw more issuance and more auctions at the market simply because the debt ceilling was raised, that doesnt make sense. The purpose of the program was not to keep the treasury market stressed nor to decrease the US borrowing power by getting closer to the ceilling but to help the fed to manage its balance sheet(monetary policy) The $200b figure was likely chosen so that the 'non-monetary' related lie can told more congruently
Hatzius questions for Bernanke http://www.zerohedge.com/article/six-questions-ben-bernanke "That said, Chairman Bernanke would undoubtedly stress, as he and others did with respect to last weekâs discount rate increase, that ramping up the SFP to $200bn from $5bn currently is not a precursor to near-term reserve operations of significant size" Yes, but the UST just did a massive reverse repo likely on instructions from the Fed that is not good for dovish traders. I'm going to listen for the testimony fully trying to find out why Bernanke is withdrawing stimulus like that
are you saying the fed is now financing its mbs purchases by selling treasuries, whereas before it simply "created" the money for its purchases?
Yes, since the SFP was created to help the Fed I seriously doubt Bernanke was not involved in this decision