BERNANKE CONFIRMS THAT QE2 IS NOT FOCUSED ON MAIN STREET
The most interesting development in today’s FOMC announcement came from the details released by the NY Fed. Specifically, they noted that they will focus on shorter duration bonds via the new QE program. The ten year yield is surging on this news to 2.62%. The five year is tanking to 1.12%. This is very odd because short rates are already very low. There’s really no need to focus on shorter bonds if the Fed is truly trying to stimulate loan growth. If the Fed is intending to reduce borrowing costs and really generate an economic impact they should be targeting long bonds – the bonds that home loans and most auto loans are based on. If the Fed were trying to target households via this program they would have targeted the 7-10′s and 10-17′s. But their focus is in the 5-6 range.
Of course, one of the unintended consequences of QE is that recent expectations of long dated maturities purchases is driving down the yield curve and negatively influencing net interest margin at banks. Unless I am missing something (which could very well be the case) it appears to me as though Mr. Bernanke is trying to keep the curve steep. In doing so, he is directly communicating to us all that he is not worried about reducing our borrowing costs, but is instead worried about keeping the bank net interest margins intact. QE2 was never intended to boost Main Street. It is entirely focused on helping the banks. Mr. Bernanke continues to believe that he can generate economic recovery if he gets the banks back to full strength.
The Fed’s dual mandate of (1) price stability and (2) full employment needs to be changed to a single mandate of price stability ONLY. In my opinion, that’s the best and most realistic way to reform the Fed. The mandate of full employment can be used to justify just about any kind of manipulation.
What a sad day for America. We’re running a ponzi scheme acknowledged by the Fed and we’re trying to recreate the banking behemoth.
2 minutes until last second ES boom. Get your trades in now. We should be able to flip it in a few hours for at least a 0.2% gain.
and leverage that bitch up.
Wow, we got 10 points in NQ and 3 in ES in less than 5 minutes.
That was a slick move. Hope you actually levered it up.
If you’re going to trade the fed announcement you may as well go to vegas where you get free drinks. Just wait around for the high probability scalps where you can get 10 cents or 20 cents and rack them up interday. I’m only pulling down a couple of hundred bucks a day doing that but it’s all I got until I can take a meaningful short position in this tape.
I’m not sure how exchanging dollars for treasuries/agencies helps the banks much. Wouldn’t a T-bond/agency bond have been reflected as a cash-like equivalent on banks’ balance sheets? Couldn’t the banks have just repo’ed those bonds for cash without the need for the Fed to purchase? Lord knows they won’t lend the extra cash to regular folk – we already know that. What am I missing?
You’re missing the fact that the treasury purchases are a sideshow. The real intention is to move MBS off the bank balance sheets. Bennie wants this program in place later in 2011 when housing double dips so he can buy up all the MBS from the banks.
you are missing the dichotomy between what the fed said and what they are doing. they say they want to lower long term rates to spur demand. this would help consumers (how much is debateable). in order to accomplish this, they would have to buy a decent amount of 10 year and longer term treasuries. if they did that, the yield curve would flatten. banks lose money if the yield curve flattens. what the fed did today was announce that they were going to focus on the short end of the curve. this steepened the curve, which will raise the margins banks can make on loans. their words are saying they want to help consumers, but their actions are saying they want to help out banks.
Nice call on volatility today by the way….
what the fed did today was announce that they were going to focus on the short end of the curve.
According to the table above, about 2/3rd’s of the intended buying will be for the middle of the curve (4-10 year treasuries.)
A lot of spreads for both residential mortgages are set based upon the spreads over the 10 year. Commercial real estate mortgages are often based upon 5- and 10-year spreads.
The Fed doesn’t need to control the 30-year bond in order to influence mortgage rates. Pulling down the 10-year rate should be the primary objective, and doing that would necessarily require reducing the rates of the earlier maturities, such as the 5-year rate.
TPC:
Bernanke does NOT believe he can generate economic recovery by supporting the banks, but rather, he knows he can put money in the pockets of his banker buddies by doing so. You have been spot on in your evaluation of the Fed’s monetary policies. However, you are wrong in the belief these policies are well intentioned though mistaken. Bernanke and his cronies are low life scum with no moral character. As long as the media perpetuates the myth these people are looking after the “public interest” this shit will continue. I just hope Ron Paul hauls Bernanke’s ass before his committee once a week until people understand what is really going on.
Brad Delong points out how futile this will be:
“The five-year note carries an interest rate of 1.17% per year. The Federal Reserve is thus changing the supply of assets by taking onto its own balance sheet… wait for it… wait for it… duration risk that the market is currently willing to pay $7 billion a year to avoid.
To take $7 billion a year of duration risk off of the private sector’s books in a global economy that still has more than $60 trillion of financial assets is a change in “credit conditions” equivalent to what would be achieved in normal times by a coordinated one basis point reduction in short-term interest rates by the world’s central bankers.”
TPC 100% on the money! He is scared to lower long term rates. I guess the banks won’t start lending any time soon!
speechless, don’t get it…is there a confusion between remedy and symptom. Like…when everything’s OK curve is steep and economy is levered so let’s build a steep curve and spread some cash…
ok now fed does not buy MBS so not very helpful for the banks…anyway with this foreclosure gate would’nt have been a good idea (unless fed accept to refuse putting the non compliant MBS back to the bank if such a possibility appears)…then your theory about steepness may make sense. Yet i am not sure since i do not know banks liquidity ratio i.e. how much is funded with xyz maturity debt ?
changing the 35% limit on soma holdings also helping to steepen the curve. the fed will be buying all the net new issuance for 2011 and will run up against this constraint. without the limit change they would have to extend their maturity profile.
TPC: Have you written about why QE is impacting the USD?
- QE doesn’t seem to have any near term impact on inflation.
- It really doesn’t increase the money supply (in the broadest terms) – other than perhaps the slight overpayment that BB commits to when he buys Treasuries.
So, I’m not getting where QE hurts the dollar?
(Clearly, Japan’s QE hasn’t hurt the Yen at all.)
If the Bankster Oligarchy is committing treason.. then why aren’t there hearings and talk of a military junta?
There must be some union of Lions or Patriots in the combined branches of the armed forces . They all know who each other are vs. the ticket puncher bureaucrat types. To unite and create a formal document and send it to the Joint Chiefs would at least serve written notice that this has become a national security matter and that they are watching.I only wish the Joint Chiefs had the sophistication to see how this is going to impact national security. They have an obligation to speak up.
When insolvent banks are a higher priority than the people it can only end one way.
The funny thing about raising inflation expectations, is that it actually produces inflation. Just the mere pavlovian defensive response to potential inflation – WHAM BAM! inflation. (see George Soros on reflexivity)
So Ben is bluffing the market in a sense. Deflation might be just what the doctor ordered, but if everyone collectively thinks that their dollars are going to lose value, they go and buy a bunch of shit. Oil, gold, houses, stocks, Euros, who knows? the dynamics of inflation are an inexact science, I would say.
This is like the scene in Jurassic park where they fuck around and mess with mother nature…..
But for now the animal spirits are running hot, so tread lightly.
TPC, you’ve had a real good run of QE coverage, and I’ve certainly learned and appreciated the effort.
And on another note, when this market gets soft, and it will eventually – all the lemmings will not be so vocal. “Don’t fight the Fed” is not a sound investment strategy, but you CAN trade it.
As always, with Ponzi schemes, gotta get out just BEFORE the rush.
But those of us that already read your site have already gotten this…
Your bat is beginning to hurt (on our skulls)
Dude!
I agree with Angry MBA. QE II is targeting the part of the yield curve that has the largest effect on mortgage rates. Even though most mortgages are 30-year tenures, the average duration of a mortgage is around seven years because of refinancing and people moving.