Monday, January 14, 2013

The Fed

At their last meeting during December 11-12, the members of the Fed’s FOMC decided to add a new policy goal. They declared that their ultra-easy monetary policy would remain in force until the unemployment rate falls to 6.5%, as long as inflation doesn’t rise above 2.5%. According to the minutes of the meeting, instead of “calendar-date forward guidance,” the Fed now will focus on “quantitative thresholds,” which “could help the public more readily understand how the likely timing of an eventual increase in the federal funds rate would shift in response to unanticipated changes in economic conditions and the outlook.” 

The FOMC also announced on December 12 that the Fed will buy $45 billion a month in long-term US Treasuries starting January, with no limit on the total amount and no termination date. That adds up to $540 billion a year, though Fed Chairman Ben Bernanke said the latest version of QE would be “flexible.” Of course, that’s in addition to the $40 billion on mortgage-backed securities per month that the Fed committed to start buying back at the September 12-13 meeting of the FOMC under QE3. The latest program, let’s call it "QE4," replaces Operation Twist, which expired at the end of last year. Under that program, the Fed swapped about $45 billion in short-term Treasuries for long-term Treasuries.

From September 12 through January 9, the Fed’s assets are up $105 billion, with holdings of mortgage-back securities and Agency debt up $72 billion and holdings of US Treasuries up $19 billion. A few Fed officials are having some second thoughts about sinking deeper into the QE mud pit. For example, Esther George, the President of the Kansas City FRB, warned in a 1/10 speech that “These purchases also have their own set of risks and are not without cost. At their current level and pace of growth, I believe they almost certainly increase the risk of complicating the FOMC’s exit strategy.” She is a voting member of the FOMC this year.

Today's Morning Briefing: Whatever It Takes. (1) Central bankers are less conservative, more progressive. (2) Giving the people more money. (3) Let’s have some austerity, but later. (4) The Fed’s “quantitative threshold” for jobless rate is 6.5% until further notice. (5) Draghi’s amazing verbal intervention is working amazingly well. (6) BOJ is giving Abe what he wants. (7) A more populist bull market. (8) Risk On/Off is the wrong model. (9) Health Care leading the way. (10) Asset Managers are also leading. (11) Transports are bullish on global economy. (12) “Zero Dark Thirty” (+ + +). (More for subscribers.)

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