Fed says it’s running out of bullets
FOMC signals that bond purchases may stop
(MarketWatch) — For the first time since the financial crisis started five years ago, the Federal Reserve has at last made its first signal that its extraordinary loose monetary policy will start to get tougher.
To be sure, the change isn’t gigantic. There’s no sense that interest rates will increase from the near zero levels that have lasted for over four years.
And the Fed only last month initiated a new bond-buying program, to top off a plan to add more mortgage-backed securities that had only been around since September.
But, the minutes show, the central bank is starting to say, enough is enough. Of the crowd that supported bond buys, a few say they should continue until the end of the year, and several said it could stop, or slow, well before then.Read more on the Fed minutes.
FOMC Minutes Released: Dissension To QE4EVA Growing
While some were concerned at the Fed’s new quantitative targets as suggesting early tightening, it appears (from the FOMC Minutes) that those fears were somewhat warranted (with most seeing QE ending in 2013):
- *FED SAYS A FEW ON FOMC WANTED QE UNTIL ABOUT THE END OF 2013
- *FED: SEVERAL ON FOMC BACKED QE HALT OR CUT WELL BEFORE 2013 END
- *ALMOST ALL FOMC MEMBERS SAW POTENTIAL QE COSTS AS INCREASING
The punchline: “several” means more than just QE4 hater Jeff Lacker are turning hawkish. Though, even with the risks, they want moar. Pre-FOMC Minutes: ES 1460, 10Y 1.86%, EUR 1.3108, Gold $1674. Post: ES -6pts, 10Y +5bps, EUR -40 pips, Gold -$10.
The Federal Reserve just released the minutes from its December FOMC meeting, and they strike a surprisingly hawkish tone.
Markets are giving up gains on the news, and the dollar is surging.
Gold is also falling.
Several FOMC members backed a halt or cut to the Fed’s open-ended quantitative easing program well before the end of 2013.
Furthermore, a few on the Committee wanted quantitative easing until about the end of 2013.
Why the next U.S. downgrade will really matter
“This downgrade is likely to have a more significant market impact than the S&P downgrade” in 2011, he said. “In particular, many investors can look towards the most common rating of an issuer, so despite the AA+ rating from S&P most issuers could still count their Treasury and agency MBS [mortgage-backed securities] exposure in their AAA bucket” because it still has that top rating from Moody’s Investors Service and Fitch Ratings.
Last time the U.S. was downgraded, in 2011, analysts noted that bond yields don’t necessarily go to the moon because investors will still want liquidity and depth. Not to mention, a rating around AA isn’t bad at all, and fund managers still need to keep high-rated debt in their portfolios. Read: How safe are safe havens in a U.S. debt crisis?
“If Fitch or Moody’s goes, then the AAA bucket gets much smaller, so anyone targeting an average rating for their portfolio will need to go up-in-credit in the rest of their portfolio to maintain their average rating,” Porcelli said.
Warning: The real 2013 cliff is still in front of us
From Azizonomics: There’s a much bigger cliff than the so-called fiscal cliff. The absolute worst result of the fiscal cliff would be a moderate uniform tax increase at a bad time, resulting in a moderate contraction. It is an obvious — but ultimately rather cosmetic — stumbling block on the so-called “road to recovery.”
The much bigger cliff stems from the fact that the so-called recovery itself is built on nothing but sand. This is a result of underlying systemic fragilities that have never been allowed to break. I have spent the last year and a half writing about this graph — the total debt in the economy as a proportion of the economy’s output…
This is the bubble that won’t go away. This is the zombified mess that the Federal Reserve won’t let dissolve (as happened regularly in the 19th century and early 20th century each time there was an unsustainable debt bubble). This is the shifting sand — preserved by the massive monetary stimulus programs — that the so-called recovery is built upon.
During the 1980s and 1990s and 2000s, cheap money pumped up the debt level in America. In 2008, the bubble burst, and the hyper-connective fragile financial system was set to burn. Then central banks around the world stepped in to “stabilize” (or as Nassim Taleb puts it, overstabilize) the financial system. The unsustainable reality of debt vastly exceeding income was put on life support.
A high pre-existing residual debt level makes growth challenging, as consumers and producers remain focussed on paying down the pre-existing debt load, they are drained by pre-existing debt service costs, and they are wary about taking on debt or investing in a weak and depressed environment. It’s a classic Catch-22… Read full article…
Billionaires Dumping Stocks
“In the latest filing for Buffett’s holding company Berkshire Hathaway, Buffett has been drastically reducing his exposure to stocks that depend on consumer purchasing habits. Berkshire sold roughly 19 million shares of Johnson & Johnson, and reduced his overall stake in “consumer product stocks” by 21%. Berkshire Hathaway also sold its entire stake in California-based computer parts supplier Intel.”
Atlanta To San Diego: 7 Cities’ Pension Problems
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