GS says: Fed likely to buy $1Trillion in US Treasuries soon; inflationary?

[devil21]

They might just be jawboning but when GS speaks, people should listen. This may be what's ramping up PMs lately. Is Ben warming up his helicopter?

http://blogs.wsj.com/economics/2010/09/14/goldman-fed-may-announce-new-asset-buys-in-november/

The U.S. Federal Reserve could announce a new program of asset purchases to support a weak economy as early as November, according to Goldman Sachs Group Inc.

“We don’t expect this at the Sept. 21 meeting, but in November or December there’s certainly a possibility that it will be announced,” Jan Hatzius, chief economist at the bank, said Tuesday. He added the Fed is likely to buy U.S. Treasurys worth around $1.0 trillion to kick-start the economy.

To fight the financial crisis in 2008 and 2009, the Fed bought $1.7 trillion in mainly mortgage-backed securities, a move that helped to keep mortgage and other long-term borrowing rates low. That program ended in March. But with the recovery slowing, the Fed said Aug. 10 that it would reinvest the proceeds of mortgage bonds into U.S. Treasurys to prevent its portfolio of securities from shrinking. The question now is whether the central bank will start a new program of asset purchases that would increase the size of its $2.0 trillion balance sheet further.

Goldman Sachs expects this to happen soon given the weakness in the U.S. economy as a result of lower business inventory accumulation and a fading fiscal stimulus. The bank expects the U.S. unemployment rate to creep back up to 10% by early 2011 from 9.6% in August and to stay around that level for most of the year.

U.S. inflation is predicted to continue slowing to 0.5% by the end of next year from around 1.0% currently. That would be well below the Fed’s informal target of between 1.5% and 2.0%.

The upcoming meetings of the Fed’s policy-setting committee this year are Sept. 21, Nov. 2-3 and Dec. 14.

 

[psi2941]

If this story is true! Then buy buy buy pm now

 

[hugolp]

JPMorgan started sending rumors yesterday about the Fed starting QE2 in the next meeting (20 something). But yesterday night said it was false.

Now GS is saying that the Fed is going to monetize and blablabla.

It seems to me that they are trying to encourage people to invest their money.

The Fed will do all this things, but I dont think it will do them now. I am not in Bernanke's (or whoever really makes the decissions) head so take this as just my opinion.

Gold, silver, food, commodities, energy are all red hot. If the Fed really starts QE2 or/and monetizes gov debt they will go through the roof and even might start a run on the dollar. Also, there are the November elections and the Fed likes to make big moves outside of election periods to avoid taking heat. I think its more probable that the Fed will let sometime go by and let the deflationary correction take hold again, and then start the money printing again, after november elections, probably in 2011.

 

[Disconsolate]

Fml.

College, part-time worker. I have barely any means of shielding myself from inflation.

 

[Johnnybags]

Todays 3.8 billion installment

http://www.newyorkfed.org/markets/pomo/display/index.cfm

The FED is printing faster and faster and ore and more. Trainwreck. They will never cut gubmint, just steal your bank account.

 

[Zippyjuan]

Actually they are keeping the money supply pretty constant right now. Have you read the link you posted?

On August 10, 2010, the FOMC directed the Open Market Trading Desk at the Federal Reserve Bank of New York to keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.


There are no operations at this time.

They have all these mortgage backed securities they bought during the financial crisis and some are starting to mature. When they get the money from them, they are using that to buy treasuries. They are selling (redeeming) and buying the same amount which has zero impact on the money in circulation. They are not "printing" more and more money right now.

As for the original post, the Fed currently has about $700 billion in treasuries so if they purchased over a trillion worth that would more than double what they have now. Based on their comments at the last meeting, this seems hardly likely.

 

[devil21]

^^^^^
Oh lord, here we go with another worshipper of official propaganda.

You don't think the paper the Fed took on it's balance sheet was the worthless junk that everyone else wanted to get rid of? "When they get the money"....if....maybe....

Besides, unless the Fed is taking in $1Trillion (lol) in payments on that crap debt then there's a mathematical disconnect in there.

 

[hugolp]

Actually they are keeping the money supply pretty constant right now. Have you read the link you posted?



They have all these mortgage backed securities they bought during the financial crisis and some are starting to mature. When they get the money from them, they are using that to buy treasuries. They are selling (redeeming) and buying the same amount which has zero impact on the money in circulation. They are not "printing" more and more money right now.

As for the original post, the Fed currently has about $700 billion in treasuries so if they purchased over a trillion worth that would more than double what they have now. Based on their comments at the last meeting, this seems hardly likely.

Yes, this is true, BUT this are the MBS they bought with newly printed money back in 2008-2009, that they promise they were to remove from the market and the banks balance sheet.

In fact, you personally spend a lot of posts in this same forum saying that there was no inflationary danger because the Fed would remove that money by selling and maturing the MBS. Exactly the official Bernanke discurse back then.

But now the Fed is doing the opposite. Its NOT removing the money, as you and the Fed claimed a year or two ago. Instead, it is using the money from the matturing MBS to buy treasuries (financing politicians), actually putting it into circulation in the market.

So, are you willing to accept you were wrong back then and the people saying that buying MBS would lead to inflationary problems were right?

 

[Zippyjuan]

What I have actually said in the past is that the money the Fed did put out there was not making its way into the economy being spent and as such was not having any impact on inflation. Money only causes inflation when it is being spent. I have also said that both the action and timing of any unwinding of the money out there would be difficult. I have said that I don't see much likelyhood of hyperinflation but I have not said that we will not face inflation some point down the road- we certainly will. I just think that it is a few years away yet. It will take time for the economy to change from its present state.

The Fed is holding a neutral position (as they have since at least March when they halted buying more mortgage backed securities) of neither increasing nor increasing the money they put into the system.

But now the Fed is doing the opposite.

The opposite of removing money from the system would be adding money to it. They are not doing that. They are not reducing it either. Here is a link to a graph of their balance sheet since September 2009. It is remarkably flat. If they were doing the opposite of removing money from the system, it would be going up.
http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

September 9, 2009 their assets totaled $2.09 trillion according to the interactive chart. September 8th 2010 it was $2.30 trillion (back in March when they stopped buying MBS, it was $2.31 trillion). If, as the original post suggests, the Fed were to buy an additional $1 trillion in treasuries, that would be a nearly 50% increase in their balance sheet.

Instead, it is using the money from the matturing MBS to buy treasuries (financing politicians), actually putting it into circulation in the market.

Perhaps you don't understand what they are doing. When the MBS matures, the Fed gets money for it. That takes money out of the market in exchange for the MBS. This reduces the money out there. Then they take the same money and buy treasuries from brokers of the same amount. That adds money yes but it is the same amount they took out- it is a neutral action as far as the money supply is concerned. If the Fed just kept the money from their maturing securities, the money supply would decrease. When the Fed buys, that puts money into the system. When they sell things, they take money back out. In this case, they are both buying and selling. The value of the assets in their portofolio doesn't change and the money supply does not change. Brian has explained this in a couple of other threads.

 

[hugolp]

I remember reading you saying that the Fed would remove the excess liquidity if it needed to. I am not going to go through your archives because I have better things to do.

The opposite of removing money from the system would be adding money to it.

The opposite from removing the money from the system is not removing it, which is exactly what they are doing.

They are not doing that. They are not reducing it either. Here is a link to a graph of their balance sheet since September 2009. It is remarkably flat. If they were doing the opposite of removing money from the system, it would be going up.
http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

September 9, 2009 their assets totaled $2.09 trillion according to the interactive chart. September 8th 2010 it was $2.30 trillion (back in March when they stopped buying MBS, it was $2.31 trillion). If, as the original post suggests, the Fed were to buy an additional $1 trillion in treasuries, that would be a nearly 50% increase in their balance sheet.



Perhaps you don't understand what they are doing. When the MBS matures, the Fed gets money for it. That takes money out of the market in exchange for the MBS.

I understand exactly what they are doing.

They increased the monetary base, but the majority of the money did not go into circulation because it was stuck at the banks. Now, instead of removing this money, they are giving it to the Treasury, who spends it "right away" and puts it into circulation. So, instead of removing the previous monetary injections like they said they would do, they are actually putting it into the market directly.

Yes, the money in circulation is not increasing, but the Fed is exchanging MBS for Treasuries, which basically voids the possibility of selling the MBS and removing the money from the system.

This reduces the money out there. Then they take the same money and buy treasuries from brokers of the same amount. That adds money yes but it is the same amount they took out- it is a neutral action as far as the money supply is concerned. If the Fed just kept the money from their maturing securities, the money supply would decrease. When the Fed buys, that puts money into the system. When they sell things, they take money back out. In this case, they are both buying and selling. The value of the assets in their portofolio doesn't change and the money supply does not change. Brian has explained this in a couple of other threads.

The point is that you can not ignore the massive monetary injection that happened during 2008-2009 and the fact that they were suppose to remove it.

 

[Zippyjuan]

They increased the monetary base, but the majority of the money did not go into circulation because it was stuck at the banks. Now, instead of removing this money, they are giving it to the Treasury, who spends it "right away" and puts it into circulation. So, instead of removing the previous monetary injections like they said they would do, they are actually putting it into the market directly.

They are not giving any money to the Treasury. The treasury already has the money from selling the treasury notes. The Fed is buying them from others who already have them. If I buy a used car am I giving money to Chrysler? The rest I do agree with.

The opposite from removing the money from the system is not removing it, which is exactly what they are doing.

An interesting definition of "opposite". Not what I consider it to be. To me, the opposite of reducing would be adding. One goes up, the other is going down. Staying the same is neither. Just semantics I guess.

Yes, the money in circulation is not increasing, but the Fed is exchanging MBS for Treasuries, which basically voids the possibility of selling the MBS and removing the money from the system.

It is certainly true that once they sell their MBS they cannot sell them again. They would have to try to sell their some of their treasuries instead. Those would seem to be more liquid anyways (unless the market for them dries up too like it did for MBS a couple years ago) so they will still have assets of the same value they can sell to try to reduce the base.

The point is that you can not ignore the massive monetary injection that happened during 2008-2009 and the fact that they were suppose to remove it.

When was it they were supposed to have done it? Your statement seems to say that it should have already happened. I don't believe that the Fed has said when they might try to sell their holdings to withdraw liquidity from the economy so it is difficult at this time to say that they are not removing it "as they were supposed to". I am certainly not trying to say that they will be successful in either the timing or the execution when they do decide to pull it back. But that does not mean they will not try to do so nor that they have failed to do so because it has not happened yet.

Thank you for sharing your thoughts on the topic.

 

[hugolp]

They are not giving any money to the Treasury. The treasury already has the money from selling the treasury notes. The Fed is buying them from others who already have them. If I buy a used car am I giving money to Chrysler? The rest I do agree with.

Supply and demand. If the Fed is buying treasuries in the market, is creating an artificial demand for treasuries, which helps to keep the rates down, allowing the government to issue more debt. This is specially true, because the primary dealers dont want to loose their status and to keep the license they keep buying government debt. This allows for all kind of shenerigans (check this about PIMCO and how it keeps frontrunning every Fed action as if it knew them beforehand). Its not direct, but an indirect way of financing the government. Nevertheless they are doing it.

An interesting definition of "opposite". Not what I consider it to be. To me, the opposite of reducing would be adding. One goes up, the other is going down. Staying the same is neither. Just semantics I guess.


It is certainly true that once they sell their MBS they cannot sell them again. They would have to try to sell their some of their treasuries instead. Those would seem to be more liquid anyways (unless the market for them dries up too like it did for MBS a couple years ago) so they will still have assets of the same value they can sell to try to reduce the base.

They are putting all the eggs in one basket. Not that it matters really. The Fed has never any intention to sell MBS or Treasuries in a meaningful way. The Fed will keep buying treasuries as a way to finance the government.

When was it they were supposed to have done it? Your statement seems to say that it should have already happened. I don't believe that the Fed has said when they might try to sell their holdings to withdraw liquidity from the economy so it is difficult at this time to say that they are not removing it "as they were supposed to". I am certainly not trying to say that they will be successful in either the timing or the execution when they do decide to pull it back. But that does not mean they will not try to do so nor that they have failed to do so because it has not happened yet.

Thank you for sharing your thoughts on the topic.

Ben Bernanke did say after the 2008-2009 monetary injection that he would remove the funds from the economy if needed. It was obvious back then as it is now that he is not going to do it.

When prices start to rise seriously after QE2 (which will probably happen at the beginning of 2011) the Fed will raise interest rates (late and not enough) while it will keep monetizing government debt. This will lead to higher interest rates for the private sector, and lower for the government. It will mean negative interest rates.

This is actually what is happening in India right now. CPI is arround 13%, WPI is over 9%, and the 10 year note is over 7%.

This way they wipe out the debt (and the paper savers) in 3 or 4 years, while they keep the banking system and the government in place. Also, they starve the private sector and keep the economy depressed for those years, but that is not a concern for them.

 

[gonegolfin]

Perhaps you don't understand what they are doing. When the MBS matures, the Fed gets money for it. That takes money out of the market in exchange for the MBS. This reduces the money out there. Then they take the same money and buy treasuries from brokers of the same amount. That adds money yes but it is the same amount they took out- it is a neutral action as far as the money supply is concerned. If the Fed just kept the money from their maturing securities, the money supply would decrease. When the Fed buys, that puts money into the system. When they sell things, they take money back out. In this case, they are both buying and selling. The value of the assets in their portofolio doesn't change and the money supply does not change. Brian has explained this in a couple of other threads.

Allow me to clarify/correct some of the above.

Because the MBSs presumably came mostly from the banking system (securities purchased by the banks for their portfolio with reserve assets), money supply was not affected when they were purchased (from the banking system) by the Fed. Only bank reserves were affected in this case.

Edit: However, when the security matures or is sold by the Fed, both money supply and reserves decrease in the sale amount of the security (or the principal repaid in the case of maturation).

That said, the actions being conducted by the Fed are certainly balance sheet neutral (and reserve neutral). But you cannot say that they are necessarily money supply neutral. When treasuries are purchased by the Fed with the maturing proceeds from the MBSs, these purchases are being made through primary dealers. Primary dealers are not depository institutions themselves. They hold deposit accounts at a banking institution(s). Thus, when they sell treasuries to the Fed, both bank reserves and money supply increase when the primary dealer bank accounts are credited.

Additionally, I should point out that while the value stated in the Fed balance sheet does not change with these actions, the Fed is reducing risk with each MBS that matures. And with the purchase of treasuries, it is keeping the balance sheet neutral while reducing risk. That said, we do not yet know how many losses the Fed has taken thus far in its MBS holdings as it counts them at par value. But it is considerably less than what will happen if long term interest rates move north in any significant amount.

All of this is more proof that the Fed is treading water and an exit strategy is not being implemented (as I wrote would happen).

Brian

 

[gonegolfin]

They increased the monetary base, but the majority of the money did not go into circulation because it was stuck at the banks.

As I have written in several other threads ... only for assets purchased by the Fed from the banking system. Other purchases, such as treasury purchases from primary dealers, increase both bank reserves and money supply.

Now, instead of removing this money, they are giving it to the Treasury, who spends it "right away" and puts it into circulation.

They are technically not giving these funds to the Treasury, whom then spends it into circulation. They are purchasing from the open market (in this case, the primary dealers). Once they do this, money supply is increased.

Yes, the money in circulation is not increasing,

Yes it is. But the total aggregate value of these transactions is still relatively small and may not be noticed in the money supply figures.

but the Fed is exchanging MBS for Treasuries, which basically voids the possibility of selling the MBS and removing the money from the system.

The Fed no longer needs to sell the MBSs that have matured as they have already been sold (maturation == sold == expired). With the additional step of the follow-on treasury purchases, these reserves (liability side) are now simply held in the form of treasuries (asset side). Among many other strategies, the Fed can remove these reserves from the system simply by selling treasuries (which they did in 2007 -> 2008 to sterilize the lending and credit facilities).

The point is that you can not ignore the massive monetary injection that happened during 2008-2009 and the fact that they were suppose to remove it.

Certainly not. These operations are balance sheet neutral. The balance sheet is near the all-time high and would be at an all-time high if the Fed were not draining reserves by depositing Treasury auction proceeds in the Fed Treasury account on behalf of the Treasury. What has changed is the composition of the balance sheet (for the better). But as I said in the other post, we do not yet know what losses the Fed has taken on its MBS holdings.

Brian

 

[gonegolfin]

When prices start to rise seriously after QE2 (which will probably happen at the beginning of 2011) the Fed will raise interest rates (late and not enough) while it will keep monetizing government debt.

A clarification ... it is impossible to raise the trading federal funds rate while monetizing government debt (in this environment where the banking system has reserves out the wazoo). This is a contradiction. The only thing the Fed can do is raise the interest rate paid on reserves ... which is the outright takeover of short term interest rates by the Fed (as opposed to the traditional Fed manipulation of interest rates by providing reserves to and draining reserves from the federal funds market).

The discount rate is inconsequential.

Brian

 

[Zippyjuan]

Thank you as always for your insight!

 

[hugolp]

Allow me to clarify/correct some of the above.

Because the MBSs presumably came mostly from the banking system (securities purchased by the banks for their portfolio with reserve assets), money supply was not affected when they were purchased (from the banking system) by the Fed. Only bank reserves were affected in this case.

Thus, for MBSs purchased from the banks, non-action by the Fed upon maturation would simply result in reserves being extinguished ... not money counted as part of the money supply.

That said, the actions being conducted by the Fed are certainly balance sheet neutral (and reserve neutral). But you cannot say that they are necessarily money supply neutral. When treasuries are purchased by the Fed with the maturing proceeds from the MBSs, these purchases are being made through primary dealers. Primary dealers are not depository institutions themselves. They hold deposit accounts at a banking institution(s). Thus, when they sell treasuries to the Fed, both bank reserves and money supply increase when the primary dealer bank accounts are credited.

Yes it is. But the total aggregate value of these transactions is still relatively small and may not be noticed in the money supply figures.

This is something I dont completely understand yet. I though the money from the maturing MBS did not come from the banking system, but from citizens, and therefore the money goes in and out with no increase in the money supply. But if it comes from the bank then its just draining excess reserves and then increasing the money supply. Guess I have to study more how MBS work.

 

[gonegolfin]

This is something I dont completely understand yet. I though the money from the maturing MBS did not come from the banking system, but from citizens, and therefore the money goes in and out with no increase in the money supply.

I made an edit to my original post that you will see in Step 3 below. I uncovered this as I went through all of the permutations. It helps to lay out the permutations in writing ...

Step 1:
a)
In the case of bank owned MBSs, these investments were made with excess reserves. When these investments are made by the bank(s), money supply increases in a corresponding amount (direct bank loans and bank investments have the same effect on money supply). Aggregate bank reserves remain constant.

Note: For our purposes, you can ignore the origination of the individual mortgages that are packaged in a given MBS. The money supply is technically increased when these loans are made. But when another bank comes along and purchases the MBS, the new money created to purchase this MBS (from the purchasing bank's reserves) offsets the money destroyed when the original lending bank packaging/selling the MBS receives payment from the bank purchasing the MBS.

b)
In the case of private non-bank owned MBSs, when these MBSs were originally purchased by the non-bank, they were purchased with money from the existing money supply. Thus, both reserves and money supply remain constant.

Note: A similar note to the one in a) above applies here.

Step 2:
a)
When the Fed purchases MBSs from the banks (member depository institutions), it simply credits the bank with bank reserves in the amount of the purchase. Money supply remains constant while bank reserves increase by the purchase amount.

b)
However, if the Fed purchases MBSs from a private non-bank party (non-depository institution), bank reserves and money supply would increase.

Step 3:
If/when the Fed sells MBSs or allows them to mature, both bank reserves and money supply decrease. That is, if the MBSs were sold to the Fed by a depository institution (bank), then Step 1a is unwound. If the MBSs were sold to the Fed by a non-bank, Step 2b is unwound.

Guess I have to study more how MBS work.

It is not the MBS that is important. You can substitute other securities. What is important is the various permutations that can occur between the Fed/Primary Dealers/Banking institutions/Private parties in the purchases and sales of these securities.

I hope this helps.

Brian