Stealth Easing ?
Interesting activity on the part of the Fed. I suspect Bernanke & Co. are waiting for the the rest of the world's central bankers to start cutting to catch up with the US Fed.
"The Federal Reserve may have trimmed borrowing costs yesterday without actually saying so.
The central bank used power granted under last week's financial-rescue legislation to effectively set a floor under its main interest rate that's lower than the 2 percent target set by policy makers last month. The Fed may now pay interest on bank reserves while it floods financial markets with liquidity, pushing down the overnight lending rate by about 0.75 percentage point to 1.25 percent.
"Absolutely, it's a stealth easing,'' said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed researcher.
The announcement, and a Fed decision to double the auction of cash to banks to as much as $900 billion, failed to avert a 3.9 percent decline yesterday in the Standard & Poor's 500 Index. The index has tumbled 28 percent this year even as the central bank has expanded credit more than at any time in seven decades, including a 3.25 percentage-point cut in the main rate during the past 13 months."
Yet another arrow from the Fed's quiver has been used. How many more surprises do they have in their bag of tricks . . . ?
>
Source:
Fed Sets Floor Below Rate Target, Engineering `Stealth' Cut
Scott Lanman
Bloomberg, Oct. 7 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a2KRwOfPJk58&
Tuesday, October 07, 2008 | 09:00 AM | Permalink
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Just as you ask the question, they answer - they are entering the junk bond market.
Posted by: E | Oct 7, 2008 9:11:32 AM
The Fed just announced a facility for 3 mo. CP.
I expect that to lessen the pressure on insurance company liquidity as well as routine non-MBS paper as well.
We may have turned the corner and hopefully can avoid the total collapse of CP, all extremely short and intermediate maturities.
It's a good thng.
Posted by: Eclectic | Oct 7, 2008 9:11:50 AM
'Easing' isn't the only Item one would find under their Category: Stealth..
btw, I don't think I received my FY'07 FedRes Annual Report, anybody else receive theirs?
further, does SarBox apply to the FedRes? or did they get another Waiver extension?
Posted by: Mark E Hoffer | Oct 7, 2008 9:15:52 AM
If Alan Greenspan were still in charge, he would have done something stupid, but it would have fixed things for a while. Of course the next problem would have been magnified because of the quick fix approach.
So, tell me this ...
If the maestro were still in charge, what would he do to make things good again?
Posted by: dead hobo | Oct 7, 2008 9:21:20 AM
In a myopic oversight of historic proportions, the very faith in fiat currency is being undermined by cerntral bankers in a misguided attempt to avoid the consequences of Ponzi financing - their solution to the chain letter is for the originator to become the last and biggest fool.
These are dangerous times, indeed.
Posted by: Winston Munn | Oct 7, 2008 9:24:53 AM
The inflation that eventually resolves the problems must be worldwide - that is a given.
That inflation cannot be measured in price increases of commodities or in change in relative values of currencies, as people now commonly want to do. It will be measured against the value of existing debt. That is, it must be true inflation: wages and prices, everywhere.
Posted by: wally | Oct 7, 2008 9:32:26 AM
I said this to you before in the comments, back in January when they cut rates after the SoGen fiasco, don't ever underestimate their "ammo". Now whether the ammo is effective or not, that's another matter. But the bottom line is that they STILL have yet to take out the nuclear bomb of their arsenal -- quantitative easing. Printing money.
With the dollar strengthening, commodity prices collapsing, and deflation the threat, the Fed can simply start up the printing presses. Need to buy a trillion worth of CP? Print out a trillion, buy it, and be done with it.
Not that they should do that. The point is, they could. In other words, the quiver is never empty.
By the way, I did read that the quantitative easing that Japan did for so long is a major reason we're in the fix we're in now. Their abnormally low rates were the financing mechanism for so much of the leverage that is being unwound today.
Posted by: Don | Oct 7, 2008 9:42:41 AM
I hope someone is thinking about the other side of this problem, but I fear not. The debt load and increase in money supply will have lasting effects and if the resultant inflation is limited to assets and commodities, we will face an insurmountable problem. Consumers cannot pay off their debt loads (or get them to a reasonable level), the government deficit can't be brought under control, nor can we fund the massive entitlements without a substantial dose of wage inflation.
Posted by: larster | Oct 7, 2008 9:46:33 AM
Don, you are 100% right. and I've been ranting about Japan for 20 years... talk about stealth printing...
Posted by: karen | Oct 7, 2008 9:51:59 AM
If people want and need cash, and people like me hoard it, then you are looking at deflation, coming soon to an economy near you. The US carry trade is coming. This will be the next Fed innovation. Look for zero interest rates and a liquidity trap as the logical conclusion to this mess. I'm not kidding.
If the Fed doesn't build a fire under this economy very soon, a local version of Japan will be the future for us all. We'll have to build out way out of this crisis. Actual work will be required. Hard assets and useful services. Wall Street Hot Potato will be a thing of the past.
This will take years to turn around if it isn't put under control very very soon. Enjoy!
Posted by: dead hobo | Oct 7, 2008 9:56:16 AM
> The Fed just announced a facility for 3 mo. CP.
Apparently, the Fed is now the lender of only resort.
HCF
Posted by: HCF | Oct 7, 2008 10:04:10 AM
mark hoffer
I thought the Fed govt was automatically exempt from all and any laws it subjects the hoi polloi to, eh?
larster,
caution is to the wind.
how can we know what the ultimate outcome is when the opacity as the amount of risk the feds have taken on is about as great as those darn CDSs. Fed is firing bullets all over the place. I accept doing nothing is not an option, but when the smoke clears from the fed shooting, what then?
I wish I had a dollar for everybody who says, not quite ready to buy yet, but getting close. So many investment types, that is just the standard mantra, no matter. what else can they tell their clients?
Posted by: cloudy | Oct 7, 2008 10:04:19 AM
"We'll have to build out way out of this crisis. Actual work will be required. Hard assets and useful services. Wall Street Hot Potato will be a thing of the past."
HOLY CRAP . . . what an idea . . . actually produce something what a novel idea!
Posted by: Shane | Oct 7, 2008 10:04:40 AM
It'll already take years to turn, no matter what happens from here.
I'm figuring a bottom in the human activity we collectively understand as the economy will form in about four years, but w/out growth from there for another ten.
Of course, that's essentially the history of the Great Depression. But as Mark Twain said, although history might not repeat itself, it does ryhme.
Posted by: Donkei | Oct 7, 2008 10:06:06 AM
Posted by: cloudy | Oct 7, 2008 10:04:19 AM
yes, of course, as you know.
from this: "from all and any laws it subjects the hoi polloi to, eh?"
this: "subjects the hoi polloi to"
is a nice play on words.
past that, though, "The Federal Reserve", and the "Federal Government", are two animals, any self-resecting Zoo would have them in different cages..
Posted by: Mark E Hoffer | Oct 7, 2008 10:17:17 AM
So the USG is buying commercial paper en masse now...what next?
The whole 'Headline Screamer' series about the recession reminds me of the Saturday Night Live skit with Phil Hartman as a really shitty B-Actor, 'The Aviator' - when his agent (Jon Lovitz) keeps telling him 'You suck..you're a horrible actor...face it, you're the worst', and Hartman responds 'Give it to me straight Johnny...no beating around the bush...I won't be finessed, dammit!'
No one in the mass media wants to be the first to say 'the US economy is in the shitter'...no one wants to face the reality...the recession started months ago and the economy sucks. Thank goodness for BR and Roubini.
Posted by: Genghis Ortiz | Oct 7, 2008 10:22:06 AM
Why even call it "stealth"? The Fed has been missing the federal funds target consistently for two weeks, with the effective rate averaging 1.4% rather than the headline target of 2.0%. And that data is lying out in the open for all to see:
http://www.newyorkfed.org/markets/omo/dmm/fedfundsdata.cfm
The upshot must be to expect far more than a mere 50bp cut by the Fed later this month. That wouldn't even reach the current effective rate. We heading back to Alan Greenspan interest rate territory, no doubt about it.
Posted by: Darel | Oct 7, 2008 10:38:22 AM
Some really excellent posts and comments this morning. I think the morning crowd is the really smart macroeconomics group, the traders come later, and the weekend is for rants.
Don's comment was right on the mark, and dead hobo's too. We basically have a choice: reflate or deflate and you can be sure that most of the world is going to be doing this together. Unless you want to see people living on a garbage tip, you are probably going to choose reflation, infrastructure projects, FDR all over again. I'm surprised they are dicking around in Europe over this rate cut decision.
The trader thread last night was very interesting, I read it over this morning. I was down on the day yesterday (GDX position), apparently I was the only one... :-) My Dead Cat Trades are doing OK though, and you know that the hour of reflation cometh....
Posted by: leftback | Oct 7, 2008 11:15:39 AM
@leftback: Perhaps you're right, but there's such an aversion to anything resemblgin "socialism" in this country (the well-funded wingnuts on the far Right have done a fine job of hammering home that propoganda to an increasingly dumb electorate), we might have to be completely on the brink of a full-on Depression before drastic FDR-like reforms are taken.
Perhaps the way out of this our re-investing in our infrastructure and making a serious commitment to developing altnernative energies? Perhaps it's also not the answer, but does anyone else have any good ideas?
Posted by: Jeff M. | Oct 7, 2008 11:26:47 AM
As reported by Steve Leisman yesterday, part of that $700B can be used for making liquidity injections in exchange for warrants. Interesting that we didn’t hear a word about this until yesterday. I think that this is a much better approach (than buying toxic assets) as long as the “winners and losers” are decided by competent people and not by politicians.
Posted by: DL | Oct 7, 2008 11:41:00 AM
Jeff M., I completely agree.
The whole US financial system is weak because consumers can't pay the mortgages with their discretionary income. We spend $500B+ on imported energy. So, I see an investment in "wind energy" (e.g., the Pickens/Gore plan <-- my name for it) as a decent solution to our financial crisis. That is:
- We reduce payments for imported energy.
- We employ construction workers, managers, scientists, IT workers, and accountants.
- The newly re-employed pay less on imported energy. Helps the US's balance of payments and US dollar.
- The newly re-employed use their extra discretionary income to pay their mortgages.
- Foreclosures decrease.
- CDO writeoffs decrease.
- The feds have less to clean up.
Instead, what our $700B bailout does is take the debts we can't pay and add them to our overall tab. In a way, it looks like the US took out an option ARM and hasn't been paying the fully amortizing amount.
Posted by: wunsacon | Oct 7, 2008 11:46:19 AM
@ Jeff M:
We should have continued to invest in nuclear energy. The evironmental lobby did us all a disservice when we mothballed the expansion of this program long ago. Do people think coal and oil fired stations don't cause health problems? Idiocy.
The technology that built the existing stations is the same that took Apollo to the moon - the era of slide rules. Now that we have much better engineering and technology we can do this much more safely, reduce our reliance on T Boone Pickens, and reduce our investment in dusty sandboxes far from home where we have no business.
The repudiation of science and engineering in favor of "intelligent design", an SUV in every driveway and a MBA in every household was a disaster. I'd like to see some of those MBAs digging trenches and laying pipe.
Posted by: leftback | Oct 7, 2008 11:48:17 AM
>> The whole US financial system is weak because consumers can't pay the mortgages with their discretionary income.
Clarification: To the extent that statement glosses over the overleveraging, decreased lending standards, fraud, etc., my statement above was idiotic. The real root causes of our crisis precede the consumers' inability to pay. But, ...*cough*..."we are where we are". Helping people make payments by improving/maintaining their incomes could in turn help a sequence of items.
Posted by: wunsacon | Oct 7, 2008 11:51:01 AM
This 2nd post didn't appear....I'll try again. Sorry if it ends up as a double-post.
>> The whole US financial system is weak because consumers can't pay the mortgages with their discretionary income.
Clarification: To the extent that statement glosses over the overleveraging, decreased lending standards, fraud, etc., my statement above was idiotic. The real root causes of our crisis precede the consumers' inability to pay. But, ...*cough*..."we are where we are". Helping people make payments by improving/maintaining their incomes could in turn help a sequence of items.
Posted by: wunsacon | Oct 7, 2008 11:55:55 AM
Ha...wouldn't ya know it...
Posted by: wunsacon | Oct 7, 2008 11:56:43 AM
