*****The Fed Goes Insane*****

Bloomberg reports that 'rambo fed' pledges to start buying treasuries to combat crisis.

(emphasis mine) [my comment]

'Rambo Fed' Pledges to Start Buying Treasuries to Combat Crisis
By Scott Lanman

March 19 (Bloomberg) -- By committing to buy Treasuries and double his purchases of mortgage debt, Federal Reserve Chairman Ben S. Bernanke signaled his determination to avoid a repeat of the Great Depression and his willingness to pump as much cash into the economy as needed to end the current crisis. [Bye Bye dollar]

U.S. central bankers decided yesterday to buy as much as $300 billion of long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion [Completely insane], aiming to lower home-loan and other interest rates. The Fed kept its main rate at almost zero and may keep it there for an "extended" time.

The moves sparked the biggest drop in 10-year Treasury yields since 1962, rallies in the stock market and gold and a plunge in the dollar against the euro. Economist Richard Hoey said Bernanke has created the "Rambo Fed," referring to the Sylvester Stallone character skilled with weapons.

"This is a very powerful and aggressive move," Hoey, chief economist at Bank of New York Mellon Corp., said in an interview with Bloomberg Television. "One of the reasons I've been arguing we won't have a depression is we've got a Fed chairman who understands the problem and is going to come with the right diagnosis and the right medicine."
With the purchases of Treasuries and housing debt, Bernanke is effectively using the Fed's powers to print money and aim it where he and other officials believe it will have the greatest impact in lowering borrowing costs.

Unanimous Decision

The Federal Open Market Committee's decision was unanimous, indicating the agreement to start buying Treasuries quelled disputes over how the central bank should expand its balance sheet. Richmond Fed President Jeffrey Lacker and others favored government-debt purchases instead of intervening in credit markets, as Bernanke has pioneered in the past six months.

Bernanke has studied the Great Depression extensively [and exclusively. If he had also studied Weimar Germany's hyperinflation, things might be different] and published a book of his papers on the subject in 2000. In 1929, the Fed was "essentially leaderless and lacking in expertise," Bernanke said in a November 2002 speech. The situation led to decisions that were associated with a "massive collapse of money, prices, and output," he said.

Yesterday's decisions will add $750 billion in purchases this year of mortgage-backed securities issued by government-sponsored enterprises Fannie Mae, Freddie Mac and Ginnie Mae, for a total of $1.25 trillion. The Fed has already announced $217.1 billion in net purchases out of $500 billion planned through June, under a program unveiled in November.

The central bank will also double to as much as $200 billion this year its planned purchases of debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks. The Fed bought $44.4 billion of the so-called agency debt as of March 11.

Jumpstart Lending

The $1 trillion Term Asset-Backed Securities Loan Facility, which is opening this week to jumpstart consumer and business lending, "is likely to be expanded to include other financial assets," the FOMC statement said, without elaborating.

The Obama administration is considering melding the Treasury's plan to set up private investment funds to buy frozen assets with the Fed program, known as the TALF, people familiar with the matter said. Treasury Secretary Timothy Geithner may make an announcement as soon as this week, after his first unveiling of the strategy caused a sell-off in financial stocks.

"This is not really a victory for Lacker," said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. "Lacker seems to be arguing for Treasury purchases instead of targeted programs. They are instead supplementing the targeted programs. They are just using all tools."

Double Balance Sheet

The New York Fed will concentrate Treasury purchases among two- and 10-year securities. The transactions will take place two to three times a week, and the Fed may also buy other maturity Treasuries and Treasury Inflation-Protected Securities, according to a New York Fed statement.

The moves may more than double the Fed's balance-sheet assets by September to $4.5 trillion from $1.9 trillion, said John Ryding, founder of RDQ Economics LLC in New York.

At the same time, the changes increase the danger, once the economy recovers, that the Fed won't be able to unload the securities quickly enough to raise interest rates and counter inflation, said Ryding, a former Fed economist.

Bernanke floated the idea of buying Treasuries in a Dec. 1 speech. Then the FOMC said in its last statement on Jan. 28 that the Fed would be "prepared" for the purchases if "evolving circumstances" indicated their effectiveness.

Bank of England

The option gained ground after the Bank of England succeeded in lowering long-term rates by buying U.K. government bonds known as gilts in a program announced this month, said Lyle Gramley, a former Fed governor. The 10-year gilt yield slid to the lowest level in at least 20 years after the purchases began.

"Our objective is to improve the functioning of private credit markets so that people can borrow for all kinds of purposes," Bernanke said at a Feb. 24 Senate hearing. "We are prepared, and we want to keep the option open to buy Treasury securities if we think that is the best way to improve the functioning or reduce interest rates in private markets."

While Treasury yields fell, the strategy isn't guaranteed to work in reducing other rates.
[Correct]

The Fed is "naive" if officials think the move will lower borrowing costs, said Doug Dachille, chief executive officer of New York-based First Principles Capital Management. The "historic precedent" of when the Treasury Department was buying back debt amid the budget surpluses of the Clinton administration show it may fail to do so, he said.

Bloomberg reports that Bernanke caps treasury yields to cut consumer borrowing rates.

Bernanke Caps Treasury Yields to Cut Consumer Borrowing Rates
By Dakin Campbell

March 19 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke may have brought an end to the worst quarterly start for Treasuries since 1980 by establishing a ceiling on yields with plans to buy $300 billion in government debt.

Treasuries lost 3.4 percent since December prior to yesterday's announcement that the Fed would expand asset purchases to drive consumer borrowing rates lower, and were headed for their worst three-month period since the third quarter of 1980, when they fell 5.06 percent, Merrill Lynch & Co. index data show. Yesterday's rally pared this year's losses to 1.38 percent.

"The Fed is capping Treasury yields," said David Glocke, who manages $65 billion of Treasuries at Vanguard Group Inc. in Valley Forge, Pennsylvania. "I don't think we will see rates drift back up above three percent; everyone looks at that as being the ceiling."

Treasury 10-year note yields fell the most since 1962 yesterday, dropping to 2.52 percent, after the Fed surprised investors by expanding the debt purchase portion of its quantitative easing policy, which already includes agency and mortgage debt, to about $1.75 trillion in securities.

While investors anticipated an increase in mortgage and agency debt purchases, firms including Goldman Sachs Group Inc., Morgan Stanley and UBS AG forecast that Bernanke would focus on expanding existing programs before buying Treasuries.

"We were a little surprised about the timing," said Ira Jersey, head of interest-rate strategy at RBC Capital Markets in New York. "They have to get spreads on consumer rates down."

Mortgage Rates

Central bankers and Treasury haven't been able to meet Bernanke's goal of reducing consumer interest rates along with the borrowing costs paid by banks.

The difference between rates on 30-year fixed mortgages and 10-year Treasuries was 2.1 percentage points yesterday, Bloomberg data show. That's up from an average of 1.75 percentage points in the decade before the subprime mortgage market collapsed.

Investors have also shunned debt backed by consumer loans as unemployment has climbed in the worst financial crisis since the Great Depression. Sales of the bonds plunged 40 percent last year to $106 billion, according to data compiled by Bloomberg, choking off funding to lenders. About $2.3 billion of debt backed by auto loans has been sold this year, compared with more than $9.6 billion in the same period of 2008, according to data from JPMorgan Chase & Co.

Yield Ceiling

Ten-year Treasury yields tumbled 47 basis points yesterday to 2.53 percent after the Fed's announcement. The note's yield touched 3.02 percent yesterday and has failed to break 3.05 percent three separate times since March 4.

"If rates drifted to that level I'd be a buyer," Vanguard's Glocke said.

Investor concern about rising supplies of debt and stock gains had pushed yields up from record lows in the fourth quarter. Goldman Sachs estimates that Treasury sales will almost triple this year to as much as $2.5 trillion as President Barack Obama looks to finance a budget deficit that his administration forecasts may expand to $1.75 trillion.

The Fed said it will increase its purchases of agency debt this year by up to $100 billion to a total of as much as $200 billion and will buy $750 billion in mortgage-backed securities on top of the already-announced $500 billion program, according to the central bank's policy statement. The Fed also said it will consider expanding the Term Asset-Backed Securities Loan Facility to include "other financial assets."

'Reinforces the Case'

Bernanke first mentioned the option of buying longer-term Treasuries on Dec. 1. Less than three weeks later, 10- and 30- year yields touched record lows. The Fed trimmed the target rate for overnight loans between banks to a range of zero to 0.25 percent at the Dec. 16 meeting to help unfreeze credit markets.

"Our medium-term expectation of lower 10-year Treasury yields has been premised upon quantitative easing," JPMorgan Chase & Co. strategists led by Srini Ramaswamy wrote in a note to clients yesterday. "Today's FOMC statement reinforces the case for lower yield levels over a longer term horizon."

The Fed may also buy Treasury Inflation-Protected Securities, or TIPS, used by investors to guard against inflation. The purchases will begin "late next week" and will take place two to three times a week thereafter, according to a statement on the Fed Bank of New York's Web site.

'Exit Strategy'

"The big concern in Treasuries is, 'What will the Fed do if we see inflation coming back and what is the strategy for reversing these purchases [There is no strategy for reversing these purchases.],'" said Mustafa Chowdhury, head of U.S. interest-rates research in New York at Deutsche Bank AG, one of 16 primary dealers that trade government securities with the Fed. "If a clear exit strategy is not spelled out for the market, it will cause a huge reaction."

The consumer price index climbed 0.4 percent after a 0.3 percent rise in January, the Labor Department said yesterday. Excluding food and fuel, the so-called core rate advanced 0.2 percent. The gains pushed the annual core inflation rate up to 1.8 percent, within the range that most Fed officials say is their objective.

"The Fed has employed its shock and awe policy," said Richard Schlanger, a vice president who helps invest $13 billion in fixed-income securities at Pioneer Investment Management in Boston. "This has to have a profound impact on credit spreads going forward."

My reaction: Bernanke is using the Fed's powers to print money.


1) The fed is set to buy $300 billion of long-term Treasuries, which means the fed is capping treasury yields.

"The Fed is capping Treasury yields," said David Glocke, who manages $65 billion of Treasuries at Vanguard Group Inc. in Valley Forge, Pennsylvania. "I don't think we will see rates drift back up above three percent; everyone looks at that as being the ceiling."

2) The fed will also add $750 billion in purchases of agencies (mortgage-backed securities issued by Freddie/Fannie), for a total of $1.25 trillion.

3) The fed will double its $100 billion planned purchases of debt issued by Fannie and Freddie.

4) The fed's $1 trillion Term Asset-Backed Securities Loan Facili ty will be expanded to include "other financial assets".

5) The Fed is also planning of buying Treasury Inflation-Protected Securities (TIPS).

6) The fed's purchases will begin "late next week" and will take place two to three times a week thereafter.

7) The moves will more than double the Fed's balance-sheet assets by September to $4.5 trillion from $1.9 trillion.


Conclusion: To me a least, this pretty much confirms the dollar's demise.


Fed announcement caused a dollar crash:



and a $60 gold rally:

This entry was posted in Currency_Collapse, Gold, Market_Skepticism, News_Developments, Wall_Street_Meltdown. Bookmark the permalink.

18 Responses to *****The Fed Goes Insane*****

  1. Anonymous says:

    Hi Eric, I've been following MarketSkeptics for a while, this quite a nice place. I think that the fortunate combination of your origins and your present seeding gives you quite an uncommon viewpoint.

    Today I must ask you: why do you think the Fed went insane? Where you expecting something else? They don't have the tools to properly toggle Money Velocity. This day would have to come, playing with Money Supply is all they know to (and can) do.

    If you haven't done so, re-read Ben's 2002 Deflation speech. It is all written there: if rock bottom interest rates won't do it then cap treasuries. Or in a more vernacular English: set the mattress on fire.

    What they are actually doing is trying to revive Money Velocity by increasing Money Supply - once the feeling of "cheap money" sets in again Money Velocity will increase again. But of course, when that happens both variables will be increasing at the same time...

  2. Boris says:

    Hi Eric.

    (Accidentally hit enter).

    "The big concern in Treasuries is, 'What will the Fed do if we see inflation coming back and what is the strategy for reversing these purchases [There is no strategy for reversing these purchases.],
    ----
    Yes, there is a strategy but very painful.

    Watch Marc Faber interview:
    http://www.cnbc.com/id/29720589

    "Yields have already backed up pretty substantially and I tell you, I think the US government bond market is a disaster waiting to happen for the simple reason that the requirements of the government to cover its fiscal deficit will be very, very high," Faber said.

    "The Federal Reserve will have to buy Treasuries, otherwise yields will go up substantially," he said, adding that as their reserves were dwindling, foreign investors were likely to scale down their purchases.

    But there will be a time when the Federal Reserve will have to increase interest rates to fight inflation, and it will be reluctant to do so because the cost of servicing government debt will rise substantially.

    "So we'll go into high inflation rates one day," Faber said.

  3. Jeff Burton says:

    Any way to figure out if treasury is holding back on new TIPS issuance? I think it was very interesting that the fed explicitly said they were buying TIPS. The smart move on their part would be to stop issuing more and buy up all they can. Even though TIPS is a fraction of all issuance (half trillion outstanding if my memory serves me), it's going to grow into a monster when inflation hits.

  4. Martijn says:

    This is a very interesting series on the build up of the treasuries bubble and the consequences of its predicted burst.

    http://www.atimes.com/atimes/Global_Economy/KC14Dj05.html

    http://www.atimes.com/atimes/China_Business/KC17Cb02.html

    http://www.atimes.com/atimes/China_Business/KC18Cb01.html

    That would btw truly be bullish for gold. I am still holding on to it for a while.

  5. Martijn says:

    Also interesting: the euro is much stronger than believed and the story about Eastern Europe beeing a time bomb is grossly overstated!

    http://www.leap2020.eu/GEAB-N-33-is-available!-Growing-Transatlantic-tensions-on-the-eve-of-the-G20-summit-An-illustration-of-Wall-Street-s-and_a2940.html?PHPSESSID=a02f21047df1ca66bf688e050104dd70

  6. SPECTRE of Deflation says:

    The dollar demise? You think that other countries out there aren't going to do the same as England and America? We are in the beginning of global currency devaluation, and America is actually way less levered than the EU. You sound like Schiff with his views on the dollar. You both forget that this is global in nature.

  7. Anonymous says:

    Thank you for your hard work.
    Totally agree with you, saved the rate but killed the USD. The World is outraged and will revenge. Bernard announced the Dark Age of USD had begun. Deadly bye for USD empire.

  8. Martijn says:

    @Spectre

    So far the EU has been reluctant to take similar mesures. In fact Merkel (Germany) has disagreed quite firmly with the course the US is taking.
    Btw, what do you mean by the leverage of the EU, and what does it have to do with government policy to devalue the euro?

  9. Anonymous says:

    Ding dong the dollar is dead!!!

  10. Martijn says:

    Money will be too tight to mention!
    http://www.youtube.com/watch?v=bREgcLhTHI0

  11. Boris says:

    EUR will survive as long as Germany veto ECB try to print EUR from thin air.

    Did anybody notice rampant rally in commodity futures today?! It was huge!

    http://www.bloomberg.com/markets/commodities/cfutures.html

    And $ plunged again against other currencies and precious metals.

  12. ronster says:

    It is hilarious how the white house and congress use the AIG situation as a distraction. The real scam is the amount of money the Feds are printing.

    the Financial Gangsters of Wall Street swept in and ripped the 401k's and other financial instruments to shreds. A prolonged recession/depression would create havoc in the US economy with a flood of foreclosures, vehicle repossesions, medical bill bankruptcies, etc.

    THAT, my friends, is why Obama gathered people like Bernanke and Geithner, etc, and said, "Fan out across the country. Get on tv shows like 60 minutes. Preach the word that everything is fine. Tell the great un-washed it's a great time to buy stocks. Tell them people are starting to buy property, etc."

    Well, that kind of b.s WW2 propaganda might have worked in the 1940's when Hollywood churned out countless heroic propaganda war movies but it ain't gonna work in 2009. At least, I hope not. I hope people are not that stupid. Hopefully the internet and other comminication channels have wised people up so they don't let Washington pull their strings via propaganda sound bites.

  13. Helicopter Ben Bernanke is swamping us with Massive Quantitative Easing....The Undertow is likely to destroy us all!

    http://fargoneworld.blogspot.com

  14. Mark says:

    Hmmm.... I'm in Europe. And I think of buying TBT plus some currency-secured commodity ETF -- effectively resulting in a 50% commodity investment and a 50% double-short position in 20+-year-treasuries where there is reduced (no?) net US$ risk if looking at the combined investment.

    What do you think?

    What do you think of the timing?

  15. Martijn says:

    Guess what, we are still alive. And so is the dollar.

  16. ????? says:

    i agree with this its all right ???

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