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Hilsenrath: New Fed exit plan taking shape

  • Under the old plan from 2011, the Fed expected to take a number of steps to remove the trillions it pumped into the financial system. A new plan being considered would instead leave that money in, perhaps permanently, instead paying interest on excess reserves and anchoring rates using reverse repos.
  • The upshot: The Fed would set interest rates by managing the cost rather than the supply of money.
  • This jibes with previous Fed comments that the central may not have to actively sell MBS on its balance sheets, and just last week FRBNY President Bill Dudley said the Fed wouldn't have to allow paper to mature and run off its balance sheet months ahead of rate hikes.
  • The new plan is just a trial balloon, reminds Hilsenrath, noting some at the Fed would prefer a return to the old days of scarce reserves and setting rates by managing those levels.
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Comments (18)
  • bbro
    , contributor
    Comments (9303) | Send Message
     
    The Deposits to Loans ratio is at a 35 year high....
    10 Mar, 09:25 AM Reply Like
  • steve4466
    , contributor
    Comments (91) | Send Message
     
    Well what a surprise, did anyone really think the Fed would be able to reverse QE and get the money back out of the system? In the UK a new accounting rule comes into effect in September whereby the Bank of England repays all its interest received on QE assets directly back to the government. So the UK government suddenly saves 9 bn pounds (almost 15 bn dollars) each year - in effect the government sold all those bonds to its own central bank at 0% interest. Once that happens, you can be pretty sure QE won't be reversed for a very long time, if ever. Looks like the US is headed towards a similar exit 'solution'.
    10 Mar, 09:59 AM Reply Like
  • notta lackey
    , contributor
    Comments (131) | Send Message
     
    The Bank of England is like the Fed, a cartel owned by banks. The only difference is its 200 years older. Is it a surprise that they get a giant windfall from working Brits?

     

    Next, and playing in a theatre near you.........
    10 Mar, 03:05 PM Reply Like
  • Moon Kil Woong
    , contributor
    Comments (11014) | Send Message
     
    LOL they can't sell them because then they'd have to reveal their losses which is how much they enriched their member banks. Any other transaction of this sort would violate Sarbanes Oxley and be defined as fraud.
    11 Mar, 03:03 AM Reply Like
  • minecanary
    , contributor
    Comments (411) | Send Message
     
    So really it's not an exit, just a pause. Then once everybody gets used to a 5 trill balance sheet being normal and the market drops a 100 points, Yeller will suggest that 10 trill is really exceptional. Besides, it should be time to goose Hillary's campaign by then.
    10 Mar, 10:47 AM Reply Like
  • Rico59
    , contributor
    Comments (214) | Send Message
     
    The absurd point is that they need to pay interest--that is truly ridiculous (and always has been)
    10 Mar, 11:22 AM Reply Like
  • notta lackey
    , contributor
    Comments (131) | Send Message
     
    It is not absurd. Since when is it news that the bankers will steal everything they can get?
    10 Mar, 03:06 PM Reply Like
  • Brian58
    , contributor
    Comments (95) | Send Message
     
    Summary: buy physical and precious metals...
    10 Mar, 12:14 PM Reply Like
  • bbro
    , contributor
    Comments (9303) | Send Message
     
    Over the last 25 years... Gold up 249% Vanguard S&P 500 Index fund (VFINX) up 970% (dividends reinvested).....
    10 Mar, 12:43 PM Reply Like
  • Brian McMorris
    , contributor
    Comments (853) | Send Message
     
    Gold is a currency. How much up is the USD in 25 years? Oh, wait, it is down the past 25 years over 50%! If you owned Gold in 1988 when it was $488 and bought stock with it taking back dividends and trading for Gold each time, your dividends would be worth a lot more than those same dividends in Dollars, worth 40% of what they were worth in 1988. Buy stocks for sure, but hold "cash" in gold terms, not Dollar terms. It is a much more sound strategy.
    10 Mar, 10:06 PM Reply Like
  • eudemonic
    , contributor
    Comments (24) | Send Message
     
    "The Fed would set interest rates by managing the cost rather than the supply of money."

     

    I'm truly confused. Interest is the time cost of money, so "The Fed would set interest rates, by mangaging interest rates...."?
    10 Mar, 12:30 PM Reply Like
  • JJTV
    , contributor
    Comments (113) | Send Message
     
    The Fed sets the short-term rate of interest. Prior to 2008 this was done by increasing or decreasing bank reserves (buying or selling treasuries in the secondary market). After 2008 the Fed was given the ability to directly set the short-term rate without the need of buying or selling treasuries. If the Fed wants to increase rates it simply increases the interest paid on excess reserves as opposed to draining reserves via open market operations. This gives the fed more control over the short-term rates and insures that the banking system has adequate liquidity going forward.
    10 Mar, 01:27 PM Reply Like
  • notta lackey
    , contributor
    Comments (131) | Send Message
     
    And so the politicians have "adequate liquidity going forward" as well, so they can keep reaching in our pants pocket.
    10 Mar, 03:08 PM Reply Like
  • Smarty_Pants
    , contributor
    Comments (2781) | Send Message
     
    Truth be told, the FED cannot stop adding to its balance sheet until the US Congress adheres to a budget which spends less than it collects in tax revenues annually.

     

    Until then, the US Treasury will sell Bills / Notes / Bonds to cover the shortfall in revenue and, in all likelihood, the FED will buy a significant portion of those debts with freshly created money. Where else is the nearly $1 Trillion going to come from each year to buy those new issues? If the non-government / non-bank market is the buyer (meaning those of us who can't create our own money), then you can expect interest rates to rise due to the glut of new debt supplied.

     

    Take a look at the recent history of the FED's balance sheet:

     

    http://bit.ly/12tbCZG

     

    A quadrupling of base money in the past 6 years, and that's what they claim has been necessary to "sustain" the post 2008 economic recovery. If it takes a six year, 26% annual increase in base money to eke out sub-3% GDP growth then the odds of a significant slowing in the expansion of the FED's balance sheet are likely on the low side, unless you believe the FED wants to see economic growth stop or reverse.

     

    And ... that's probably not the way to bet.
    10 Mar, 02:09 PM Reply Like
  • JJTV
    , contributor
    Comments (113) | Send Message
     
    Actually the Fed purchases treasuries on the secondary market. The primary dealers are the ones who purchase directly from the treasury. So the fed "funds the government" no more than you "fund Apple" when you buy shares from someone else during trading. Demand for debt from the primary dealers is very strong as the auctions are consistently oversuscribed. The canadian central bank does purchase debt directly from the treasury and they in fact increased those purchases from 15% to 20% with no serious consequences.

     

    More importantly, QE removes interest income from the private sector by trading low interest bearing liabilities, bank reserves, for interest bearing securities, treasury bonds and MBS. In many ways this acts as a headwind as opposed to the latter for the private sector and economic growth by removing interest income.
    10 Mar, 03:43 PM Reply Like
  • Smarty_Pants
    , contributor
    Comments (2781) | Send Message
     
    "The primary dealers are the ones who purchase directly from the treasury" - JJTV

     

    Knowing full well they can sell the vast majority of that new issue to the FED. Quoting an early December 2013 Bloomberg story:

     

    "the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month ... [to] ... it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co."

     

    http://bloom.bg/WGG00S

     

    So yeah, if you wan't to split hairs to that degree, the FED isn't purchasing any treasury debt directly from the US Government, they're just winding up as the final owners of 90% of the new issue. In reality it's a semantic argument and there's little to no difference in the end result. They might as well be buying it directly, and, in fact, they are funding the US deficit indirectly.

     

    "More importantly, QE removes interest income from the private sector" - JJTV

     

    Only temporarily. By law the FED must turn over all excess interest collected each year to the US Government, keeping only that which they require to pay the FED's expenses of operation. Then:

     

    1) Any interest spent on FED operations (utilities, supplies, travel, etc.) goes directly back into the economy;
    2) Any interest turned over to the Treasury is spent back into the economy by Congress;
    3) The FED's employees / contractors spend a good portion of their paychecks directly back into the economy;
    4) The only FED interest that doesn't go directly back into the economy is what the FED's employees / contractors save out of their paychecks, which indirectly re-enters the economy as an investment of some sort. The only exception I can think of off the top of my head is money the FED employees / contractors stuff into their mattresses (or equivalent cash holdings), which cannot amount to more than "a million or two" at any given time, and is probably much less than that.

     

    So I would wager that any portion of the interest collected by the FED which doesn't directly or indirectly return into the economy is a minute fraction of the total; ie. nearly zero.

     

    FWIW, the FED currently owns $2.288453 Trillion of US debt. At ~3% interest they collect ~$68.65 Billion of interest annually. The 12 FED banks' 2013 budget totaled around $3.69 Billion, so they returned nearly $65 Billion to Congress, which immediately spent every penny of it (that's 94.6% of all interest collected by the FED). Any claim that the FED is 'removing interest' from the economy is being incredibly generous.
    10 Mar, 04:54 PM Reply Like
  • Brian McMorris
    , contributor
    Comments (853) | Send Message
     
    I love this Fed which never thinks there is any consequence to printing money, QE or whatever. They experiment with the largest economy on the planet. That is smart! These guys have PhDs. They can see that it will all work out fine, until it doesn't.

     

    With the GDP levered 6X what it was levered in the past, there will be a cost to QE, especially if the balance sheet is not wound back down to historic, more stable, levels. Yes, we understand that Big Ben put the Fed in a box. He was warned that he would not find a way out when he first did this. Now, the Fed is trying to change the narrative and has decided it is a good thing to have a giant balance sheet. How did big balance sheets stuffed with liabilities work out for the big banks in 2007? Not so well? Why does anyone think the Central Bank is any different. Leverage is leverage. It is always dangerous used to excess. No amount of story-telling will change that.

     

    What is with these "ivory tower" types who think they can play God? Obamacare and now this? What ever happened to free markets where the masses made decisions rather than the chosen few? Elitism is a social disease.
    10 Mar, 10:11 PM Reply Like
  • Stone Fox Capital
    , contributor
    Comments (5756) | Send Message
     
    i'm sure this new plan will end will... its not like complicating an easy situation ever ends bad.
    10 Mar, 11:30 PM Reply Like
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