Are Big Ben Bernanke and Turbo-Tim Geithner preparing to gently turn the lights up, turn the music down, put away the hard booze, and throw the coffee on? Have the partygoers on Wall Street had too much of a good time? Has the ‘liquid-ity’ flowed a little too liberally at this bash?
We will all learn more today at 2:15pm or thereabouts when the Fed releases its regular statement assessing our economy. Will a slightly more positve view of the economy actually be met with a selloff in the markets? I believe that may very well happen. Why? The Wall Street party’s ‘hosts,’ that being Bernanke and Geithner, need to prepare the partygoers to sober up, which is a very delicate undertaking. As with any sobering process, the first thing you do is make sure you have called your friends down at ‘the station’ so nobody gets picked up unnecessarily. That ‘cover’ has worked wonders for a long time, but the partygoers may want one more ‘get out of jail free’ card at this juncture. We saw as much in the token fine assessed by the SEC ‘cops’ against Bank of America just last week.
Bloomberg highlights the predicament of the party’s host in writing, Fed May Signal U.S. Economic Recovery Has Started. We do not need to be mentalists to read the tea leaves indicating the Fed’s juice is likely to slow and that it may be time to go home.Bloomberg writes:
>>”The bottom is no longer falling out, but the recovery is still at a very early stage,” said Gertler, who worked with research on the Great Depression with Bernanke before he became Fed chairman. “There is no need to expand the balance sheet now, but it is a bit too early to begin shrinking it.”
>>Central bank officials may also discuss changing the size and duration of their plan to buy as much as $1.25 trillion of mortgage-backed securities and $200 billion of agency debt by the end of this year, said former Fed governor Laurence Meyer, now vice chairman of St. Louis-based Macroeconomic Advisers LLC.
>>Three district bank presidents – Jeffrey Lacker of Richmond, James Bullard of St. Louis and Dennis Lockhart of Atlanta — raised the possibility that the Fed may not spend all the money authorized for the mortgage-backed debt.
>>Fed officials have started talks with bond dealers to use so-called reverse repurchase agreements to drain some of the cash the central bank has pumped into the economy, according to people with knowledge of the discussions.
How are the partygoers on Wall Street preparing for the slowing, if not the end, of this block party? The Treasury yield curve is flattening today. I highlighted this likelihood yesterday when I wrote, “Is the Federal Reserve Readying a Stealth Tightening of Monetary Policy?”
You do not have to listen very hard, though, to hear the crowd on Wall Street sharing their feelings. In fact, the classic tune by Southside Johnny and the Asbury Jukes, "I Don't Want To Go Home" is playing on Wall Street right about now. ~ LD
Related Sense on Cents Commentary:
“Bernanke Promises to Keep ‘Punch Bowl’ Filled” (July 21, 2009)