Fed likely to end QE this year: Minutes

[specuvestor]

On the other hand, if they are actively shrinking their $3tr balance sheet, this is vastly different from concept of orderly withdrawal of stimulus. The former means they want to tighten aggregate liquidity, and fast.

Fed Open Market Operation had existed way before Operation Twist to increase or reduce stimulus. Difference is we have all these fancy terms now because interest rates are essentially zero and they are doing quantitative easing, which Japan refused to do in the 90s. I am not sure if it is a given that they need to substantially shrink their balance sheet within the next 3 years. End of quant easing is not the same as removing it. Orderly withdrawal and "immediate" withdrawal of stimulus are also not the same objectives.

then tell me how FED can do orderly withdrawal of stimulus without selling their treasury holdings and cancel the cash?

Read my previous posts from 6 Jan 13. In short they don't have to do any transactions in the market to create signalling effect, but just let the bonds mature

then clearly you did not read my post then reply...

the bonds FED is holding now can only mature after 5 years. What can FED do in next 3 years to shrink its balance sheet? withdraw stimulus?

You still live in a world before Operation Twist...

[freedom]

Fed Open Market Operation had existed way before Operation Twist to increase or reduce stimulus. Difference is we have all these fancy terms now because interest rates are essentially zero and they are doing quantitative easing, which Japan refused to do in the 90s. I am not sure if it is a given that they need to substantially shrink their balance sheet within the next 3 years. End of quant easing is not the same as removing it. Orderly withdrawal and "immediate" withdrawal of stimulus are also not the same objectives.

first thing, is how FED can provide stimulus to the economy. There is only one way, which is to expand its balance sheet. so how FED can withdraw stimulus? shrink its balance sheet. The rest of other operation does not really provide any real stimulus to the economy.

for example, to set a target interest rate in the mid to long term, itself does not provide any stimulus to the economy if not associated with expanding its balance sheet. The reason is that FED can't control the real interest rate, what it can do is to set fed fund rate. Does the interest rate correlate with fed fund rate? not necessary. just see what happened during great financial crisis. The fed fund rate has been set to 0-0.5% long before now, the interbank rate was much higher than fed fund rate, not mentioning the interest rate the corporations got at that time. The only way to align the real interest rate with fed fund rate is to expand its balance sheet to provide liquidity into the economy, a.k.a. QE1.

So any stimulus FED can provide must associate with expanding balance sheet, otherwise, it is not effective in the longer term. The same for withdrawal of stimulus. The only way is to shrink FED balance sheet.

[mrEngineer]

Haha. Looks like we are coming to the topic of liquidity trap in economics.

[specuvestor]

Fed Open Market Operation had existed way before Operation Twist to increase or reduce stimulus. Difference is we have all these fancy terms now because interest rates are essentially zero and they are doing quantitative easing, which Japan refused to do in the 90s. I am not sure if it is a given that they need to substantially shrink their balance sheet within the next 3 years. End of quant easing is not the same as removing it. Orderly withdrawal and "immediate" withdrawal of stimulus are also not the same objectives.

first thing, is how FED can provide stimulus to the economy. There is only one way, which is to expand its balance sheet. so how FED can withdraw stimulus? shrink its balance sheet. The rest of other operation does not really provide any real stimulus to the economy.

for example, to set a target interest rate in the mid to long term, itself does not provide any stimulus to the economy if not associated with expanding its balance sheet. The reason is that FED can't control the real interest rate, what it can do is to set fed fund rate. Does the interest rate correlate with fed fund rate? not necessary. just see what happened during great financial crisis. The fed fund rate has been set to 0-0.5% long before now, the interbank rate was much higher than fed fund rate, not mentioning the interest rate the corporations got at that time. The only way to align the real interest rate with fed fund rate is to expand its balance sheet to provide liquidity into the economy, a.k.a. QE1.

So any stimulus FED can provide must associate with expanding balance sheet, otherwise, it is not effective in the longer term. The same for withdrawal of stimulus. The only way is to shrink FED balance sheet.

Firstly nobody is saying monetary policy is not conducted via expansion and contraction of the balance sheet. The argument is whether there can be an orderly withdrawal of stimulus. If you let the bonds mature, that is an ORDERLY withdrawal of stimulus with predictable AND gradual timing in balance sheet contraction

Secondly the traded fed funds is almost never at the fed funds rate at any one time. This rate is determined by the demand supply of the federal banking reserve system. The FOMC determines the TARGETED fed fund rates which they achieve by OMO in short term treasuries. This is different from the discount window which is at an EXACT rate and provided directly by the Fed.

Thirdly the Fed sets the interest rate which by itself is a stimulus. It is the price of money. The reason why the balance sheet expansion is so significant and much talked about is that it expanded from $800b to almost $3tr in mid 2011. This is unprecedented and a result of QE. US never did a QE before.
http://www.zerohedge.com/news/feds-balan...4-trillion

Fourthly the fed controls the real interest rate by setting a rate relative to inflation. If the inflation is 2%, the fed can set the real interest rate at 1% by setting fed fund target at 3% or set the real interest rate at -1% by setting the fed fund target at 1%

Fifthly the Fed controls the short term rates to control the long term rate EXPECTATIONS. If MAS tomorrow set SGD at parity to USD tomorrow, do you think the forward curves into 1-5 years will not change? Inflation expectations are also set by monetary policies if you believe in monetarism

Sixthly the interbank rate for some time is higher because the banks were afraid to lend to one another during one phase of the crisis. This was akin to the Japanese bank premiums back in the late 90s. The inability for the Fed to reduce the perceived credit risk of the banks themselves was one of the factor to the crisis.

[freedom]

Firstly nobody is saying monetary policy is not conducted via expansion and contraction of the balance sheet. The argument is whether there can be an orderly withdrawal of stimulus. If you let the bonds mature, that is an ORDERLY withdrawal of stimulus with predictable AND gradual timing in balance sheet contraction

Secondly the traded fed funds is almost never at the fed funds rate at any one time. This rate is determined by the demand supply of the federal banking reserve system. The FOMC determines the TARGETED fed fund rates which they achieve by OMO in short term treasuries. This is different from the discount window which is at an EXACT rate and provided directly by the Fed.

Thirdly the Fed sets the interest rate which by itself is a stimulus. It is the price of money. The reason why the balance sheet expansion is so significant and much talked about is that it expanded from $800b to almost $3tr in mid 2011. This is unprecedented and a result of QE. US never did a QE before.
http://www.zerohedge.com/news/feds-balan...4-trillion

Fourthly the fed controls the real interest rate by setting a rate relative to inflation. If the inflation is 2%, the fed can set the real interest rate at 1% by setting fed fund target at 3% or set the real interest rate at -1% by setting the fed fund target at 1%

Fifthly the Fed controls the short term rates to control the long term rate EXPECTATIONS. If MAS tomorrow set SGD at parity to USD tomorrow, do you think the forward curves into 1-5 years will not change? Inflation expectations are also set by monetary policies if you believe in monetarism

Sixthly the interbank rate for some time is higher because the banks were afraid to lend to one another during one phase of the crisis. This was akin to the Japanese bank premiums back in the late 90s. The inability for the Fed to reduce the perceived credit risk of the banks themselves was one of the factor to the crisis.

your first argument, please define what is orderly? why bond mature is more orderly than bond sale? what is the difference between these two operations? To the economy, it is the same. some amount of money is withdrawn from the market. no matter how gradual a lot of people think, it is disruptive as the money is removed. If FED just wants the market to be informed and prepared, FED can always say that "it will sell how much treasuries at which week as an open market operation", just like what it already said "it will buy certain amount of long term treasuries in a month"(so is this considered non-orderly buying of long term treasuries?). Why is it so different from the maturing of any particular bond? On a separate point, does FED have meaningful amount of short term treasuries which matures? Apparently not after operation twist. so even there is such "orderly" withdrawal, it is unlikely to happen as there is no meaningful amount of bond maturing.

the rest of arguments are confused with causes and effects, which I am too lazy to correct.

[HitandRun]

My take is that even before the Fed can consider selling their bonds or letting them expire, the action of stopping QE or operation twist will send shivers down the whole market. The biggest owner/buyer of US govt debt is now the Federal Reserve. Interest rates can only go up when the biggest player stops buying. And let me quote Marc Faber in his latest GBD report, "Expecting the US to Balance its Budget is Like Me Expecting my Rottweilers to Hoard Sausages!"

[specuvestor]

A follow up to what we have discussed vs what is finally happening

Bernanke Says Fed May Avoid Selling Assets in Exit Review (1)
2013-02-27 21:24:11.237 GMT


(Updates with comment from bond strategist in ninth
paragraph.)

By Caroline Salas Gage and Joshua Zumbrun
Feb. 27 (Bloomberg) -- Federal Reserve Chairman Ben S.
Bernanke said the central bank may decide to hold bonds on its
$3.1 trillion balance sheet to maturity as part of a review of
its strategy for an exit from record monetary easing.
Bernanke told lawmakers in Washington today that he expects
to revisit “sometime soon” an exit plan that policy makers
outlined in June 2011.
Under that plan, the Fed would cease reinvesting some or
all principal payments from its securities, revise its interest-
rate outlook, raise the federal funds rate and then start
selling housing debt to eliminate it from the central bank’s
portfolio in three to five years.
“The one thing we could do differently” is “hold some of
the securities a little longer,” Bernanke said in response to
questions from members of the House Financial Services
Committee. “We could even let them just run off.”
Bernanke is the third policy maker in the last week to
voice support for altering the central bank’s exit strategy to
delay or eliminate asset sales. Governor Jerome Powell said Feb.
22 that the Fed could refrain from sales to avoid causing market
disruptions and having the Fed take losses on the securities as
interest rates rise.
San Francisco Fed President John Williams told reporters
after a Feb. 21 speech in New York that, given the increase in
the Fed’s balance sheet, the period of time over which it’s
appropriate to sell assets “probably has lengthened.” Telling
markets the Fed plans to hold assets for longer would strengthen
monetary stimulus and be “beneficial to the economy,” he said.

How Long

Bernanke echoed that view today. “One issue is how long to
hold the securities and whether to use that as a substitute, an
alternative to asset purchases,” he said. “That’s something worth discussing.”
The Fed is purchasing $85 billion of Treasury and mortgage-
backed securities a month in an effort to spur the economy and
reduce a jobless rate that stood at 7.9 percent in January.
If the central bank refrains from sales “the primary
benefit is they will not distort the financial system and they
don’t run the risk of adding price instability into those
markets,” said Ian Lyngen, a government-bond strategist at CRT
Capital Group LLC in Stamford, Connecticut. “That has always
been a concern of the Fed.”
Bernanke said today the central bank’s easing policies are
helping to improve demand for homes and cars by lowering long-
term interest rates.

Bernanke ‘Confident’

The Fed chairman said he’s “pretty confident” that the
“basic outline” of the exit strategy policy makers agreed upon
would “still be in force.”
If the Fed doesn’t sell any securities, “it doesn’t mean
that our balance sheet is going to be large for many years,” he
said. “It just would be maybe an extra year. That’s all it
would take to get back down to a more normal size.”
The Fed’s record $3.1 trillion balance sheet includes $1.74
trillion of Treasuries, $1.03 trillion of mortgage-backed
securities and $74.6 billion of Federal agency debt as of Feb.
20. In 2007, prior to the financial crisis, the total balance
sheet was less than $900 billion.
In other remarks today, Bernanke said recent increases in
some interest rates may signal the economy is gaining vigor.
“The fact that interest rates have gone up a bit is
actually indicative of a stronger economy,” he said.