fedwatch wednesday

[muldoon]

Today is the FOMC meeting, I'm thinking they need to raise the rates on the low end and the IRX is currently at 0.19,  so somewhere between 0 and .25 is a reasonable guess.  Many are thinking it wont move at all, but the problem lies in the long end of the curve, need to do something to get more buyers in the long end.  raising the 13week, even if just a tiny bit has the effect of raising the cost of the bond (which would lower the premium on the long end), and cause a nasty selloff in equities.  As money leaves stocks, it goes to bonds and the treasury can kick the can a lil longer. 

Not saying they will, but I certainly understand the thinking behind it if they do. 

Any other fed watchers have any thoughts on what todays action may bring? 

[waggin]

My feeling is that there won't be any raise in rates, but they'll hint at a future raise when they release the minutes.  That seems to have almost the same effect in the short-term.  This will be couched in some Chauncy Gardener gobblygook about not wanting to over-fertilize & burn the green shoots, but to continue to nurture the fragile garden I mean economy, blah, blah, blah.  I don't think they can raise rates yet.

[muldoon]

I have been wanting to revisit this thread all day, but got busy at work, then went for beer after work.

They stayed even on all fronts, no change - but they also announced no new QE measures, which apparently was unexpected.  The press is shut down.  

market crapped itself into the close, but look at the TYX!  and the TNX!





--
again, the debt market is saying the same thing.  

"there is no printing press"

--
waggin - good commentary, anf giving credit due where it is due - you were right.

Aside from that, I really really appreciate the reply.  I would absolutely love to get some good continuing dialog on these things as I feel like I'm talking to myself on these alot.  

Your comment of "I don't think they can raise rates yet.",
I'll reply with a "I dont think they can hold back the high rates anymore"

talk of green shoots is nothing more than jawboning in my opinion.  

[waggin]

--
again, the debt market is saying the same thing. 

"there is no printing press"

--
waggin - good commentary, anf giving credit due where it is due - you were right.

Aside from that, I really really appreciate the reply.  I would absolutely love to get some good continuing dialog on these things as I feel like I'm talking to myself on these alot. 

Your comment of "I don't think they can raise rates yet.",
I'll reply with a "I dont think they can hold back the high rates anymore"

talk of green shoots is nothing more than jawboning in my opinion. 

Thanks Muldoon, however I was only half right.  The Fed commentary was pretty neutral, where I expected a statement hinting at raising rates in the future.  My thinking was that they would try to jawbone confidence into the USD to try to prevent the lower prices/higher yields on the treasury auctions and to reduce the need to monetize debt.  Am I correct in thinking you are referring to the rates as being the yields on treasuries?  The rates I'm referring to are the target rates for fed funds, so I think we were referring to different animals.  If that's the case, I totally agree with you that they can't hold back those rates (as your graphs show.)  Reduced confidence in the USD worldwide is going to continue to put the Fed (and our government) between a rock and a hard place, so I expect a LOT of jawboning to come.  However, they can't have it both ways; QE and debt monetization do not inspire confidence in a strong dollar, and the rest of the world's confidence in the USD is slipping, thus the higher yields and the shift to shorter terms.  I also expect a lot more QE and debt monetization to come, and that will further reduce the USD index.  My take is that we'll see the seeds of inflation coming up real soon, green shoots, if you will.  I tend to watch the USD index more than the treasuries.  So far, we're the least worst currency, but I think we've got some ugliness ahead of us.  We may differ on the inflation/deflation sides of the coin, but this stuff fascinates me & I'd be happy to contribute to a lively discussion/debate.

[muldoon]

awesome thread.  I would love to carry this a bit forward.

Thanks Muldoon, however I was only half right.  The Fed commentary was pretty neutral, where I expected a statement hinting at raising rates in the future.  My thinking was that they would try to jawbone confidence into the USD to try to prevent the lower prices/higher yields on the treasury auctions and to reduce the need to monetize debt. 

There is a distinction between the us dollar and the treasury market.  The treasuries can rise and fall independent of the dollar.  In fact as treasury price fell (and yields increased) today, the dollar increased from 79.8 up to 80.6 as the INO USDX shows.  I can debate this a number of ways but the simplest is that when something is in demand the value of it goes up.  As treasuries yield spike/price fell the crunch equated to a need for MORE dollars, thus the USDX increased.  This is a crucial consideration in my opinion.

Am I correct in thinking you are referring to the rates as being the yields on treasuries?  The rates I'm referring to are the target rates for fed funds, so I think we were referring to different animals.  If that's the case, I totally agree with you that they can't hold back those rates (as your graphs show.) 

Yes, I was referring to rates as being the yields on treasuries, however I do not believe them to be different animals.  There is a distinct relationship in the debt market between the federal funds rate and the rate of treasuries - specifically the 13 week ^IRX. 

This is an image I have posted before on this forum, and I would like you to really look at it and think about it abit.  Go back and hit up yahoo for historical pricing on ^IRX if you want, validate the data points, study the relationship.  As short term debt cost increases, so doe the fed funds.  As fear drives rates lower (during downturns) - so does the fed funds.  The fed follows treasuries - they are not different animals.   This is a critical point as it highlites how in-effectual the fed is and how limited their response can be. 



For over a decade the fed funds rate has followed the 13 week treasury rate.  And there is good reason for it, it is the debt market.  Trillions of dollars, which the fed cannot defend against if it were to declare a rate that was out of line with the market.  The fed does not lead the market, the market leads the fed. 

Reduced confidence in the USD worldwide is going to continue to put the Fed (and our government) between a rock and a hard place, so I expect a LOT of jawboning to come.  However, they can't have it both ways; QE and debt monetization do not inspire confidence in a strong dollar, and the rest of the world's confidence in the USD is slipping, thus the higher yields and the shift to shorter terms. 

Fair enough, and to that I ask a simple question - where do you hide? 
did you see this today ?
http://www.ft.com/cms/s/0/2d9300c0-60a2-11de-aa12-00144feabdc0.html?ftcamp=rss&nclick_check=1

The eurozone putting some 442 billions pounds (thats like 800 billion dollars) into european banks.   There is not a single currency on the planet that looks "better" than the US dollar right now.  Yes, were screwed, but they appear to be screwed much worse. 

What is slipping is the re-purchase from russia/iran/china.  Yes, they appear to be distancing themselves from the US dollar.  While that is alarming, and something I do watch daily, at the end of it I have to say so what?  Can they really do any better? 

I also expect a lot more QE and debt monetization to come, and that will further reduce the USD index.  My take is that we'll see the seeds of inflation coming up real soon, green shoots, if you will. 

We disagree on this point, I wont hold it against you though.  I believe that QE has been canceled, I believe that monetization is off the table.   Time will tell, but todays FOMC minutes certainly indicate that QE is not going to be expanded. 

I tend to watch the USD index more than the treasuries.  So far, we're the least worst currency, but I think we've got some ugliness ahead of us. 

I watch them both, especially the crosses, as a USDX reference is useless without a reference against others.  I agree we are the "least worst currency", something I noted above in the "were screwed, their screwed worse" statement above.   I personally believe the debt market - and indirectly the bond market in general - tells all. 

We may differ on the inflation/deflation sides of the coin, but this stuff fascinates me & I'd be happy to contribute to a lively discussion/debate.

me too!  hope to hear more from you.  As for deflation vs. inflation - just consider this:

november 22, 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=a58EF32GpHeg&refer=home
$516 trillion credit in Derivatives

june 9th, 2009
http://online.wsj.com/article/BT-CO-20090609-715102.html
$27.8 trillion credit Derivatives Outstanding As Of June 5

You need to consider what has been destroyed and compare to what has been created.   The M1 or Mprime shows what 1 trillion increase - versus a 500 trillion decrease in notional value?  Or versus a 14 trillion decrease in real estate value, or versus a 29.3 trillion decrease in equities asset value.  Look at what has been destroyed as well.  (hint - credit). 

Anyway, these clowns in the fed and treasury give us something rediculous every damned day, so don't feel bad to post up when ever you want to.   We don't have to agree, I just want to keep the conversation honest. 

To be honest, I would love someone to convince me I'm wrong, I swear to god I would sleep soo much better at night if I could be convinced that what I think is coming isn't coming after all. 

[waggin]

Sorry for neglecting to respond, but it's been a busy week.  In between all of the fretting over and trying to make sense of government policy (now there's an opening if I've ever seen one), I've been trying to wrap up my forest plan/PBRS stuff for my property.  In the end, putting 10 of my 12'ish acres into open space will save me around 75% of the land portion of my property taxes.  Since I'm a procrastinator extrordinaire, I had to hand deliver the agreement to Seattle yesterday.  Oh, and I went backpacking in the North Cascades Friday/Saturday.  Now I just need to wrap up the forest plan this week to get the optimal reduction.  Sometime soon, I'll actually start a thread on my property!

I definitely want to keep some form of this discussion alive, but I won't be able to get much research done this week.  If you don't mind, can you give me a quick tutorial on how to split the quotes into separate boxes? I haven't figured that out yet.

At the top of your last post, you talked about supply/demand and pricing.  If we're referring to treasury yields increasing/prices declining, to me that's actually a reflection of LOWER investment demand.  People are not willing to buy unless they get a higher yield.  They require a higher risk premium to be willing to buy the treasuries. 

If we're seeing the Fed keeping the fed funds rate between 0 and .25%, and treasury buyers are requiring higher yields, that suggests lower confidence in the dollar to me.  There may be demand for dollars for liquidity or a "safe" place to park, but people aren't willingly INVESTING in dollars without the higher yield.  When the BRIC countries start working out currency swap agreements between themselves to reduce the dependence on the dollar, they're attempting to protect themselves.  Their problem is the lower liquidity of those currencies.  The Russian Ruble is about as il-liquid as you can get.  For now, they're stuck with the USD, but I think they will continue to try to reduce their dependence on it.  I don't think that in and of itself is tremendously significant in the short term, but the trend will continue. 

As far as where to hide (invest), I wish I had a clue.  Overall, I'm a big believer in commodities and am willing to accept a lot of volatility in the short term.  Since things are so wacky, I don't try to do a ton of trading in & out, but I did have a strong opinion that things were a little bid up recently and took some profits on precious metals ETF's(great for trading, but in the end it's paper & not trustworthy) & oil.  In the long run, since I think the only way out of the debt hole we're in is to inflate/devalue the dollar, I like tangible things.  Call me a conspiracy theorist if you will, but I think there is massive manipulation of just about every market in the world.  This has caused a lot of confusion and imbalances, which a lot of people are trying to sustain or game for their own benefit.  Pretty much everything about our economy is unsustainable, from the size of government down to home prices.  Right now, we have the talking up of the economy with all the politicians & economists saying we'll have the bottom of the recession in the next quarter (starting July 1st.)  I'm a real estate agent, and I am watching with interest the big advertising push to basically convince people that there is never a better time to buy houses.  What's the saying?  If you say something often enough, then people believe it's true.  Hmmm, I tend to think that Robert Shiller (Case-Shiller Home Index) has a much better handle of things.  This is somewhat of a rambling paragraph, but hopefully it will explain my outlook a little bit.

My take on the derivatives market is that there is that it's the biggest house of cards in existence.  Ever play Jenga?  That's the game with the wood blocks you pull out from the bottom & stack on top.  No regulations, no requirements for reserves, no reporting requirements, and no formal exchange all add up to a big black hole.  Warren Buffet called them "financial weapons of mass destruction."  I firmly believe that a lot of TARP went to covering derivatives based on MBS's, CDS's/CDO's, etc. We'll never know just how much of our tax dollars went to settling that stuff for AIG, JP Morgan, and Goldman Sachs.  When you look at the $500 to $1,000+ trillion derivatives market(we don't really know!), that dwarfs annual world GDP of what, $60 trillion?  Isn't US GDP around $14 trillion?  This ties back into the original topic, because I think our government (be it the politicians or the folks with the money really running the show) will print to cover what's needed in derivative la-la land as well.

Tying this all together is that our debt & operation is unsustainable.  The easiest way to settle a debt (or default on it-depends on your perspective) is to pay it back with something that's worth less.  That will be the path I forsee.

Down the road, I'll include some more links to relevant articles and commentary.  Sorry, but I'm not going to be able to give you any reassurance that will help you sleep better.

"Permit me to issue and control the money of the nation and I care not who makes its laws." — Mayer Amsched Rothchild, a prominent European banker in the eighteenth century

"If the American people ever allow the banks to control issuance of their currency, first by inflation and then by deflation, the banks and corporations that grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied." — Thomas Jefferson

Edit: Just read the "John Perkins: Economic Hit Man" thread, and I'm wishing we could combine the two threads.  IMO, they're intertwined.

[muldoon]

I'm going to drag up another old thread.

I have posted before on the observed relationship between the 13week treasury bond and the fed funds rate.  For those who wish to follow this should note that the IRX(13week) traded at .80% yesterday and .70% today.  The fed funds target still tracks at 0%.  I personally believe that the fed lags the market and that this would portend a rise in rates coming in the coming weeks. 

That is quite a political problem tho.  Especially with all the populist anger lately, the idea of banks raising rates seems particularly dicey. 

An interesting news article on Bloomy today.  Seems they are trying to work out an alternative to the fed funds target, to meet the market demand and stay under the radar.   I thought it was quite interesting.  I have bolded a few key pieces. 

http://www.bloomberg.com/apps/news?pid=20601068&sid=ae0FqLWM34iE

Jan. 26 (Bloomberg) -- Federal Reserve policy makers are considering adopting a new benchmark interest rate to replace the one they've used for the last two decades.

The central bank has been unable to control the federal funds rate since the September 2008 bankruptcy of Lehman Brothers Holdings Inc., when it began flooding financial markets with $1 trillion to prevent the economy from collapsing. Officials, who start a two-day meeting today, have said they may replace or supplement the fed funds rate with interest paid on excess bank reserves.

"One option you might want to consider is that our policy rate is the interest rate on excess reserves and we let the fed funds rate trade with some spread to that," Richmond Fed President Jeffrey Lacker told reporters on Jan. 8 in Linthicum, Maryland.

The central bank needs to have an effective policy rate in place when it starts to raise interest rates from record lows to keep inflation in check, said Marvin Goodfriend, a former Fed economist. Policy makers are concerned that the Fed funds rate, at which banks borrow from each other in the overnight market, may fail to meet the new target, damaging their credibility and their ability to control inflation as the economy recovers.

'Extended Period'

The choice of a benchmark is the "front line of defense against inflation, and also it's at the heart of the central bank being able to precisely and flexibly guide interest-rate policy in the recovery," said Goodfriend, now a professor at Carnegie Mellon University in Pittsburgh.

The Federal Open Market Committee is likely to maintain its pledge to keep interest rates "exceptionally low" for an "extended period" in a statement at about 2:15 p.m. tomorrow, economists said. The Fed probably won't raise interest rates from record lows until the November meeting, according to the median of 51 forecasts in a Bloomberg survey of economists this month.

Fed Chairman Ben S. Bernanke, in July Congressional testimony, called interest on reserves "perhaps the most important" tool for tightening credit.

Inflation Concerns

Banks' excess reserves, or deposits held with the Fed above required amounts, totaled $1 trillion in the two weeks ended Jan. 13, compared with $2.2 billion at the start of 2007.

Theres the funds that created QE by the way

The Fed created the reserves through emergency loans and a $1.7 trillion purchase program of mortgage-backed securities, federal agency and Treasury debt.

By raising the deposit rate, now at 0.25 percent, officials reckon banks will keep money at the Fed and not stoke inflation by lending out too much as the economy recovers.

If we give the banks back their money, they may begin to loan it out.  We NEED that money for QE2. 

The new policy may be similar to what the Bank of England does now, said Philip Shaw, chief economist at Investec Securities in London. The U.K. central bank's benchmark interest rate, now at 0.5 percent, is the rate it pays on the reserves it holds for commercial banks. It may drain excess liquidity from the system by selling back the gilts it has purchased through its so-called quantitative easing program, Shaw said.

Communications Strategy

Policy makers will need to adopt a communications strategy to explain the new benchmark because "people might have had a hard time getting their mind around the idea that the official rate had become the interest on reserves rate," said Kenneth Kuttner, a former Fed economist who has co-written research with Bernanke and now teaches at Williams College in Williamstown, Massachusetts.

Without a federal funds target, banks might have to find a new way to set the prime borrowing rate, the figure most familiar to consumers that that is now pegged at three percentage points above the fed funds target.

In the past, the Fed had controlled the rate by buying or selling Treasury securities, adding or withdrawing cash from the system. That mechanism broke down when the Fed started flooding the system with cash after the bankruptcy of Lehman Brothers to prevent a financial meltdown.

you think? 

The deposit rate would help set a floor under the fed funds rate because the Fed would lock up funds by offering a fixed rate of interest for a defined period and prohibiting early withdrawals.

'Risk Free'

"In general, banks will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve," Bernanke said in an October speech in Washington.

The New York Fed has been testing another tool, reverse repurchase agreements, as a way of pulling cash out of the financial system. In that case, the Fed would sell securities and buy them back at an agreed-upon later date.

There could be complications to using the deposit rate. Banks may be able to generate more revenue by lending at prime rate rather than by earning interest at the Fed, said William Ford, a former Atlanta Fed president at Middle Tennessee State University in Murfreesboro.

Also, the Fed's direct control over a policy rate --instead of targeting a market rate -- could skew trading and financing toward short-term borrowing once investors know the rate won't change between Fed meetings, said Vincent Reinhart, a former Fed monetary-affairs director.

The new reliance on reserve interest could also increase the policy clout of Fed governors in Washington at the expense of the 12 regional Fed bank presidents, Reinhart said.

Congress gave only the Fed governors the authority to set the deposit rate. The presidents have historically favored higher rates and voiced more concern about inflation.

"The Federal Reserve Act puts a very high weight on comity," said Reinhart, now a resident scholar at the American Enterprise Institute in Washington. Using interest on reserves for setting policy "can change the tenor of the discussions, and I don't know how they get around it."

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.