- Bloomberg.com – Fed Discusses Limited Bond Sales to Withdraw Stimulus
Federal Reserve officials are considering a proposal to schedule limited sales of bonds from the central bank’s $2.2 trillion balance sheet as part of a range of tools for withdrawing record monetary stimulus. The Federal Open Market Committee discussed asset sales at its November meeting, with some members in favor and others warning that it would cause “sharp increases” in longer-term interest rates, according to minutes of the meeting released Nov. 24. A middle route now being studied would allow small amounts of bonds to be unloaded at announced times. “The attitude toward asset sales is changing in terms of more in favor and more open minded, and doing it very gradually,” said former Fed Governor Laurence Meyer, vice chairman of Macroeconomic Advisers LLC in Washington. Devising a plan for pulling back stimulus “is under way intensively on the Federal Open Market Committee,” he said. Chairman Ben S. Bernanke is trying to wind down emergency stimulus programs that helped avert a second Great Depression, while alleviating concerns that inflation will accelerate as the economy picks up. U.S. Treasury securities posted their worst performance since the 1970s after the Obama administration borrowed record sums to help drive the rebound from recession. Yields on 10-year notes are close to their highest level since June, rising to 3.84 percent at 4:45 p.m. in New York.
Comment
For those keeping score at home, the Federal Reserve can now utilize the following tools:
Remember that the Federal Reserve has to withdraw over a trillion dollars of excess liquidity. The easiest way to do this is to sell hundreds of billions of MBS, Treasuries and agencies. As the November 4 FOMC says, they are scared to death of doing this, so they propose one complicated scheme after another to withdraw liquidity like reverse repos, term deposits and now bond sales.
We have argued that these schemes will not work. They cannot be done in the sizes necessary or enough to even matter. The Federal Reserve could possibly drain tens of billions of dollars via these schemes, but collectively that will amount to a rounding error when the goal is to withdraw over a trillion in excess reserves.
The Federal Reserve does not want to admit defeat, so they continue pursuing these strategies that will not make a difference. We believe they also do it to “look busy” as they are taking measurements and notes as to how to withdraw all the liquidity they have pumped in. They think this will give the market comfort that someone is on the case and that inflation expectations will not get out of control. A quick look at a TIPS breakeven chart shows the market is not buying this. Inflation expectations are going vertical.
Complicated Is Simple
The Federal Reserve/Treasury (what’s the difference?) owns 80% of AIG. With each passing day it looks like the Federal Reserve is adopting AIG Financial Product’s business practices. That is, when faced with a financial problem, they create complicated tools. When critics says these new products will not work, tell them they do not know what they are talking about and create even more complicated tools to dazzle everyone. Once the tools are so complicated that no one understands them, you will be hailed as an expert with no peer. You might even be named TIME’s Person of the Year.