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Decoding the Fed (Again)

Wednesday, November 4, 2009, 4:57 PM

Once again, the Federal Reserve Open Market Committee (waggishly referred to as the Open Mouth Committee during the Greenspan era, for its tendency to try and talk up a good response in the markets) has delivered a widely anticipated "non-event" from its most recent meeting.

That is, interest rates were left untouched at a level indistinguishable from zero.

As expected.

Once again I will try and provide translation services for the overly obtuse and meandering language preferred by the FOMC staff writers.

FOMC Statement

Release Date: November 4, 2009

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months.

Translation:  "We're hopeful, sort of.  It seems that the trillions we've spent have resulted in some statistical results.  Maybe.  And, no, we're not going to define what we mean by "conditions" and "activity," so that we can weasel out from under those words if it turns out there's another dip in the future.  After all, when we say "activity in the housing sector has increased…" we might be referring to the act of stripping copper fixtures from houses in Detroit." 

Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

Translation:  "We use the word 'appears' because we don't want to commit here.  You might be thinking that spending is a hard, measureable fact and that it is either expanding or it is not, but we prefer to soften and stretch everything, because clear, plain language is against our principles.  Next, it is clear to us, as it should be to you, that the notion of expanding household spending is in complete opposition to the reality of job losses and all the other items we mentioned.  And we are not going to explain ourselves further; any pesky questions about household spending can be described as 'expanding' while every state in the union is reporting plummeting sales tax revenues." 

Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Translation:  "When it comes to business, the operative phrase is 'getting worse more slowly.'  Given that households and businesses are not really expanding, how can we say that the economy is improving?  Easy, when we say 'economy,' just insert the phrase 'our buddies, the big banks,' and our FOMC statements will make a lot more sense to you." 

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

Translation:  "We are pleased to have you along for the ride, as we conduct the largest experiment in human monetary history.  Our theory is that if we manufacture enough money out of thin air and hand it to our buddies, the big banks, that everything will work out swell.  If not, at least we'll have had fun trying." 

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

Translation:  "We are not going to sacrifice one minute of potential earnings for our buddies, the big banks, as they feast upon zero percent money but charge you 29.99%.  When inflation rears its ugly head, then, and only then, will we spin the wheel on the USS Moneyliner.  Don't worry, we'll catch it in time.  Or not.  Either way, we can't lose, because we can just print up as much as we need at any time.  You?  Not so much.  Plan accordingly." 

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.

Translation:  "We're going to fight an audit with our dying breath." 

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Translation:  "We're not going to bother ourselves with any silly notions about how the dollar is being perceived internationally.  All we care about is cherry picking a few metrics that support our desire to get as much free money back to our buddies, the big banks, as fast as we can.  We've set the money meter to "free" and will keep it there forever if necessary. " 

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt.

Translation:  "Because a few folks were getting nervous about the amount of free money we were printing and handing out for MBA and Agency paper, we've decided to trim that program back.  Where we were going to buy $200 billion of agency debt, we are now going to 'only' buy $175 billion.  We sincerely hope that people focus on that and do not calculate that the $25 billion reduction only represents a measly 1.7% reduction in the overall MBS/Agency program.  Come on, how about it!  $25 billion less!!  Whoo Hoo!!!  Join in any time here…." 

The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Translation:  "Anything we said above about conditions or amounts or limits can and will be tossed under a bus at any time, should we decide to do that." 

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Translation:  "As far as we know, none of these folks have recently bought 50,000 shares in Goldman Sachs and been shoveling them money or possibly feeding them insider information like the last guy we ditched." 


All joking aside, I am disappointed in this recent Fed decision.  Where they say that we've got recovery all over the place, and where there is lots of evidence to support that view, their actions convey something entirely different.  Raising rates here would have been a vote of confidence in the recovery.

Instead, what we've got is a "free money forever" decision that clearly puts the health of big banks ahead of any concerns over the dollar.

All in all, the Fed statement leaves me with the distinct feeling of being patronized, as though judged incapable of handling the truth.  The Fed's words and the actions do not align and we are left wondering where the truth lies.  As usual, my preference is to trust actions over words.  The actions say that there's still something not right in the system, which is no surprise to anyone who has been paying attention. 

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19 Comments

macro2682's picture
macro2682
Status: Platinum Member (Offline)
Joined: Sep 3 2009
Posts: 554
Re: Decoding the Fed (Again)

The dollar funded carry trade keeps getting stronger.

Jeff Borsuk's picture
Jeff Borsuk
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Posts: 150
Re: Decoding the Fed (Again)

Chris,

Excellent translation!

"We are not going to sacrifice one minute of potential earnings for our buddies, the big banks, as they feast upon zero percent money but charge you 29.99%."

...the arrogance! It's maddening!

Jeff

Davos's picture
Davos
Status: Diamond Member (Offline)
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Posts: 3620
Re: Decoding the Fed (Again)
Jeff Borsuk wrote:

...the arrogance! 

Rimes with("Fed") ignorance.

Good read, thanks!

Nichoman's picture
Nichoman
Status: Gold Member (Offline)
Joined: Nov 1 2008
Posts: 422
Re: Decoding the Fed (Again)

Would offer the level of cynicism in this post speaks greater volumes than anythimg else.

Understandable...if not warranted. 

 

Nichoman 

Tapani's picture
Tapani
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Posts: 69
Re: Decoding the Fed (Again)

I think Chris has been hanging around too long with people like us on this site Smile

That could have been taken as "out there with the NWO types" at some other site...

 

NoLogos's picture
NoLogos
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Re: Decoding the Fed (Again)

 But tractor production is rising yet again, comrade! The glorious "capitalist" banking system cannot possibly fail! Wink

DJT's picture
DJT
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Posts: 7
Re: Decoding the Fed (Again)

I became interested in the operations of the Federal Reserve shortly after the "credit crisis" began. I stumbled upon the following information.

This is an excerpt from a book called “Modern Money Mechanics,” that apparently was published by the Chicago Federal Reserve. 

How Open Market Sales Reduce bank Reserves and Deposits… 

Just as purchases of government securities by the Federal Reserve System can provide the basis for deposit expansion by adding to bank reserves, sales of securities by the Federal Reserve System reduce the money stock by absorbing bank reserves…. 

Contraction Also Is a Cumulative Process… 

There is one important difference between the expansion and contraction processes. When the Federal Reserve System adds to bank reserves, expansion of credit and deposits may take place up to the limits permitted by the minimum reserve ratio that banks are required to maintain. But when the System acts to reduce the amount of bank reserves, contraction of credit and deposits must take place… 

But the significance of this difference should not be overemphasized. Because excess reserve balances do not earn interest, there is a strong incentive to convert them into earning assets (loans and investments). 

This is from the Domestic Open Market Operations report for 2008 from the Markets Group prepared for the Federal Reserve Bank of New York… 

C. Purchases and Sales of U.S. Treasury securities  

During 2008, the value of the permanent holdings of U.S. Treasury securities in the SOMA portfolio decreased by $265.7 billion, ending the year at $470.0 billion (Chart 8).10 The contraction comprised $114.7 billion in redemptions, $151.6 billion in sales, and $0.6 billion in realized Treasury Inflation-Indexed Securities (TIIS) inflation compensation.11 These sales and redemptions were largely arranged to drain reserves from the banking system to prompt fed funds to trade at the target rate. 

This information indicated that the Fed directly triggered the contraction of the money supply by draining the banking systems reserves and that the subsequent contraction will continue. Of course it can be argued that the bailout was needed to increase the banking systems reserves. It should be noted however that the law was changed when TARP was funded and now banks do earn interest on excess reserves held at the Fed. This acts as a disincentive to lend.

Prior to finding the Markets Group Report I had remembered seeing a chart on the Feds website that showed their open market transactions pertaining to US Treasuries going back to 2005. They began selling them in 2007 and increased in 2008. I had saved a copy of this chart in November of last year and went back to check to see what they had been doing a few months later only to discover that Novemeber of 2008 was the last month they published it. 

According to this information using a 10 to 1 ratio of bank reserves to available credit the decrease in available credit would be over two trillion dollars. It appears the Fed does have other tools besides manipulating interest rates to control the money supply and they have used it recently.

This information has been troubling me every since I found it, I would greatly appreaciate any insghts that might shed light on these events.

 

LogansRun's picture
LogansRun
Status: Diamond Member (Offline)
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Posts: 1444
Re: Decoding the Fed (Again)
Tapani wrote:

I think Chris has been hanging around too long with people like us on this site Smile

That could have been taken as "out there with the NWO types" at some other site...

 

That means ME.  BTW:  I worked hand in hand for years with these scum bags...in fact, I did their dirty work for them without "knowing" what was actually happening.

Trust me when I say, "conspiracy Theory" is no longer "THEORY".  If you don't see it by now.....ugh!!!

Cheers!

EndGamePlayer's picture
EndGamePlayer
Status: Platinum Member (Offline)
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Posts: 546
Re: Decoding the Fed (Again)

Oh the light side is so refreshing. The down-side -the average person will think that the Fed means "all is well as we keep our eye on the pulse of the economy". If only it was so funny.          EndtheGamePlayer

spinone's picture
spinone
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Posts: 49
Re: Decoding the Fed (Again)

When I first stumbled on the Crash Course I was dumbstruck.  But even after a year, Chris' repetition of the same facts in a slightly different way makes the facts sink in.  Thanks, Chris.

Bigdaddydvorak's picture
Bigdaddydvorak
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Re: Decoding the Fed (Again)

Chris,

A+ would read again.  God only knows how essential humor is in dealing with these seismic shifts we're experiencing, so I'd like to be the first to thank you for providing your loyal subscribers a healthy dose of laughter in this post.

Headless's picture
Headless
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Re: Decoding the Fed (Again)

I've had it. The next time you hear from/of me, I'll be under indictment...

TheRemnant's picture
TheRemnant
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Re: Decoding the Fed (Again)

Remember folks, it was none other than the former Vice Chairman of the Federal Reserve, Alan Blinder, who appeared on PBS back in the 1990s and uttered the famous words,

"The last duty of a central banker is to tell the public the truth."

Davos's picture
Davos
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Posts: 3620
Re: Decoding the Fed (Again)
TheRemnant wrote:

Remember folks, it was none other than the former Vice Chairman of the Federal Reserve, Alan Blinder, who appeared on PBS back in the 1990s and uttered the famous words,

"The last duty of a central banker is to tell the public the truth."

Even the ones that did good did damage. Volcker really opened the gate for usury (in terms of definition:interest above legal rate). They are all slag but the real problem is Congress isn't upholding the Constitution - the 1913 act should be abolished. 

TheRemnant's picture
TheRemnant
Status: Silver Member (Offline)
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Posts: 141
Re: Decoding the Fed (Again)
Davos wrote:
TheRemnant wrote:

Remember folks, it was none other than the former Vice Chairman of the Federal Reserve, Alan Blinder, who appeared on PBS back in the 1990s and uttered the famous words,

"The last duty of a central banker is to tell the public the truth."

Even the ones that did good did damage. Volcker really opened the gate for usury (in terms of definition:interest above legal rate). They are all slag but the real problem is Congress isn't upholding the Constitution - the 1913 act should be abolished. 

Lending out money you have at any interest rate agreed upon between two consenting parties (even if above "legal" rate) isn't usury.   

Being given a license by the State to print/counterfeit money out of thin air and loaning it out at interest is.

Huff's picture
Huff
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Re: Decoding the Fed (Again)

Can someone tell me how the price is set when the Fed purchases the "toxic" mortgage-backed debt.  Presumably the purchase is at an extreme discount to reflect the low quality of the asset.   I hope the holders of these securities (who were often the creators) aren't able to swap these assets at face value for freshly printed cash.  My assumption would be that the purchase is in the "open market" and therefore occurs at an appropriate "market" price that reflects the asset's low qualtiy/collection risk.  Then again how can the market ever get to an appropriate value for the asset when the very presence of a purchaser with unlimited purchasing power must necessarily distort the equilibrium price.  Comments/info appreciated.

Huff's picture
Huff
Status: Member (Offline)
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Posts: 2
Re: Decoding the Fed (Again)

Can someone tell me how the price is set when the Fed purchases the "toxic" mortgage-backed debt.  Presumably the purchase is at an extreme discount to reflect the low quality of the asset.   I hope the holders of these securities (who were often the creators) aren't able to swap these assets at face value for freshly printed cash.  My assumption would be that the purchase is in the "open market" and therefore occurs at an appropriate "market" price that reflects the asset's low qualtiy/collection risk.  Then again how can the market ever get to an appropriate value for the asset when the very presence of a purchaser with unlimited purchasing power must necessarily distort the equilibrium price.  Comments/info appreciated.

spinone's picture
spinone
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Posts: 49
Re: Decoding the Fed (Again)

There is no market for 'securitized' mortgages, or Mortgage Backed Securities (MBS).  The government is the whole market, and the only buyer.

idoctor's picture
idoctor
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Posts: 1731
Re: Decoding the Fed (Again)

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