June 6, 2012
Three months ago, just when things looked like they were about to turn south, the Fed’s trusty mouthpiece, Jon Hilsenrath, made it clear that the market can stop falling as the Fed was “considering” sterilized QE, or more Twist, something we explained later would be impossible in the current format as the Fed would run out of sub 3 Year paper by the end of August. It did however halt the drop in stocks for a month or two until Europe became permanently unfixed. Hilsenrath then cralwed back into his WSJ cubicle. Until today: two weeks before the all critical June 20 FOMC meeting, the faithful Fed scribe has been charged with his latest leak commission: “Fed Considers More Action Amid New Recovery Doubts.” And as it has been leaked (now that people have actually done the appropriate math), so it shall be.
From the WSJ:
Disappointing U.S. economic data, new strains in financial markets and deepening worries about Europe’s fiscal crisis have prompted a shift at the Federal Reserve, putting back on the table the possibility of action to spur the recovery.
Such action seemed highly unlikely at the central bank’s April meeting, when forecasts for growth and employment were brightening. At their policy meeting this month, Fed officials will weigh whether the U.S. economic outlook is deteriorating enough to justify new measures to boost growth, according to interviews and Fed speeches.
The Fed’s next meeting, June 19 and 20, could be too soon for conclusive decisions. Fed policy makers have many unanswered questions and have had trouble forming a consensus in the past. Top Fed officials have said that they would support new measures if they became convinced the U.S. wasn’t making progress on bringing down unemployment. Recent disappointing employment reports have raised this possibility, but the data might be a temporary blip. Moreover, the Fed’s options for more easing are sure to stir internal resistance at the central bank if they are considered.
Their options include doing nothing and continuing to assess the economic outlook—or more strongly signaling a willingness to act later if the outlook more clearly worsens. Fed policy makers could take a small precautionary measure, like extending for a short period its “Operation Twist” program—in which the Fed is selling short-term securities and using the proceeds to buy long-term securities. Or, policy makers could take bolder action such as launching another large round of bond purchases if they become convinced of a significant slowdown.
Another question: does Twist end in 25 days, or will the market have a violent revulsion to a world without constant central-planner artificial “flow” creation (because as first noted here months ago, only Nobel prize-winning economists still think “stock” is even remotely relevant).
Mr. Bernanke must decide whether to let the program end. The Fed has enough short-term securities left to extend it for a few months [ZH: good to see that Hilsenrath is finally doing the math that refuted his own articles 3 months ago] as a precaution while it watches how the economy develops. If officials become more convinced about a growth slowdown they could expand the Twist program or launch another round of securities purchases—an approach known as quantitative easing—to try to boost growth.
But the most important question: with the 10 Year already at the idiotic 1.50% level, does anyone seriously believe that more risk taking will be provoked by pushing yields to 1.40%, or 1.30%? Or how about 0.00%? In fact, why doesn’t Bernanke just pull a Bank of Japan, and stop beating around the bush, instead buying up all the SPY, and REITs he can find. One ETF he doesn’t have to buy will be GLD: that one will go up on its own. Very, very fast.
Finally, as Zero Hedge explained patiently last night, while the economists, pundits, and sellsiders all have their self-serving theories, the bond market, at least for now, has spoken, and sees not more LSAP but a simple expansion of Twist from 0-3 to 0-4 year maturity sales: an outcome which to the market will be the worst of all worlds.