Fed keeps buying bonds at $85 billion monthly pace | TigerDroppings.com

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OnTheBrink
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TN
Member since Mar 2012
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Fed keeps buying bonds at $85 billion monthly pace


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quote:

WASHINGTON (Reuters) - The Federal Reserve on Wednesday said it would keep buying $85 billion in bonds per month and gave no explicit indication that it was close to scaling back the program, despite intense market speculation it could soon start drawing it to a close.







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BennyAndTheInkJets
Arkansas Fan
NYC
Member since Nov 2010
3898 posts

re: Fed keeps buying bonds at $85 billion monthly pace


Nobody was expecting them to taper this meeting. The key was the change in language, which was that the outlook for growth is a little better and labor is showing "further improvement". 5 basis point spike up in the 10-year though, we'll see how the next few rounds of job figures are before they even start talking about actually tapering.





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OnTheBrink
Alabama Fan
TN
Member since Mar 2012
3608 posts

re: Fed keeps buying bonds at $85 billion monthly pace


The Dow's reaction...



ETA: Updated....



This post was edited on 6/19 at 1:59 pm


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ThaBigFella
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baton rouge
Member since Apr 2006
2043 posts

re: Fed keeps buying bonds at $85 billion monthly pace








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LSU0358
LSU Fan
Member since Jan 2005
5133 posts

re: Fed keeps buying bonds at $85 billion monthly pace


In the FOMC statment it also reitierated that the federal funds rate will remain at 0 to 1/4 as long as unemployment remains above 6.5% and inflation is below 2%.

Overall, very similar statment to the last few, with a continued purchase of 45B / month of long term treasury securities and 40B / month of MBS.






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BennyAndTheInkJets
Arkansas Fan
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Member since Nov 2010
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re: Fed keeps buying bonds at $85 billion monthly pace


The Fed Funds target rate will be at 0.25% for at least the next 2 years, more than like 3.





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OnTheBrink
Alabama Fan
TN
Member since Mar 2012
3608 posts

re: Fed keeps buying bonds at $85 billion monthly pace


quote:

BennyAndTheInkJets


What's the market doing? Computers can't make up their mind?






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Ranger198
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Member since Oct 2012
673 posts

re: Fed keeps buying bonds at $85 billion monthly pace


Market does not like this news Dow down 150.





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LSU0358
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Member since Jan 2005
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re: Fed keeps buying bonds at $85 billion monthly pace


quote:

The Fed Funds target rate will be at 0.25% for at least the next 2 years, more than like 3.


That has been my thought as well. I think the first step will be backing off the MBS and treasury purchases.

Interesting thing is that if you look at the Economic Projections that came out with the statement today they project 6.5 - 6.8% unemployment and 1.4 - 2.0% inflation in 2014. This is a fairly significant issue as this is the first time any of the Fed projections have had that happening so soon.

I've been thinking 2015 before the candy bowl gets taken away, but could be as early as mid-2014 if the Fed projections come true.






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Bear Is Dead
LSU Fan
Monroe
Member since Nov 2007
3585 posts

re: Fed keeps buying bonds at $85 billion monthly pace


quote:

I've been thinking 2015 before the candy bowl gets taken away, but could be as early as mid-2014 if the Fed projections come true.

Can you explain the metaphor please?






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LSU0358
LSU Fan
Member since Jan 2005
5133 posts

re: Fed keeps buying bonds at $85 billion monthly pace


45 billion / month in long term treasuries and 40 billion / month in mortgage backed securties. Also, the fed funds rate is at 0 to 0.25% (this is the rate that the fed "loans" money to depository institutions (aka big banks) loan money to each other.

When the "candy bowl" gets taken away the Fed will slow down/eliminate the Treasury and MBS purchases and start to raise the funds rate.






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ThaBigFella
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baton rouge
Member since Apr 2006
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re: Fed keeps buying bonds at $85 billion monthly pace


I dont get the sell off.....he said he was still gonna print....did i miss something? Why is the dow down 200 pts





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OnTheBrink
Alabama Fan
TN
Member since Mar 2012
3608 posts

re: Fed keeps buying bonds at $85 billion monthly pace


I don't get it either BigFella. After it came out, the market went down 0.5% then up 0.5%, then down 0.5% and stayed down. And is still going down.





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Janky
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Team Primo
Member since Jun 2011
7765 posts

re: Fed keeps buying bonds at $85 billion monthly pace


Good news is bad news, bad news is good news, good news is good news and bad news is bad news. It is all f'd up. The 10 year went nuts today.





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LSU0358
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Member since Jan 2005
5133 posts

re: Fed keeps buying bonds at $85 billion monthly pace


Nothing missed, just more consolidation. Also had a huge move down in bonds with a dollar spike.





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ThaBigFella
LSU Fan
baton rouge
Member since Apr 2006
2043 posts

re: Fed keeps buying bonds at $85 billion monthly pace


Dow futures under 15000 now, tomorrow isn't gonna be pretty





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GenesChin
Ole Miss Fan
The Promise Land
Member since Feb 2012
10895 posts

re: Fed keeps buying bonds at $85 billion monthly pace


quote:

I don't get it either BigFella. After it came out, the market went down 0.5% then up 0.5%, then down 0.5% and stayed down. And is still going down.


Had more to do with the long term plan he basically spelled out which was that the money faucet will eventually be turned off






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I Love Bama
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Alabama
Member since Nov 2007
32086 posts

re: Fed keeps buying bonds at $85 billion monthly pace


bubble has to pop sooner or later





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GenesChin
Ole Miss Fan
The Promise Land
Member since Feb 2012
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re: Fed keeps buying bonds at $85 billion monthly pace


quote:

bubble has to pop sooner or later


Seemed to me that a lot of people were expecting a longer timetable on how long it would last. Also, a number of people basically operate on status quo till told to not do that anymore. If you can't predict the fed, just go based off their last words which I think was that they wouldn't scale back till 2015 or 2016






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Coeur du Tigre
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Waiting for Geauxdeaux.
Member since Nov 2008
302 posts

re: Fed keeps buying bonds at $85 billion monthly pace


I'm no expert and would like to get anyone's input on the following as background information.

One way of looking at GNP is GNP = Money Supply (M2) X Money Velocity (M2V).

GNP and M2 are calculated from observable data but M2V is indirectly calculated as M2V = GNP / M2.

(Stay with me, my head hurts too...)

Here is M2, Money Supply: Fed Data.



Here's M2V, Money Velocity: Fed Data.



Ok, here we go. Please jump in any time.

Inflation has two components, Money Supply and Money Velocity. You have to have both to create inflation. We can see from the graphs why we are having such low inflation currently. The Supply is there thanks to the QE, but the Velocity is at historically low levels. All that money has not gotten out of the banks. For those fans of Japanese deflation, this should look familiar.

Currently, the Fed has two main policies working: the Zero Interest Rate Policy (ZIRP) and the QE. The ZIRP is a standard tool of Central Banks, QE is not. QE is extraordinary. So it may be assumed that QE will be tapered down first, leaving the ZIRP in place longer.

But to avoid deflation, the Money Velocity must be increased. That means the Fed must make it more expensive for the banks to hold the money than to put it into circulation. This requires rate increases which will cause some inflation. But it depends on relative Money Supply. Just as we have no threats of inflation currently due to lack of Velocity, with the tapering of the QE funding, the Money Supply should drop, thus (hopefully) keeping inflation under the Fed's control.

This is too simplistic but it is food for thought. It could be a scenario that Chairman Ben thinks of when he drinks too much coffee. The current market? Well, The Herd is confused. As the previous poster allowed, good news is bad, bad news is good. But long run, this bull market has all the elements to continue until Velocity turns the corner and starts to increase.

Your thoughts / criticisms welcomed.







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