Bernanke hint at QE3 in conference call today?

[c1ue]

In a statement following the meeting, the Fed said it would finish its $600 billion bond-buying program in June as scheduled, and repeated its plans to keep interest rates low for an "extended period."

Buying Treasuries is only one way - what are some other ways the Fed can 'keep interest rates low for an extended period'?

[ASH]

Re: Bernanke hint at QE3 in conference call today?

Buying Treasuries is only one way - what are some other ways the Fed can 'keep interest rates low for an extended period'?

I thought that was just a reference to the targeted federal funds rate... which is regulated by buying Treasurys, but isn't classified as QE because it's a routine operation that doesn't target a specific quantity of asset purchases. The Fed basically said they are going to hold the size of their expanded balance sheet more-or-less constant (by "re-investing" maturing securities), and that they are going to keep the federal funds rate low for the foreseeable future. It might have been a coincidence of the reporter's writing that paired those two statements. I need to find a transcript of Bernanke's actual remarks to see if those two topics were actually paired.

[Roughneck]

Re: Bernanke hint at QE3 in conference call today?

As they sell off some of the securities they have purchased they will use the proceeds to buy treasuries and try and continue to suppress long term rates.

[GRG55]

Re: Bernanke hint at QE3 in conference call today?

Buying Treasuries is only one way - what are some other ways the Fed can 'keep interest rates low for an extended period'?

The Fed and Treasury aren't going to make a stupid mistake. They already know who is going to buy the T-bonds that the Fed was buying during QE2. The deals have been cut. Interest rates are not going to explode upward just because Bennie is going to the beach in July...

[WildspitzE]

Re: Bernanke hint at QE3 in conference call today?

The Fed and Treasury aren't going to make a stupid mistake. They already know who is going to buy the T-bonds that the Fed was buying during QE2. The deals have been cut. Interest rates are not going to explode upward just because Bennie is going to the beach in July...

+1, it's just another sovereign debt raise where the major book building is done way ahead of time. the interesting question, and we all have ideas , is: what does he decide to do when he comes back from the beach?

[WildspitzE]

Re: Bernanke hint at QE3 in conference call today?

I thought that was just a reference to the targeted federal funds rate... which is regulated by buying Treasurys, but isn't classified as QE because it's a routine operation that doesn't target a specific quantity of asset purchases. The Fed basically said they are going to hold the size of their expanded balance sheet more-or-less constant (by "re-investing" maturing securities), and that they are going to keep the federal funds rate low for the foreseeable future. It might have been a coincidence of the reporter's writing that paired those two statements. I need to find a transcript of Bernanke's actual remarks to see if those two topics were actually paired.

probably... but the fed funds is truly irrelevant. my take is that it's a tool of [mis]information to telegraph moves or headfake. as a rate though, it's rather useless (especially now when banks aren't borrowing from each other).

[goodrich4bk]

Re: Bernanke hint at QE3 in conference call today?

Selling naked put options on treasuries also does the trick. Here is a theory on how the Fed is doing it:

http://www.marketskeptics.com/2011/0..._content=Gmail

[Adeptus]

Re: Bernanke hint at QE3 in conference call today?

Roubini was expecting more details on an exit strategy from the FOMC, but since we didn't get any such details, it turns out he is the one providing a detailed step by step explanation of how we might expect the Fed to execute an Exit strategy:

ROUBINI on the FED's EXIT STRATEGY:

1. We're not going to have QE3 (because other Fed members are more hawkish than Bernanke)
2. The question is how fast do we exit from Zero Policy Rates?
3. First, they are going to re-invest the maturing RMBS (Residential Mortgage Back Securities)
4. Then at some point down the line, allow the 'roll-off' of the RMBS (until no more mature RMBS to invest)
5. Then reduce the balance sheet by doing reverse repos
6. And some sales of the long term bonds they bought
7. Then [talk about] dropping the [policy of] extended zero policy rates
8. Then in 2012, they may start to raise the Fed Fund Rates and/or the interest rates of excessive reserves. It will be the main tool of monetary policy to sterilize excess money.
This is going to be the sequence of the process, but the sequence and speed of it will depend very much of how much there upside or downside risk to economic growth or inflation rate. So very much will be data dependant and the state of things/economy.

[jneal3]

Re: Bernanke hint at QE3 in conference call today?

Roubini was expecting more details on an exit strategy from the FOMC, but since we didn't get any such details, it turns out he is the one providing a detailed step by step explanation of how we might expect the Fed to execute an Exit strategy:

ROUBINI on the FED's EXIT STRATEGY:

I was reading along Roubini's tick points until I got to 'and then in 2012' (!?) That list of actions the Fed could take sounded more like something carried out over several years. Does Roubini really think they could do all that this year, esp without serious market disruptions?

[Adeptus]

Re: Bernanke hint at QE3 in conference call today?

I was reading along Roubini's tick points until I got to 'and then in 2012' (!?) That list of actions the Fed could take sounded more like something carried out over several years. Does Roubini really think they could do all that this year, esp without serious market disruptions?

From my limited experience, it seems that the Fed has a history of sticking to his words. He has been known to write methodologies on how to tackle X situation YEARS in advance, and then execute them exactly as previously expressed step by step. With that in mind, I do think it is entirely possible that the Fed not do QE3 and execute something along the lines of what Roubini outlined. I was really hoping EJ was going to elucidate us on how this might proceed in his latest article, but I didn't see it. That said, in EJ's previous article he did suggest gold drop down to $1100 zone in 2011, but then end the year around $1600.

If we try to connect the dots here, to me that further substantiates the likelihood of the Fed attempting the BEGGINING of policy tightning in 2011 after June 30th; however, and this is a *BIG* HOWEVER, my expectation is that he won't get too far before the markets tank - hence the likelihood of EJ's temporary downturn projections coming true, and then either he + Geitner will try to convince Congress to execute some flavour of QE3, or if the dip is bad enough, perhaps Congress will beg Fed + Treasury to execute on some kind of QE3/stimulous... and then we end up with Gold @ $1600 and USDx @ 0.60

Just my conclusions, but I'm an amateaur... so, I'd love to read more discussion from itulip members on how they view the exit strategy / No QE3 and major events driving the markets come 2H (second half) of 2011!

[c1ue]

Re: Bernanke hint at QE3 in conference call today?

Whatever credibility the Fed has - and in my book, it is low - the true test will be in the summer months.

EJ and others have already noted that inflation is going to be unmistakable starting in Q3 (EJ) or even June (WalMart CEO); at that point the Fed's supposed inflation fighting mandate will be put to a very public test.

[Morelia]

Re: Bernanke hint at QE3 in conference call today?

Whatever credibility the Fed has - and in my book, it is low - the true test will be in the summer months.

If the summer change to winter, yours is no, yours is no disgrace.

[coolhand]

Re: Bernanke hint at QE3 in conference call today?

The history books show that the US Fed was able to hold 10-yr Treasury rates at 2% for the entirety of World War II, and beyond a bit, despite very high & very public inflation levels. So there is already a historical analog for what could occur. And they were able to do this without the help of the Treasury put options they have the ability to use now to help artificially lower bond yields, which they can write in infinite amounts.

If rates go much higher, the entire game is over from both a fundamental economic perspective & a gov't funding/hyperinflation perspective. Full stop. IMO, that tells us that rates aren't going much higher. The hedonic adjustments to inflation will mean that "good substitution" will keep inflation appear relatively tame even as we will be transitioning from eating steak to hamburger to pork to chicken to macaroni to dog food.

Keep in mind that the bottom 44 million Americans have their food paid for by the gov't via food stamps. So that is a simple function of raising their monthly draws by less than inflation...and that means the group that would be most likely to cause political trouble in high inflation will cause no political trouble. You don't bite the hand that feeds. And food stamp rolls will likely continue to grow.

I'm not saying this won't end in tears, b/c it will. But shorting US treasury bonds will likely be a loser's game for a long time to come. The trade has been and will continue to be short Treasuries & use the money to buy hard goods & productive property (or ideally, productive property that produces hard goods.)

[c1ue]

Re: Bernanke hint at QE3 in conference call today?

The history books show that the US Fed was able to hold 10-yr Treasury rates at 2% for the entirety of World War II, and beyond a bit, despite very high & very public inflation levels.

The US didn't owe gigantic sums to foreigners then, nor was there a massive trade deficit.

The fight against Hitler and post-Pearl Harbor Japan also enlisted the US population as seen by the acceptance of rationing and massive purchases of war bonds.

Any enlistment going on right now is involuntary via dollar devaluation.

[flow5]

Re: Bernanke hint at QE3 in conference call today?

Pundits never learned, or forgot, how Roosevelt got his “2 percent war”. This was achieved by having the Fed stand ready to buy (or sell) all Treasury obligations at a price which would keep the interest rate on “T” bills below one percent, and long-term bonds around 2 -1/2 percent, and all other obligations in between. fficeffice" />
This was achieved through totalitarian means; involving the control of total bank credit and the specific rationing of that credit we had official price stability and “black market” inflation.
The production of houses and automobiles was virtually stopped, and credit rationing severely reduced the demand for all types of goods and services not directly connected to the war effort. This plus controls on prices and wages kept the reported rate of inflation down.
Financing nearly 40% of WWII’s deficits through the creation of new money laid the basis for the chronic inflation this country has experienced since 1945. Interest rates, especially long-term, would have averaged much higher had investors foreseen this inflation. This was reflected in the price indices as soon as price controls were removed.