Is the Fed about to start printing more money?

[Perchoutofwater]

Fed Will Probably Start $500 Billion of Bond Buys, Survey Shows

By Caroline Salas and Alex Tanzi - Nov 1, 2010 1:36 PM CT

 

The Federal Reserve will probably begin a new round of unconventional monetary easing this week by announcing a plan to buy at least $500 billion of long-term securities, according to economists surveyed by Bloomberg News.

 

Policy makers meeting tomorrow and Nov. 3 will restart a program of securities purchases to spur growth, reduce unemployment and increase inflation, said 53 of 56 economists surveyed last week. Twenty-nine estimated the Fed will pledge to buy $500 billion or more, while another seven predicted $50 billion to $100 billion in monthly purchases without a specified total. The remainder said the Fed would buy up to $500 billion or didn’t quantify their forecast.

 

The varied responses reflect differences among Fed officials over the total amount of purchases needed to bolster the recovery. Policy makers, pursuing unprecedented stimulus, have cut the benchmark rate almost to zero and bought $1.7 trillion in securities without generating growth fast enough to bring down unemployment from near a 26-year high.

 

“There’s no silver bullet right now,” and central bankers have “very few options left in terms of lowering interest rates,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. He predicted $500 billion of Treasury and mortgage-backed securities purchases over the next six months.

 

Shock-and-Awe Plan

 

Disagreements among policy makers over whether to incrementally expand the balance sheet or stage a so-called shock-and-awe program of big asset purchases has created confusion among investors over the likely size and duration of any new easing, said Ward McCarthy, chief financial economist at Jefferies & Co. in New York.

 

“There has not been a uniformity of opinion emanating from the multitude of public appearances from Fed officials,” McCarthy said. He predicts the Fed will buy $500 billion of securities over the next six months and was among 13 economists who said the purchases would include mortgage-backed bonds in addition to Treasuries.

 

New York Fed President William Dudley set expectations for $500 billion in purchases when he said in an Oct. 1 speech that purchases totaling about that amount would add as much stimulus as lowering the Fed’s benchmark rate by 0.5 percentage point to 0.75 percentage point.

 

Dudley put the $500 billion figure “in there and it sounded like he was trying to move it along in that direction,” said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ in New York, who predicts the Fed will announce up to $500 billion of purchases by March.

 

Many Variables

 

Referring to investor expectations of the central bank’s next move, Rupkey said, “It’s a mess and it’s just because there’s too many variables between the amount and the time period.”

 

St. Louis Fed President James Bullard said Oct. 21 the Fed should buy $100 billion in long-term Treasuries this month and calibrate subsequent purchases based on the course of the economy. Atlanta Fed President Dennis Lockhart said that a pace of $100 billion of purchases a month is “in the range of numbers one might consider.”

 

Estimates by economists about the duration of a Fed asset purchase program ranged from as short as three months to as long as the end of 2011. Three analysts said the Federal Open Market Committee wouldn’t announce new stimulus.

 

Favorable Reaction

 

“It’s highly unlikely that anyone’s going to get all the details right because going into the meeting Fed officials themselves won’t have agreed on all of” them, Jefferies’ McCarthy said. He said he expects the Fed to buy mortgage-backed securities because it would be a positive surprise, and the central bank wants a “favorable market reaction.”

 

The lack of clarity over the Fed’s plans has played out in the Treasury market, which handed investors a loss of 0.18 percent in October, the first negative monthly return since March, according to index data compiled by Bank of America Merrill Lynch. After falling to 2.38 percent on Oct. 7 from 2.51 percent on Sept. 30, the yield on 10-year Treasuries has since climbed to 2.63 percent, Bloomberg data show.

 

Not all Fed officials agree the central bank should start new stimulus measures. Kansas City’s Thomas Hoenig, who has already dissented six straight times, said Oct. 25 that he opposes more easing and because it’s “a very dangerous gamble” that may accelerate inflation and create asset price bubbles. Dallas Fed President Richard Fisher and the Philadelphia Fed’s Charles Plosser have also spoken out since the FOMC’s last meeting against more action by the central bank.

 

Raise Inflation

 

Chicago Fed President Charles Evans said several times last month that the central bank needs to take action and should buy securities on a large scale to carry out his preferred strategy of aiming to raise inflation temporarily.

 

“They’re in uncharted waters here, and no one really knows, we’re all guessing” about the size and duration of the easing program and its ultimate impact, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “I haven’t seen anybody out there who has made a convincing case that this is anything but a trivial boost for the economy.”

 

The central bank last month asked bond dealers and investors for projections of its asset purchases over the next six months, along with the likely effect on yields. The New York Fed, the branch of the Federal Reserve System that implements monetary policy, asked about expectations for the size of the program and the time over which it would be completed, according to a survey obtained by Bloomberg News.

 

Incremental Tactic

 

Stanley predicted the Fed will opt for the incremental tactic and announce a program to buy $200 billion of Treasuries by its Jan. 26 meeting.

 

“They want to preserve flexibility and to have the option of tweaking the pace as they go based on whatever it is that they choose to look at,” Stanley said.

 

“Clearly the thrust of this is to get long-term rates lower, but when you listen to what they say about it they don’t even plan to get a lot of juice out of what they want to do,” he said. “What does that do for the economy?”

 

Dudley, who is also vice chairman of the FOMC, said in the Oct. 1 speech that the central bank would probably need to act to address “unacceptable” job growth and inflation.

 

The U.S. economy expanded at a 2 percent annual rate in the third quarter and inflation cooled, Commerce Department figures showed Oct. 29 in Washington. The report showed the inflation gauge watched by the Fed rose the least in almost two years as retailers like Wal-Mart Stores Inc. and Target Corp. use discounts to lure shoppers.

 

Raise Expectations

 

In addition to a new round of asset purchases, policy makers are also considering efforts to boost public expectations that inflation will rise, according to the minutes of the FOMC’s Sept. 21 meeting.

 

All but two economists predict the Fed will leave the interest rate on excess reserves unchanged at 0.25 percent. Fifteen analysts, including McCarthy, say the Fed will alter the phrase that its benchmark interest rate will stay near zero for an “extended period,” which was introduced in March 2009.

 

“They’ve been telling us they’ve been considering a change to the ‘extended period,’ so at some point they’re going to do it and this is as good a time as any,” McCarthy said.

 

The questions were as follows:

 

1a. At the FOMC’s Nov. 2-3 meeting, will the committee decide to (choose one):

 

a) Retain the current policy of keeping a constant level of the Fed’s securities holdings by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities

 

Increase the level of securities holdings through additional asset purchases

 

Result (56 replies): A, 3; B, 53.

 

1b. If you answered ( to the last question, please provide your predictions on the following possible elements of the announcement:

 

a. The amount of additional purchases announced in billions

 

of dollars:

 

b. The length of time for the additional purchases to be

 

completed:

 

c. The types of securities to be purchased:

 

1) Treasuries

 

2) mortgage-backed securities

 

3) both Treasuries and MBS

 

4) other (please elaborate)

 

Result (53 replies): a) 29 expect $500 billion or more; 7 predicted monthly purchases of $50 billion to $100 billion without specifying a total; 12 predicted up to $500 billion; 5 didn’t specify an amount.

 

7 predicted monthly purchases with no timeline; 9 predicted up to three months; 17 said between three and six months; 9 said between six months and one year; 5 said through 2011; 6 didn’t specify a pace or timeline.

 

c) 38 said Treasuries (including Treasury-Inflation Protected Securities); 13 said both Treasuries and MBS (including one that also predicted agency bond purchases); 2 didn’t specify.

 

2. Will the FOMC statement following the Nov. 2-3 meeting include any changes to the following sentence: “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.” Yes or no.

 

Results (49 replies): Yes, 15; No, 34.

 

3. Will the Fed decide at the Nov. 2-3 meeting to reduce the 0.25 percent interest rate on excess reserves? Yes or no.

 

Results (47 replies): Yes, 2; No, 45.

 

Bloomberg

 

Assuming the majority are correct, does this mean that the Fed will basically print $500 Billion in new money? If so, what percentage of the overall money supply would that be? Will it affect inflation at the same percentage?

 

If this is it likely to do to interest rates in the next year or so?

 

I'm actually considering refinancing my house. I'm trying to figure out the probability of interest rates remaining where they are while this is implemented and when inflation actually starts. I'm also trying to figure out if I wait will I be better off because my house should be worth more due to inflation. So do I wait hoping for inflation and that rates remain the same? I would think that inflation would cause me to have more equity in my house making it to where I could get a better interest rate on the refi, assuming that rates remain the same. So am I better waiting to refi, or should I go ahead and do it?

[Avernus]

Bloomberg

 

Assuming the majority are correct, does this mean that the Fed will basically print $500 Billion in new money? If so, what percentage of the overall money supply would that be? Will it affect inflation at the same percentage?

 

If this is it likely to do to interest rates in the next year or so?

 

I'm actually considering refinancing my house. I'm trying to figure out the probability of interest rates remaining where they are while this is implemented and when inflation actually starts. I'm also trying to figure out if I wait will I be better off because my house should be worth more due to inflation. So do I wait hoping for inflation and that rates remain the same? I would think that inflation would cause me to have more equity in my house making it to where I could get a better interest rate on the refi, assuming that rates remain the same. So am I better waiting to refi, or should I go ahead and do it?

 

 

I would wait until after 2012 which I think will start the time to sell and then around 2014. I expect to see house prices shoot up about 30%....I'll be selling around that time because the price of things going up gets people into spending even though they don't realize the value probably went down....so the market should be active again with all this inflation - this will be a simulated recovery which will lead to another downturn around 2018 if they continue down this path...

[MojoMan]

I read about this QE2 plan quickly and also would like to know what Weigie, muck, etc think.

 

Apparently, it is risky and could backfire.

 

Should we be AFRAID?

Edited November 3, 2010 by MojoMan

[Brentastic]

We'll find out in about 40 minutes what the Fed plans for QE2. I think they will start with $100B and leave it open for possibly more in future weeks/months. I don't think they will commit to anything more than $500B but they could. What pisses me off the most is that the Fed has everyone thinking that inflation is good and that we must achieve a 'mandated' inflation rate. Bullchit! Inflation is good for the Fed, not for everyone else.

[Brentastic]

I would wait until after 2012 which I think will start the time to sell and then around 2014. I expect to see house prices shoot up about 30%....I'll be selling around that time because the price of things going up gets people into spending even though they don't realize the value probably went down....so the market should be active again with all this inflation - this will be a simulated recovery which will lead to another downturn around 2018 if they continue down this path...

I think the housing market has entered a 20 year bear market. The housing boom starting in the 80s was because the baby boomers out-numbered the previous generation, meaning the number of homes available were few and this drove up prices and growth.

 

Now, however, the tables have turned. The gen Xers are few and the baby boomers who are dying/selling etc… are many. The demand is low while the supply is great. Until the millennium generation begins buying houses from us gen Xers, the demand remains low.

[bpwallace49]

Isnt the world going to end in 2012 anyway?

[Azazello1313]

risky, maybe, but I think it is a wise move. unlike fiscal pork "stimulus", monetary stimulus actually works.

 

this guy's blog is enormously helpful and insightful.

[Perchoutofwater]

Isnt the world going to end in 2012 anyway?

 

Only if Obama get's reelected and the Lord see's we as a nation have not repented of that sin.

[bpwallace49]

Only if Obama get's reelected and the Lord see's we as a nation have not repented of that sin.

 

The Mayan Lord?

 

Or Allah? (praise be unto him) as the Lord of our president?

Edited November 3, 2010 by bpwallace49

[Brentastic]

Fed to print another $600 by 2nd QTR 2011. Rates to remain between 0-.25% for an extended period of time.

 

The initial projections were $1Trillion, so at least it's less than that. Either way, this is unfortunate.

[Avernus]

Fed to print another $600 by 2nd QTR 2011. Rates to remain between 0-.25% for an extended period of time.

 

The initial projections were $1Trillion, so at least it's less than that. Either way, this is unfortunate.

 

600B?I'm willing to bet that this number more than doubles by the end of 2011...

[Square]

Only if Obama get's reelected and the Lord see's we as a nation have not repented of that sin.

 

The Mayan Lord?

 

Or Allah? (praise be unto him) as the Lord of our president?

Ah, c'mon... You have to know that even Perch can make a joke once in awhile.

 

[muck]

Bernanke fears deflation. Printing money today will reduce the risk of deflation occurring. A little deflation would be more harmful to the economy than a little inflation.

 

If we continue printing money, eventually, inflation will kick-in ... and then overheat.

 

Personally, I believe that we're going to see VERY low inflation (if not deflation) for at least 6-12 months (possibly as long as 2-3yrs), and then, at some point, inflation will kick-in in a very (VERY!) big way.

 

GTB ... what do you think?

[The Irish Doggy]

Personally, I believe that we're going to see VERY low inflation (if not deflation) for at least 6-12 months (possibly as long as 2-3yrs),

 

 

Agreed. There has been more than the usual amount of pressure from the big retailers on vendors to keep prices low IMO.

[T_bone65]

Printing more money keeps T_Bone65 employed that much longer