Week ending Feb 20…

GLOBAL GLASS ONION

by rjs

Federal Reserve Balance Sheet Update: Week Of February 18 – New Records In Total Assets And Excess Reserves - The Federal Reserve’s balance just hit another record high, at $2.29 trillion, jumping by a whopping $54 billion sequentially (the biggest weekly increase since mid-November).

• Securities held outright: $1,967 billion (an increase of $60.9 billion MoM, resulting from $56 billion increase in MBS and $5 nillion in Agency Debt), or a huge $53.6 billion increase sequentially. The fed is now 95% complete with its purchases of MBS, and 96% complete with purchases of Agencies. The Fed has completed $167.2 billion of its $175 billion agency debt purchase program through February 17. The Fed’s MBS total is now $1.188 trillion, and by the end of the first quarter of 2010, the Fed will have purchased $1.25 trillion.
• Net borrowings: $127 billion. The monetary base increased by $50 billion in the past fortnight to $2.06 trillion. The ratio of total assets to Monetary Base remained constant at 1.08x, elevated from the historical ratio of 1.00x.
• Float, liquidity swaps, Maiden Lane and other assets: $194 billion. The CPFF program was at $7.7 billion.  FX liquidity swaps are now non-existent.

Fed: we need to shrink our balance sheet, but how? – The Federal Open Market Committee released the minutes of the Jan 26-27 session on Wednesday. The meeting minutes revealed disagreement — or at the very least, debate — over the nature and timing of any moves to reduce the size of the Federal Reserve balance sheet. …staff noted that the Committee might want to address both the eventual size of the Federal Reserve’s balance sheet and its composition. Policymakers were unanimous in the view that it will be appropriate to shrink the supply of reserve balances and the size of the Federal Reserve’s balance sheet substantially over time. Moreover, they agreed that it will eventually be appropriate for the System Open Market Account to return to holding only securities issued by the U.S. Treasury, as it did before the financial crisis. Several thought the Federal Reserve should hold, eventually, a portfolio composed largely of shorter-term Treasury securities…

Bernanke on the Fed’s balance sheet - (charts) Federal Reserve Chair Ben Bernanke last week released a statement of how the Fed intends to manage its bloated balance sheet over the next few years. Here I offer my interpretation of what his plan involves. Bernanke drew a distinction between three different categories of assets that the Federal Reserve has held on its balance sheet. The first involve extension of short-term emergency credit to financial institutions: This lending came in the form of a wide variety of new facilities, which summed to almost $1.6 trillion by the end of 2008, but are now almost entirely wound down or phased out, as Bernanke observed:

The new normal - Also included in Federal Reserve Chair Ben Bernanke’s statement to Congress last week were some guidelines for what we might expect Federal Reserve decisions and communications to look like as we make the gradual adjustment to more normal conditions. In recent years, the Fed had gotten very good at communicating its intentions to the market. FOMC statements came down to a routine in which the Fed announced at each FOMC meeting a target for the fed funds rate that Fed watchers had usually figured out well before the meeting. But the fed funds rate has become an essentially irrelevant number for the last year, and given the Fed’s apparent intention to keep a huge volume of reserves outstanding, will likely remain irrelevant for some time to come. Hence one purpose of Bernanke’s statement was to communicate what we should be looking for in the way of a new format for policy decisions and announcements from the Fed:

Fed Raises Discount Rate to 0.75% from 0.50% – Note: Just to be clear, this is the discount rate and not the Fed Funds rate. This move was being discussed for some time although the timing is a surprise. From the Fed: The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.  Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC).

The Great Unwind begins – Today the Federal Reserve announced that it would raise the interest rate it charges banks on emergency loans from 0.5% to 0.75%, effective tomorrow. In addition, on March 18, the Fed will shorten the length of time banks can borrow from the discount window back down to overnight, where it has historically been. Finally, the minimum bid rate for the Fed’s Term Auction Facility—a program meant to ease short-term lending—will go from 0.25% to 0.50%, and then such auctions will end on March 8. And so the Great Unwind begins. In the wake of the financial-system meltdown, the Federal Reserve, like other central banks around the world, flooded markets with ridiculous amounts of liquidity in a desperate attempt to keep recession from rolling into depression.

Fed Fires Gun On U.S. Exit Strategy As It Raises Discount Rate To 0.75%- The Federal Reserve has officially begun the US “exit strategy” from its emergency economic support measures of the past two years, raising the rate at which American banks can borrow money – The US central bank, chaired by Ben Bernanke, raised the so-called discount rate from 0.5pc to 0.75pc at the request of its 12 regional member banks. The move is highly significant, marking the first time one of the “big three” central banks has tightened policy, rather than merely mooting it, since the crisis begun. Although Mr Bernanke had flagged it as a possibility a week ago, saying that he would consider such a move “before long”, the decision caught some investors by surprise…

In Surprise Move, Fed Signals Pivot to Normal Policy – Taking a step to normalize lending after holding interest rates to extraordinary lows for more than a year to prop up the financial system, the Federal Reserve on Thursday raised the interest rate it charges on short-term loans to banks. While the central bank had signaled its intentions to take such a step, the timing was a surprise. The announcement was made after the stock market had closed in a carefully worded statement that emphasized that the Fed was not yet ready to begin a broad tightening of credit that would affect businesses and consumers as they struggle to recover from the economic crisis.

Working Without a Standard Playbook, the Fed Plans Its Moves on Rates – NYTimes – In raising the interest rate it charges banks for short-term loans, the Federal Reserve set the stage on Thursday for the day when the recovering economy will lead it to begin a broader campaign to tighten monetary policy. The question now is how long it will be until that day arrives.The Fed and its chairman, Ben S. Bernanke, face a complex set of forces as they decide how and when to reverse the aggressive steps they took to contain the financial crisis and the ensuing damage to the economy.  With the financial system awash in money and economic growth picking up, inflationary forces are possible. But with unemployment hovering near double digits, with Mr. Bernanke under attack for his performance in the runup to the crisis and with Congress moving to pare back the central bank’s powers, economic and political pressures are weighing against rapid interest rate increases.

Fed’s Duke: Discount-Rate Hike Not Signaling Any Monetary Policy Change – A newly announced increase in the rate the Federal Reserve charges on emergency loans to banks does not signal any change in monetary policy but shows the central bank is moving to reverse the exceptional aid it provided amid the global financial crisis, Federal Reserve Board Governor Elizabeth Duke said Thursday. The discount rate is what the Fed charges banks that need emergency cash, and that borrowing inevitably carries a stigma for the banks that need such loans.  After U.S. stock markets closed Thursday, the Fed announced it was raising the rate by a quarter-percentage point, to 0.75%. “I’d emphasize that the changes are simply a reversal of the spread reduction we made to combat stigma and like the closure of a number of extraordinary credit programs earlier this month, represent further normalization of the Federal Reserve’s lending facilities; they do not signal any change in the outlook for monetary policy and are not expected to lead to tighter financial conditions for households and businesses,” Duke said in her prepared remarks.

Dudley Calls Discount-Rate Change ‘Technical’ – Federal Reserve Bank of New York President William Dudley said Friday the increase in the discount rate done by the central bank late Thursday was “technical” in nature.“We made a very small technical change” by raising the discount rate, Dudley said. “The action yesterday was really an action about the improvement in banks,” and reflected the fact these institutions no longer need this emergency source of cheap funding the way they did during the depths of the financial crisis, the official said.The discount rate increase “is not at all a signal of any imminent tightening” in monetary policy, and the Fed’s commitment to keep rates very low for an extended period “is still very much in place,”

Fed’s Bullard: Fed Funds Hike As Far Away As Ever After Discount Rate Hike – St. Louis Federal Reserve Bank President James Bullard said Thursday night that a Fed interest rate hike is “as far away as it ever was” in wake of the discount rate increase that the Fed announced earlier Thursday.  Bullard, a voting member of the Fed’s policymaking Federal Open Market Committee said market expectations of Fed interest rate hikes later this year are “overblown.” Calling tools like reverse repurchase agreements and term deposits which would absorb reserves but not reduce the balance sheet “untested,” Bullard indicated he would prefer asset sales.  But Bullard said he would expect the Fed to begin asset sales slowly and gradually.

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Telegraphed” Discount Rate Hike: Goldman’s Take – BOTTOM LINE: The Federal Reserve Board has voted to increase the discount rate by 1/4 percentage point, to 3/4%, effective tomorrow. It has also decided to shorten the typical maximum maturity for primary credit under this facility to overnight, from 28 days, effective March 18, increased the minimum bid rate on the Term Auction Facility to 1/2% from 1/4%, and confirmed plans to phase this facility out. In its announcement, the Board has stressed that all of these are normalizations of its discount liquidity facility and not to be taken as a sign of impending tightening in monetary policy more generally. – Goldman Sachs

Pimco’s Gross: Fed move is not start of tightening cycle | Reuters – The Federal Reserve’s surprise move on Thursday to raise the interest rate it charges banks for emergency loans does not mean that a full-fledged tightening cycle has begun, Bill Gross, the manager of the world’s biggest bond fund, told Reuters.”I don’t think it’s the beginning, really, of a tightening from the standpoint of monetary policy,” Gross told Reuters Insider television soonafter the Fed’s decision. “I don’t think it is the beginning of an increase in the fed-funds rate or in terms of interest on reserves that has been discussed as well.”

Managing Perceptions: Fed Raises Discount Rate After the Close - In a largely symbolic move, the Fed raised the Discount Rate after the bell by 25 basis points to .75%.As you know, the Discount Rate is the interest rate that the Fed charges banks who borrow from them short term on an emergency basis. This is the shaping of perception by the Fed. It does not raise rates for the consumer or businesses, and does not affect the rates and guarantees in the many Fed and Treasury programs which are still supporting the commercial banks. One has to wonder why the Fed chose to jawbone at this time. Is this a move to help them with next week’s $100+ Billion Treasury auction? We are discounting rumours that the nose counts among the Primary Dealers showed the risk of another ‘failed’ auction was rising.

The Federal Reserve’s Exit Strategy: Unlegislated Bailout of Fannie and Freddie – “All told, the Federal Reserve purchased $300 billion of Treasury securities and currently anticipates concluding purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March. I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term. However, to help reduce the size of our balance sheet and the quantity of reserves, we are allowing agency debt and MBS to run off as they mature or are prepaid. In the long run, the Federal Reserve anticipates that its balance sheet will shrink toward more historically normal levels and that most or all of its security holdings will be Treasury securities.” - Federal Reserve Chairman Ben Bernanke, “Federal Reserve’s Exit Strategy” Testimony to House Financial Services Committee, February 10, 2010 Let’s put two and two together here…

cont…. http://globalglassonion.blogspot.com/2010/02/week-ending-feb-20.html