Always consider hidden risks
The net effect of maturing assets and treasury issuance over the week caused the average maturity of all marketable treasury securities to rise to 65.36 months from 65.28 months. The stock of the Fed's holdings reduced the average maturity of marketable treasury debt held by the private sector by 9.64 months from 9.58 months in the prior week, and the privately held public debt average maturity rose to 55.73 months from 55.70 months.
The amount of ten-year equivalents held by the Fed increased to $1.333 trillion from $1.325 trillion in the prior week, which reduces the amount available to the private sector to $3.550 trillion. There were $4.884 trillion ten-year equivalents outstanding. The Fed owns 27.2% of the bond market expressed in 10 year equivalents. Assuming the Fed's balance sheet rises to $5 trillion by the end of 2014, this number will rise to nearly 60%.
Average Fed SOMA holdings duration: 7.65 years. On $3 billion in holdings this is over $2 billions for a change of 1 basis point in yield.
Bernanke is probably the biggest prop trader on this planet ; even if I try hard, he s got a small edge over me, an infinite balance sheet with no P&L...
So the Fed is piling up in Quantitative Easing and Operation Twist and the remaining result is a gargantuesque balance sheet with a ton of risk. And because No Rules of Engagemnent has been decided yet, the market can punish them accordingly very quickly...
The FED and F35 Grounded ? Still no Rules of Engagement
( From Wiki, Zero Hedge, Washington
Post,The Telegraph , Bloomberg, Chattanoogan, CNN Money )
A More Conservative Approach - Very Easy to Estimate Costs
If the FED main goal is to maintain downward pressure on longer-term interest rates, support mortgage markets, and help make broader financial conditions more accommodative, they re doing ok with what they do but with a lot of risk on board...
Shoudn t the FED Real goal is to lessen financial costs to borrowers ? Then a better and more effective effective way are to be influence by a program launched in 2012 by the BOE : Funding for Lending Scheme.
It is a simple and efficient way from the Central Bank to cut effective rates on loans and mortgages. So the basic mechanism is as follow : for each new loan, the Central Bank lessen the cost of fund to the bank who make the loan. Then the bank must do the new loan at an effective lower rates to consumers... It s a direct transfert of lowering borrowing costs...
Read also :
BOE Funding for Lending Scheme
Banks take £4.4bn from BoE under Funding for Lending
Some Mathematics : FED s Super Bowl VS BOE Funding for Lending Program
So let s say that the FED want to continue to fill their Super Bowl but with a program like the BOE : let s say they are able to create 500 billions $ of new loans for a year and propose 2% or rate reduction to consumers from auto loans to mortgages...
So 500 billions$ X 2% = 10 billions $
And actually the FED Super Bowl Balance Sheet is duration of 7.65 times 3 trillions $ of assets equal 2.3 billions $ for a change of one basis point in the bond market.
If we compare, it means that the cost of the new approach is less than 5 basis points change on the FED s balance sheet.
Make your own conclusion !
So the FED trying to keep rates very low is creating situations in the financial markets that hasn t never been tested so far,
( Read also : Houston we have problem - FED New Bubbles ) and at a huge financial risk...
At some point, if you want to help the consumers, may be the FED should target them directly with that kind of program !
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There is a lot of similarities actually between the FED Quantitative Easing program and the F35 fighter jets : they are both stealthy, risky, getting out of control and bringing new technology experiment and nobody knows what the real final costs will be !
We will try to explain the main factors at stake with the FED these days :
Even with the FED new policy of the past years to be more open to communication with the markets, we realize at some point that it can be more harmful than anything else...With the build up of assets and risks associated to it, more and more debate ( especially internally ) are bringing confusion to market participants. And even with all those new tranparency strategy they try, one and only one question arise :
how they will manage their exit strategy.
And Senators Bob Corker, R-Tn., and David Vitter, R-La., both members of the Senate Banking Committee, earlier in february introduced legislation to re-establish price stability as the Federal Reserve’s single mandate.
“Providing the Fed with a clear and explicit focus on keeping inflation low will serve America better than the broad, bipolar mandate it has today. The dual mandate blurs the line between fiscal and monetary policy and allows Congress to shirk its responsibility to enact sound budgets and policies that produce economic growth,” said Sen. Corker. “The best way to achieve full employment in the long-run is to provide markets certainty that long-term price stability will be maintained.”
“I’ve long argued that the Fed should just focus on inflation. With endless stimulus-type initiatives coming out of the Fed and the money printing press never ending – all under the banner of helping boost employment – the Federal Reserve should get back to its original goal. This policy strives to do just that,” said Sen. Vitter.
Stanford Economist John Taylor and St. Louis Federal Reserve President James Bullard have both expressed support for returning the Fed to a single mandate of price stability.
THE FED'S GREAT EXPERIMENT
Sometime in the next few years the bank will need to stop stimulating growth and start selling the assets it has accumulated along the way. No central bank has ever before unwound such a massive amount of stimulus.
The Fed "is making up a lot of this as we go along," says Tim Duy, a University of Oregon economist who writes a blog called Fed Watch that is popular among monetary-policy junkies. "We're not entirely flying blind from a historical perspective, but we're certainly close to that."
In theory, the Fed merely has to reverse the QE process, selling assets to suck up all those dollars. Easier said than done, says Plosser. "If we are too late or must react aggressively, the consequences could get more ugly, more risky than in normal times," he says.
"My view is we've done enough," says Fisher. "The gas tank is overflowing."
The funny things at looking at the FED Huge Punch Bowl, is that most of the FED watchers are focusing in terms of FED assets, in terms of Balance Sheet. Very few overview it with a risk perspective. Let s try to overview the risk behind that massive FED balance sheet...
Data below are as of october 2012 to estimate the risk on the balance sheet of the FED.