Is the Fed Cutting the Cord, or Just Getting Blown Off?

Is this the elusive "exit strategy" in action or just a case of investors trying to wean themselves from the toxic teat?

The U.S. Federal Reserve said on Friday it is scaling back offerings of emergency cash to banks amid waning demand in a step toward pulling back its extraordinary support for the financial system, which appears to be stabilizing after a devastating crisis.

The Fed said it will reduce each of its two Term Auction Facility auctions in September to $75 billion from $100 billion.

The Fed created TAF auctions to supply financial institutions with cash as the credit meltdown, which began in the second half of 2007, became more pronounced and the Fed steadily increased the amounts it was offering.

In its most recent auction, the Fed offered $100 billion but had bids for only $73.4 billion.

As financial markets heal, the Fed will begin to exit from its policies of providing massive liquidity and cutting interest rates to near zero.

And of course, JDA's favorite Fedhead weighed in on this in a recent speech to the Danville, VA Chamber of Commerce:

Richmond Fed President Jeffrey Lacker said on Thursday the Fed should curtail its purchases of longer-term securities if an economic rebound that appears to be in place gains strength.

Lacker and others are concerned the Fed's bloated balance sheet will set the stage for inflation when the recovery gets going.

'Anything that'll help reduce the Fed's balance sheet is greatly welcome,' Ablin said. 'I would expect further steps down the line.'

Some Fed programs will roll off naturally as demand dies down. Others, such as the purchases of longer-term Treasury and mortgage-related securities, will be harder to unwind.

"Demand"? We still care about that?

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


<"Demand"? We still care about that?<

I think they do, JR. In fact I think this is a sincere effort to undergo a thorough public relations makeover - for the following reasons.

1.) A charm offensive may be needed to keep the Fed sekrit sauce still sekrit - that way pesky judges will learn their place and see the error in their initial ruling(s).

2. Zombification of banks is relentless and unending. Witness Mr Middleton's take -

But, as Zombification is a continuing process, a need is exhibited to take the public pressure off the Fed and reassure the public that the necessary steps are being taken to restore everything back to normal. The more cynical and conspiratorial types (yrs truly) might see this as an attempt to prepare the second edition of the last financial coup theme "we didn't see this coming, honest" when bank bailouts part deux occur, but I am sure the media will take the contrarian view that this is a sincere attempt by the fed to restore normality now that the recession is over and the crisis is past.

3.) Perhaps the Treasury auctions really can't stand the competition for funds at the moment. I think most of the bloggers are now of the opinion that the TIC flows have turned negative and a failed (1.0 b/c) Treasury auction is the absolute worst of all outcomes.

4.) Now that ZB is back in the saddle maybe he has a master plan after all - but I see that outcome as likely as Greenspoon taking responsibility for his various policy failures.

And wow, 60 minutes did a hatchet piece on the current mess just this evening. First television I have watched in over a year.

It feels weird calling you Canuckistan (and I'm still LOLing over that) but I'm glad you found yourself a nick you feel comfortable with :)

You know by now that I'm not ashamed of my extensive collection of tin foil hats (a girl has to have one to go with each outfit, right?) so I'll come out and say it: the Fed has way too many things on its plate. Monetary policy has never really been its strong suit but now it has to worry about defense, offense, PR, AND monetary policy (among other things including dissemination of disinformation of course)... would you be all that surprised if some time later down the road the Fed tells us it is OUR fault for interfering in their business? "Oh, we could have fixed everything but you bastards were all up in our bizness..." Oh wait, ZB already did that, didn't he? Pfft.

Point being, they already know what's coming. They know that this "rally" is unsustainable AND they know that they are being watched. But it isn't the bloggers they need to worry about, we've been at this forever. It isn't Ron Paul they need to worry about.

It's the sheep. The sheep, slowly but surely, are blinking the sleep out of their eyes and going "hey, honey, put down the remote for a second and look at this, would you? something doesn't seem right."

The SHEEP are their biggest threat. Not me. I only get to people who come looking for me. The sheep can choose to avoid the dark pools of truth found here, ZH, Denninger, etc etc... But they are starting to ask those precious kwestions like "WTF is up with these Fed people anyway?" and THAT is what keeps ZB up at night.

They know fudging accounting rules can only get them so far. They know they are backed into a corner with this "exit strategy" shit. Look at Lacker's speech on Thursday... though pointing to him might not be appropriate since he's always been the one most likely to "get it".

you think we're in for Bailout Redux? I know Q3 and 4 are going to hurt but... not sure if that's the route we're going to have to take. FDIC bailout, perhaps :P

>you think we're in for Bailout Redux?<

Yes, I do. Many Tier 1 capital ratios are plainly awful and the 'too small to saves' have their asses too far out on the ledge.

>I know Q3 and 4 are going to hurt but... not sure if that's the route we're going to have to take. FDIC bailout, perhaps <

Perhaps we're saying the same thing, only differently.

You are correct in that the masses need to be soothed. Many of them seem to think something is amiss...;)

If you are suggesting an indirect bailout instead of a direct bailout, I would defer to your superior wisdom.

>the Fed has way too many things on its plate<

Agreed. But then again, these types are a bit like Yogi Bear - 'smarter than the average bear' (and of course always filching your picinic basket....:) ) so if anyone (in their opinion) can get away with this, then they can.

>Point being, they already know what's coming. They know that this "rally" is unsustainable AND they know that they are being watched.<

Of course they do. Why else would the insider stock sell/buy ratio be 30:1?
But face it, after you have crashed the ship of state, isn't it your job as "Commode-Door Ben" to make sure as many of the first class passengers get to the lifeboats as humanly possible? There will be plenty of flotsam for the JR's and average ppl to cling to.

As Max Keiser so eloquently stated:
"Capitalism is only for the poor".

>but I'm glad you found yourself a nick you feel comfortable with :)<

I took what was there. I was surprised to see other like minded individuals ahead of me in the nick queue....