NY Fed Markets Desk Head: "Watch Us Pull Out. Seriously."

Tuesday, March 09, 2010 , , , 1 Comments

 Grow up, you filthy freaks!

Yeah I'm going to go ahead and resist the easy juvenile joke here, let's talk about the Fed pulling out instead (Lord, just can't get away from it).

WSJ's Real Time Economics:

The Federal Reserve pumped more than $1 trillion dollars into the economy at a lightning pace, but it plans to take it out glacially, a senior Fed official said in a speech Monday.

Brian Sack, who runs the markets group at the Federal Reserve Bank of New York, laid out more detail on the Fed’s plans to reduce its massive holdings of mortgage backed securities and Treasurys in a speech to the National Association of Business Economics in Washington.

The Fed is on course to own more than $1.25 trillion worth of mortgage backed securities by the end of March. As the economy improves it wants to reduce those holdings, but officials don’t want to do it in a jarring way. Mr. Sack noted that some of these holdings will run off naturally. By the end of 2011, more than $200 billion worth of mortgage securities mature or will be prepaid by borrowers. The Fed can shrink its balance sheet by not reinvesting proceeds from these securities as they’re paid off by borrowers, helping its own balance sheet to “shrink meaningfully.”

Mr. Sack noted that another $140 billion worth of Treasury securities mature by the end of 2011. Right now the Fed is reinvesting cash it gets as Treasury securities mature, but it could decide to let those securities run off too, shrinking its balance sheet even more, he noted.

“With this approach, the FOMC would be shrinking its balance sheet in a gradual and passive manner,” he said. “That, in my view, is a crucial message for the markets.

“A decision to shrink the balance sheet more aggressively could be disruptive to market functioning,” he said, adding, “A more aggressive approach would risk an immediate and substantial rise in longer-term yields that, at this time, would be counterproductive for achieving the (Fed’s economic growth) objectives.”

That's because the Fed now has a direct financial interest in the outcome of any policy shift, as it is the largest holder of, well, just about anything that isn't nailed down. If that isn't a conflict of interest, I invite you to explain to me what one is, as it seems clear that the Fed cannot possibly respect its dual mandate of price stability and maximum employment (LOL!) and serve its massive portfolio without taking a huge financial hit.

So? What does that leave you with?

Chickenshit central bankers who are scared to death to pull the trigger on a strategy they don't have but must know deep down is doomed anyway.

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.


Anonymous said...

I'm hoping that they (and their enablers) have truly bitten off more they they can comfortably chew and are forced to swallow a large dose of their own medicine. In a perfect world, they've created their own clusterfuck. In a more perfect world, if this thing blows up in their faces, it would be best (by that I mean entertaining) if it would do so during the political "high season". There is a fine line between being paternalistic/accommodating and being meddlesome.