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VIDEOFOMC: What Does It Mean?
Interest rates were left unchanged, but there's much more to this story.
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Also see the following: Fed FAQ: Reinvestment of Principal Payments on Agency Debt and Agency
Mortgage-Backed Securities in Treasuries.
Below, you'll find a small sampling of posts from our Buzz and Banter (click for a free trial), as our Professors weigh in:
I Smell Money PrintingLance Lewis
The FOMC statement is out, and surprise, surprise... the Fed has pledged to keep its balance sheet at its current level by redeploying principal payments from agency debt and agency MBS.
We expected that part, but here’s the kicker: the Fed is also going to reinvest those funds exclusively in long-term Treasuries. Thus, over time the Fed is basically going to be converting its $200 bln of agency debt and 1.25 trln of agency MBS on its balance sheet into $1.45 trln of long-term Treasuries (i.e. -- the Fed has pledged to monetize $1.45 trl of government debt).
Needless to say, this is extremely bullish for gold and very bearish for the dollar in my view.
Through The Wormhole, Redux. Again
Howard Simons
The FOMC decision to take whatever payments it receives on mortgage-backed securities, some of which are comprised of mortgages that never should have been written to borrowers without jobs/income/assets and were securitized by investment banks who knew they were bad and were backstopped by Fannie & Freddie, rated by someone with a rubber stamp and sold to buyers who couldn't spell "CDO" to buy Treasury bonds for a government piling up a cool $1.5 trillion or so in new debt every year will push already-low long-term interest rates lower and achieve not a gosh-darn thing because none of the problems we face are attributable to too-high interest rates.
If any of you are wondering why that could not be said in one sentence, cease thy wondering: I just did.
Big Ben and his Minute MenTodd Harrison
As I sit on this conference call (I know, but it's important), the following vibes are top of mind as I digest the latest FOMC ball spinning on the roulette wheel:
The Fed, for lack of a better analogy, is the casino. That's the bet on the "last bullet inward" trade.
The first move -- quite obviously -- was up. That said, and consistent with Coop's Cha-Cha-Cha, I've noticed the "first move-false move" dynamic has recently applied to both the same day and the next day. In other words, "up-down" wouldn't shock me today, nor would a Snapper tomorrow.
The actual action on reinvesting principal payments on the mortgage holdings into long-term Treasury securities? More of the same, in terms of big government. Bottom line: it helps. For as long as investors retain faith in the system and the credibility of policyholders.
R.P.
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