(A response to a comment about Fed policy changes)

On Tue, Mar 11, 2008 at 9:46 AM, Mike wrote:

the dollar may be the buy of a lifetime here….

Right, especially if the Fed cuts less than expected next week, or not at all.

Vicious reversal of commodities, USD, short term rates, but bad day or two for stocks.

This expanded lending facility may also function to increase the supply of short Treasuries for money funds and narrow the Treasury/LIBOR spread and shut up the rocket scientists who say low rates on short term Treasuries are the market screaming for rate cuts.

9 Responses

  1. Are you saying the commodity bubble could pop next week?

    money funds and narrow the Treasury/LIBOR spread and shut up the rocket scientists who say low rates on short term Treasuries are the market screaming for rate cuts.

    This is used allot by the CNBC talking heads. What is the counter argument? Why are short term rates so low when inflation is high? (flight to quality?)

  2. If they understood how little Agency/MBS debt they would have to purchase to correct the problem and bring international buyers back to the US MBS market, they’d probably be very surprised–this would also stop the nonsense of further easing.

  3. RESPONDING TO BOTH QUESTIONS:

    No pop, but have a set back that initially looks like a pop

    short rates are low because money market funds can’t/won’t buy anything else because they are frightened of losing their par nav.

    That’s the big question, are they doing all this instead of an ease (afraid of inflation, finally) or in addition to an ease. No way to tell with this Fed.

  4. Yes, I’m currently short Dec 09 and still way under water.

    Hard for me to see this Fed keeping rates low much longer if crude/food keeps rising. And even if it doesn’t and levels off there’s a couple of years of catch up in the core numbers already baked in.

  5. “This expanded lending facility may also function to increase the supply of short Treasuries for money funds and narrow the Treasury/LIBOR spread and shut up the rocket scientists who say low rates on short term Treasuries are the market screaming for rate cuts.”

    The TSLF looks like it will operate to offset the TAF as it is directed at the Primary Dealers. Kind of like a super charged $200 billion repurchase agreement to keep short-term interest rates above the zero bound.

    Notice the increase in the TAF to $100 billion was mentioned in the same release as the ‘potential’ $200 billion TSLF.

    The first $100 billion will be for mopping up TAF issued reserves and the second $100 billion will be traded for various agencies etc. as well as kept for future TAF expansion. The primary dealers will likely sell any TSLF issued tsy secs to small banks to help pull reserves from circulation.

    Since the supply of tsy secs would increase and the supply of other securities decrease, there likely will be a compression in yields.

    “The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, …..

    The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion.”

    http://www.federalreserve.gov/newsevents/press/monetary/20080311a.htm

  6. The larger point is that ANY assets banks are allowed to hold already have to be on the regulators approved list, and banks in any case can fund all their (legal) assets with with govt insured deposits.

    So why should another arm of govt, the Fed, not always provide funding for the same govt approved assets that the govt already provides funding for?

    This was my proposal to the Fed back in August. Why did it take them so long to ‘figure it out’ first with the TAF and now with the sec lending facility? And even now only with partial measures? Clearly they are still in the dark on the workings of monetary ops and reserve accounting.

  7. W,
    So before you write your pre-fed meeting analysis. Given what happened yesterday, that is, the FED announces these TAF/TSLF solutions and the fact that the stock market loves it, doesn’t this change the equation for the FED. Did yesterday teach them that they may be able to fight inflation without obliterating the stock market? Or are they going to continue to throw the kitchen sink at at the ‘market functioning’ problem and economic weakness problem at the expense of inflation?

  8. Right, that’s the question.

    did they do all that as an alternative to cutting rates.

    or in addition to a rate cut.

    This Fed is capable of cutting 100 or not cutting at all.

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