Your Move Europe

The Fed meeting resulted in some of the most violent price action we've seen. When the bell rang, the conventional view was positive as stocks had a moonshot in the final 70 minutes. I found the statement to be brilliant. The Fed "said" something but "did" nothing. Not a single dollar was promised to be printed or additional Treasury note monetized. Many will now call for QE3. I believe the Fed could merely roll matures and refis into slightly longer duration and hold the size of the balance sheet stable.
We are not mortgage bond experts. The rough estimate that we have is extending duration from 5.9 years to 7 years (on Fed bal sheet) would take 130B in 10 year supply out. Three dissents show this was not an easy meeting. The Chairman found a compromise way out. There remains a ton of dysfunction. The 2 year hit 16+ as flatteners were lifted in the melee. LIBOR remains at 27bp (a false rate). The focus now shifts back to Europe and the size of the bazooka.
The ECB has dealt only with liquidity issues in the EU. The solvency issue is the EFSF, ESM or some other yet to be formed groups problem. In many ways, the Fed needs the ECBs policy now and the ECB needs the Feds. There is no way to make the swap let alone a creeping switch. The meeting has taken the next year and a half out of the Eurodollar curve. Chaos (and volatility) in the name of stability should stay with us for some time.

Leave a Reply

Your email address will not be published. Required fields are marked *