Corridors, Floors and the Way Out

The FRB of New York further attempted to explain a Monetary Regime (something I have felt they should do more of) in a note here:

Thanks to FI must follow Ed Bradford (@fullcarry) for pointing it out.

The Last paragraph is important. The ability to return to a corridor, from a "soggy floor" will be difficult. More likely, no such return to "normal" - where FF are targeted in a midpoint between IOER and Disco Rate- is even hoped for. The Fed can work to firm up the floor and or the floor can firm itself. We would welcome (read anticipate) that firming. An increased PR campaign on extreme accommodation could enhance efforts at more transparency.

Also today, The Fed released its projected timetable template for getting the balance sheet back down. The Fed takes the Street's estimate that hikes begin in late 2013 (promise of 2014 forgotten I guess). They then say FF would be 4% by end of 2016. Declines would commence 2 quarters before hikes and MBS sales 2 quarters after. (Thus jamming themselves on the way out?) By mid-2019 the portfolio would be all Treasuries. By 2017, reserve balances would be $25 B down from the present $1.5T. We have said before that the only exit strategy is "held to maturity" and some of that rings true here. Still, this is an aggressive reduction in balance sheet with NO discussion of collateral damage in the process. I'll make a bold prediction in George HW Bush voice, "Naw gonna doit." Additional Twisting is a no go too. The Fed would need to restock short maturity inventory and a longer duration portfolio would run over this template.

In a carry trade that makes Jon Corzine's back office skills look amateurish , the Fed bought $773B in "stuff" last year and turned $83B in "profits" over to the Treasury Dept. They see that falling to $80B in 2012 and a paltry $30B by 2016. If the Fed were a stock (it is to the regional system, actually), its earnings have peaked and its long term credibility is dropping. Higher multiple? Doubtful. Smells like a short.

Leave a Reply

Your email address will not be published.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