The Fed meets on 12-11 and 12-12 and the replacement for the 667B Operation Twist is the agenda. Remarkably, the Fed has not telegraphed details of their intentions, most likely to keep a distance from the FC governmental mess. If the Fed balks, expect hash language on the Budget process (and a harsh market reaction) as the reason.The feeling is 40-45B in Treasury purchases with various concepts of length. We have been in favor of the 1 to 5 year sector (and more)
over longer dates (and less). My view is there would be positive throw-off from the curve and purchases would cluster inside the Fed's "extended period" guidance. This would help signal BOTH the improving fundamentals and the long awaited end to QE. Call it a final insurance policy move. Others, highlighted by Dudley's recent confab, have focused on the wide spreads in MBS buckets and opt for playing farther out.
The Balance sheet level should approach 4T up from the present 2.86T. A new LSAP of robust size will take out over 90% of net new supply. On an approximate NGDP relationship to pre-crisis the Fed would be about 3T bigger. 1.5T on the liability side is bank reserves. 3T exit strategy fantasy operations will make for interesting minutes in the weeks to come.
Finally, I would point out the trend direction of the deficit in chart 3 and the lack of such improvement for velocity in chart 4. I expect V to turn up in the first half of 2013. Coupled with the 0-negative money curves developing around the world, the US situation could turn virtuous.
Treasuries and MBS held by the Fed.
US Debt level
US Budget Deficit