Nothing Is Better Than Something

The Fed stirred up market festivity,
In spite of low business activity,
From the joy that relates
To their keeping the rates
At zero, as is their proclivity.

With rates so depressingly low,
Fixed income has nowhere to go
So the stock market beckons
To each one who reckons
The chance that their nest egg may grow. 

It highlights how hard to discern it is
To know when the bond market's turn it is,
But with rates to be found
At the null lower bound,
The Dow lacks investment alternatives.

Doves & Hawks Together

Thoughts diverge in the FOMC
On how long to hold on to QE,
But in case of deflation,
Without hesitation,
They'll ease up unanimously.

Market Correlation

Some analysts set about crunchin'
A proven statistical function
For why stocks and debt,
Which used to offset,
More recently move in conjunction.

At the end of it all they succeeded,
Having crunched all the data they needed,
Finding no other fact
So truthfully tracked
As expected expanse of QE did.

Season of Easin'

S&P GSCI GLOBAL COMMODITY INDEX 
VS. U.S. 5-YEAR INFLATION EXPECTATION

The Fed has a great flexibility
To promote economic stability;
They may finish QE
If it's growth they foresee,
Or extend if they sense more fragility.

In the weakening outlook of Spring,
It appears to QE they must cling,
While back in the Winter,
We thought they'd begin ter
Discreetly unwind the whole thing.

Quantitative Ending?

Said Bernanke: "I think we will phase out
QE as recovery plays out,
And joblessness wanes
(Though the latter remains,
Admittedly, still quite a ways out)."

Help the Long-Term Unemployed

The news has been better concerning
A rise in the ranks of the earning,
But many confirm
They've been out longer-term
Without showing signs of returning.

In order to bring employees in,
We need programs to put more trainees in,
To conquer more ills
By developing skills
Than the Fed's quantitatively easin'.

Safe Investments?

Said a strategist, airing his views
On central bank rumors and news:
"You've booked every gain
And best not retain
Your bonds, which are certain to lose."

The Bonds That Divide Us

At the Fed, there are three schools of thought
On the bonds that Bernanke has bought:
A) keep on going,
B) begin slowing,
Or C) we would rather have not.

Minutes of the Federal Open Market Committee's December meeting were released on Thursday, and they reveal the divisions among the members on the Fed's policy of buying mortgage and Treasury bonds to stimulate the economy. Following that meeting, on December 12, the Fed announced that it would continue with the bond purchases until the pace of job creation improved. Yet, the minutes show that the "hawks" on the committee fundamentally disagreed with the entire program and, even among those who supported it, there was disagreement over its timeline. Those who wanted an open-ended monthly commitment to add $85 billion to the Fed's balance sheet were most concerned with allowing the stimulus to have its intended effect, while those who worried about the risk of adding so much to the Fed's own investment portfolio wanted to bring the program to a mid-2013 close.

However, Diane Swonk of Mesirow Financial tells the New York Times that "there’s still a huge bias toward buying." Any appearance of dissension, according to Ms. Swonk, reflects merely "modest misgivings in the middle of the most aggressive effort the Fed has ever undertaken to stimulate the economy."

The Futility of Liquidity

Though the Fed may be funding us cheaply,
Recovery's not rising steeply,
Until and unless
We consumers express
More demand again, broadly and deeply.

This was the message conveyed by Federal Reserve Bank of Dallas President Richard Fisher in a speech in Gainsville, Texas on Tuesday. While "quantitative easing is a necessary but insufficient tool to spark job creation," said Mr. Fisher, "employers will not deploy the cheap and abundant capital on hand toward job creation while there is so much uncertainty surrounding final demand for the goods and services they sell." This is actually a mild statement for the Dallas Fed president, who, while not a member of the Fed Open Market Committee, has consistently opposed its stimulative measures, arguing that quantitative easing and Operation Twist would have little impact against the resistance of regulatory burdens and tax uncertainty. In his latest remarks, he sounds almost Krugmanesque.

More QE, Please

Said Bernanke: "More QE is planned
To give job creation a hand"
(Though it's tricky to know
How banks full of dough
In the aggregate, pump up demand).

Ben Bernanke's announcement of a shift in Fed policy has baffled many in the markets, as Heidi Moore writes in the Guardian. Having moved from a regimen in which rate-setting was linked to both unemployment and inflation, to one in which low inflation is simply assumed while a jobless rate cap of 6.5% is targeted, has raised a number of questions as to implementation and projected timing of eventual interest rate hikes.

More broadly though is the question of how, when US banks already have over $1 trillion in reserves, flooding the system with even more cash will make a difference in the pace of hiring. Most economists agree that the proximate cause of our unemployment level is the lack of aggregate demand. The Fed's purchasing of more billions of Treasury and mortgage bonds may lower yields and therefore move investors into riskier assets such as equities. However, with regard to job creation, quantitative easing is more of a desperation play by a central bank that wishes that the Federal government would hire people to fix the damn infrastructure, already, but expects that they won't.

Monetary Policy Shift

The Fed made a policy shift
To render employment a lift
By buying more bonds,
As liberals and cons
In Congress are "fiscally cliffed."

Said Bernanke: "This monetization,
Which we do without sparking inflation,
Will terminate when
I'm happy again
With the pace of employment creation."

He continued, dispensing liquidity
To the bankers within his vicinity:
"Let the buying commence
Without the pretense
Of an end-date to QE Infinity."

The Federal Reserve Open Market Committee ended its latest two-day meeting with a blockbuster announcement: Chairman Ben Bernanke and colleagues will keep interest rates super-low until the unemployment rate falls below 6.5%. It's the first time that an explicitly quantitative criterion has been publicly articulated for the setting of interest rates. According to the Fed's own labor market projections, we can therefore expect near-zero short-term rates until 2015. Mr. Bernanke expressed frustration with the slow pace of the recovery, as well as the additional roadblock created by the fiscal cliff. "If we could wave a magic wand and get unemployment down to 5% tomorrow, obviously we would do that," he said.

Message from the Fed

"To counter employment fragility,
We promote cheaper funding ability,
But investors who yearn
For a decent return
Must accept more default probability."

The Fed Open Market Committee announced the details of its latest stimulus program on Wednesday, and it's a doozy: under the 3rd round of quantitative easing, the Fed will purchase up to $40 billion a month of mortgage bonds and Treasuries, in addition to its $45 billion of monthly machinations under the Operation Twist program. This massive QE3 intervention is intended to lower long-term interest rates, as the Fed long ago did for short-term rates. Chairman Bernanke and colleagues hope to drive the 10-year T-note, currently yielding 1.75%, back to its July low of 1.38%.

For bond investors, all this rate compression inflames an already acute yield pressure. Those who want to earn an attractive yield must either shift into riskier bonds, or reduce their fixed income allocation in favor of stocks or other more volatile asset classes. As one CIO expressed it to the Wall Street Journal, retail investors "are practically walking around in a daze; they don't know what to do. There is no safe yield out there, so they are redefining what is safe, which is a dangerous thing to do."

QE3

It's expected the FOMC
Will finally enact QE3,
Prodigiously trying
By means of bond-buying
In some way to boost GDP.

If 500 billion is loosed,
There's a zero-point-one percent boost
In the rate of employed,
Which may leave one annoyed
With the gain this investment produced.

"Economists are skeptical about the benefits of another round of bond-buying by the Federal Reserve," writes Phil Izzo in the Wall Street Journal, but nearly all of them expect it, anyway. QE3, the third round of quantitative easing, will comprise more buying of Treasury and mortgage bonds, in a further attempt to reduce long-term interest rates and boost economic activity. Within the economic community, however, expectations for QE3's effectiveness could hardly be lower. 47 forecasters surveyed by the Journal estimate on average that, for every $500 billion in bond purchases, we can expect a 0.1 percentage point drop in the unemployment rate and a 0.2 percentage point increase in GDP. At least there will be no harm done: the group expects inflation to tick up by only 0.2 percentage points.

Momentous Decisions

A decision of global import,
Of the market-determining sort,
May sometimes be posed
For the judgment of those
Who make up a council or court.

Though everyone knows how it has to be,
Since there's only one way to vote ration'ly,
The markets are all
Completely enthralled
By the spellbinding risk of catastrophe.

Today, the financial world is enthralled by two such momentous decisions: 

• In Germany, the Federal Constitutional Court in Karlsruhe must determine whether the European Stability Mechanism may proceed; i.e., whether Germany may participate in it. Everyone expects a resounding "Ja" from the court, as a euro-collapse may well be the consequence of a "Nein" decision. At the same time, the court's upholding the ESM does not mean business as usual, as it would set in motion a process that may well end in a loss of German sovereignty to some form of European political union. 
• Meanwhile, here at home, the Fed Open Market Committee is expected to end its September meeting with an announcement of QE3, the third round of quantitative easing. Intended as a new round of economic stimulus, QE3 is already having an effect on the market before it's enacted, but it is not clear that a new round of Fed bond-buying will move the dial on the unemployment rate. 

Regardless, it appears that New York, London and Tokyo have already decided what Washington and Karlsruhe will do. Shares are up and the dollar is down in anticipation.

Fed Chairman's Remarks at Jackson Hole

"The data we had to exhaust
To show the recovery's lost
May allow me to ease
Now that everyone sees
That the benefit outweighs the cost."

The Economist's Greg Ip explains why Federal Reserve Chairman Ben Bernanke has waited so long to take action to accelerate the stalled US recovery: "Since Mr Bernanke could not escape criticism regardless of what the Fed did, tactically he was best served by waiting until the case for action was unambiguous, unsurprising and, most important, well articulated. The data have made the case unambiguous: employment and growth are weak and inflation by the Fed's preferred measure has edged down. By [the next FOMC meeting on] September 13th, it will certainly be unsurprising. Mr Bernanke's task today was to articulate the case."

See the link above for a comprehensive analysis of the Chairman's speech on Friday at the annual Kansas City Fed economic symposium at Jackson Hole, Wyoming.

At the End of his String

Said Bernanke: "I wish we could bask
In the glow of achieving our task
That the jobless plateau
And inflation stay low,
But at this point, it's too much to ask."

"It's likely no difference at all if I
Induce mortgage interest to fall, if I
Have no guarantees on
The prospects who seize on
Cheap funding, but can't really qualify."

The Federal Open Market Committee wraps up its latest two-day meeting this afternoon and, as always, releases a statement at 2:15. Reuters' Pedro da Costa writes that economists expect the Fed to indicate a "readiness to act" in support of flagging US economic growth. Eric Green of TD Securities, for example, says: "We do not expect any new initiative from the Fed. A dovish statement signaling willingness to do more will manage frustrated expectations for more (monetary easing)." One such heretofore unrequited expectation is that of a third round of quantitative easing ("QE3"), in which the Fed would likely buy long-term mortgage bonds. This would help to lower long-term interest rates, making it cheaper to borrow, and also "breathe fresh life into a housing sector that is finally showing some signs of healing," as Mr. da Costa writes. One problem with such a move is that, as previously noted in this space, US households have been trying to reduce their excessive debt levels, while many who might like to exploit cheaper mortgages cannot qualify to get one.

A Call to Fed Action

An economy mired in stagnation
From a crisis of hypothecation
Then turned to the Fed
And fitfully said:
"Only you can provide our salvation!"

With a glance in its slim bag of tricks,
Said the Fed: "We can certainly fix
Your moribund state
By dropping the rate
From zero-point-two-five to nix."

In a story that inspired much scorn from the financial blogosphere, The Wall Street Journal's Jon Hilsenrath writes that "Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring." The only problem is that, even by the admission of a journalist well connected with the aforementioned Fed officials, the potential steps are not likely to have much effect. For example:

Determined to keep trying to get the economy going without causing inflation, the Fed is exploring other novel measures. One idea mentioned by Mr. Bernanke in his testimony would be to use a facility the Fed calls its discount window to provide cheap credit directly to banks that make new business or consumer loans. But it isn't clear such a program would do much good when banks already have ample access to cheap credit and this kind of program doesn't appear to be winning favor at the moment.

I'm afraid that the time for pushing on a string is past, and the hour for fiscal and structural changes is here, if only the Congress would grasp it.

ECB Rate Announcement

Said Mario Draghi: "Please heed me:
Our 'zone isn't going agreeably;
The better to serve you
In line with our purview,
We'll pay you to borrow if need be."

In an acknowledgement that things are bad all over, the European Central Bank has dropped its benchmark interest rates to record lows. ECB President Mario Draghi admitted in a press conference that his fears of a general slowdown in the euro zone have come to pass. Even such notable ECB hawks as Germany's Jens Weidmann have grasped the olive branch and joined in the unanimously dovish rate decision.

After a 0.25% reduction, the central bank's refinancing rate is now 0.75% and the overnight deposit rate, 0.00%. As Mr. Draghi reminded his listeners, this means that real (inflation-adjusted) rates are negative. At the same time, Europe's central banker is aware that any expansion of credit must be driven by demand, and thus the efforts to get the continent's economy moving again may amount to "pushing on a string."

Like We Did Last Summer

Said the Fed: "The economy's gist, again,
Is that lackluster data persist again;
In short, we have found
That it's coming unwound,
So come on now baby - let's twist again!"

The policy makers of the Federal Reserve Open Market Committee conclude their latest two-day meeting this afternoon with a Ben Bernanke press conference at 2:15 EDT. Most observers expect that, in view of lingering economic weakness in the US, and the downside risks posed by the euro zone debt crisis, the Fed will continue with the so-called Operation Twist.

Under this groovy program of monetary stimulus, the Fed sells short-term Treasury bills and notes, and invests the proceeds in long-term bonds (either Treasuries or mortgage-backed). In so doing, Chairman Bernanke and his cohort hope to stimulate credit activity by holding down the cost of long-term borrowing. As we have seen, this program has had mixed results, in part due to many Americans' limited access to credit. Then again, the tools of the Fed are also limited.

Unqualified Interest

As a primary task of the Fed, it
Should cheapen the cost of our credit,
Which would help a lot more
If the mean credit score
Would qualify many to get it.

The Wall Street Journal's Jon Hilsenrath reports that the Fed's efforts to spread the stimulant of low interest rates throughout the US economy is stymied by the many borrowers who are over-leveraged, underwater and therefore unqualified to refinance at lower rates. Moreover, the fortunate few who can refi at will tend to reinvest rather than spend the proceeds, as they were already able to buy whatever they wanted. In a response that is short on verbiage but long on sarcasm and contempt, the Zero Hedge blog suggests that our national economic model - borrowing to fund consumer-driven growth - may not be sustainable.