gonegolfin
Member
The below describes some interesting intervention by the Federal Reserve on the short end of the yield curve that I have noticed in the last month ... something I have yet to see anyone write about, either in the Wall Street media nor in the alternative financial media.
I have always monitored the Federal Reserve's open market operations, which are almost always temporary open market operations (TOMOs). But always of great interest are any permanent open market operations (POMOs) undertaken by the Fed since these are operations where the Fed permanently injects more money into the system (increase in the supply of money == inflationary) or removes/extinguishes money from the system (decrease in the supply of money == deflationary). The Fed conducts these operations by either buying securities (usually treasuries, but lately many more agency bonds (Fannie Mae, Freddie Mac, Sallie Mae, etc.) and mortgage backed securities) in the open market or selling treasuries in the open market from their portfolio. The Fed purchasing securities is essentially monetizing debt as debt is purchased (one would argue bad debt as of late) with newly created dollars (why private banks have the power to manipulate our money supply/currency is another topic). This results in an increase of the money supply and is thus inflationary. When the Fed sells treasury securities from its portfolio, it takes in existing dollars from the money supply and as such, those dollars cease to exist (extinguished from the money supply). In theory, the TOMOs will have a neutral effect on the money supply in the end as the borrowing banks must pay back their Fed loans (reverse repurchase agreements) and reclaim their collateral when the loans mature (the loaned money is extinguished). However, the Fed keeps rolling over these loans into new loans. So, the effect thus far has been only an inflationary one. But POMOs are permanent and is the focal point of the discussion here.
These permanent open market operations began on March 7th with the last one being Thursday April 3rd. Now, while the Fed has engaged in many inflationary moves over the past several months (targets for interest rates cut aggressively, TAF, TSLF, more temporary open market operations, extending the discount window to the primary dealers, loans to JP Morgan for the arranged buyout of Bear Stearns), these permanent operations to which I refer are actually deflationary as they are selling T-Bills and T-Bonds from their portfolio. Twelve permanent open market operations have taken place during this period on eleven different dates. The Fed portfolio sales amount to a total of $144 billion in less than a month. $79 billion of this total is the selling of T-Bills, mostly of the one and three month variety. This leaves about $35 billion in sales of T-bonds, with some having a maturity of just over three years. The New York Fed Open Market Operations can be found here ... http://newyorkfed.org/markets/openmarket.html.
What is the Fed doing? It looks as if they are attempting to force higher yields (lower prices) on these shorter term securities (1 mos. -> 3 years) by adding supply into the market. Why would they do this? Well, there has been a flood of money into short term treasuries (viewed as a safe haven - believe it or not), especially around the time the Bear Stearns crisis erupted. This pushed yields down to 0.61% on 3/19 for the three-month T-bill and just above 0.25% on the one-month T-bill. This is essentially as valuable as cash in the mattress and is not good for the US Dollar. Maybe the Fed views this situation as a must defense of the Dollar and is taking action, but in a targeted fashion as an overall deflationary policy would be catastrophic to the economy and the US Government. If you look at the three-month T-Bill today, it is back in the 1.35% range with the one-month sitting at 1.50% ... http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml. The short end of the yield curve took quite a leap in only a few days. Again, the Fed selling these short term treasuries from its portfolio into the marketplace has a deflationary effect on the money supply and provides more supply of short term treasuries to meet demand. In addition to some defense to the Dollar, I am speculating that they feel they need to do this to bring the short end of the treasury yield curve back closer to where the federal funds rate is sitting. Doing so will also lessen expectations in the marketplace that the Fed is not close to finishing its cuts in interest rates and give the Fed some leeway to stop in the next quarter or so (this simply cannot continue). All of what is happening is an interesting mix of inflationary and deflationary forces (mostly inflationary), which is not unusual in an inflationary recession. But it also helps illustrate all of the different fires the Federal Reserve is fighting (which must be solved with different and often contradictory measures) as they are truly between a rock and a hard place. Of course, the Fed is the root cause of the problem.
Brian
I have always monitored the Federal Reserve's open market operations, which are almost always temporary open market operations (TOMOs). But always of great interest are any permanent open market operations (POMOs) undertaken by the Fed since these are operations where the Fed permanently injects more money into the system (increase in the supply of money == inflationary) or removes/extinguishes money from the system (decrease in the supply of money == deflationary). The Fed conducts these operations by either buying securities (usually treasuries, but lately many more agency bonds (Fannie Mae, Freddie Mac, Sallie Mae, etc.) and mortgage backed securities) in the open market or selling treasuries in the open market from their portfolio. The Fed purchasing securities is essentially monetizing debt as debt is purchased (one would argue bad debt as of late) with newly created dollars (why private banks have the power to manipulate our money supply/currency is another topic). This results in an increase of the money supply and is thus inflationary. When the Fed sells treasury securities from its portfolio, it takes in existing dollars from the money supply and as such, those dollars cease to exist (extinguished from the money supply). In theory, the TOMOs will have a neutral effect on the money supply in the end as the borrowing banks must pay back their Fed loans (reverse repurchase agreements) and reclaim their collateral when the loans mature (the loaned money is extinguished). However, the Fed keeps rolling over these loans into new loans. So, the effect thus far has been only an inflationary one. But POMOs are permanent and is the focal point of the discussion here.
These permanent open market operations began on March 7th with the last one being Thursday April 3rd. Now, while the Fed has engaged in many inflationary moves over the past several months (targets for interest rates cut aggressively, TAF, TSLF, more temporary open market operations, extending the discount window to the primary dealers, loans to JP Morgan for the arranged buyout of Bear Stearns), these permanent operations to which I refer are actually deflationary as they are selling T-Bills and T-Bonds from their portfolio. Twelve permanent open market operations have taken place during this period on eleven different dates. The Fed portfolio sales amount to a total of $144 billion in less than a month. $79 billion of this total is the selling of T-Bills, mostly of the one and three month variety. This leaves about $35 billion in sales of T-bonds, with some having a maturity of just over three years. The New York Fed Open Market Operations can be found here ... http://newyorkfed.org/markets/openmarket.html.
What is the Fed doing? It looks as if they are attempting to force higher yields (lower prices) on these shorter term securities (1 mos. -> 3 years) by adding supply into the market. Why would they do this? Well, there has been a flood of money into short term treasuries (viewed as a safe haven - believe it or not), especially around the time the Bear Stearns crisis erupted. This pushed yields down to 0.61% on 3/19 for the three-month T-bill and just above 0.25% on the one-month T-bill. This is essentially as valuable as cash in the mattress and is not good for the US Dollar. Maybe the Fed views this situation as a must defense of the Dollar and is taking action, but in a targeted fashion as an overall deflationary policy would be catastrophic to the economy and the US Government. If you look at the three-month T-Bill today, it is back in the 1.35% range with the one-month sitting at 1.50% ... http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml. The short end of the yield curve took quite a leap in only a few days. Again, the Fed selling these short term treasuries from its portfolio into the marketplace has a deflationary effect on the money supply and provides more supply of short term treasuries to meet demand. In addition to some defense to the Dollar, I am speculating that they feel they need to do this to bring the short end of the treasury yield curve back closer to where the federal funds rate is sitting. Doing so will also lessen expectations in the marketplace that the Fed is not close to finishing its cuts in interest rates and give the Fed some leeway to stop in the next quarter or so (this simply cannot continue). All of what is happening is an interesting mix of inflationary and deflationary forces (mostly inflationary), which is not unusual in an inflationary recession. But it also helps illustrate all of the different fires the Federal Reserve is fighting (which must be solved with different and often contradictory measures) as they are truly between a rock and a hard place. Of course, the Fed is the root cause of the problem.
Brian
