If you were watching capital markets closely yesterday, you saw a phenomenon that has rarely been seen before. I certainly never have. And it was linked to the Federal Reserve’s policy statement, released about 2:15pm Eastern time. This was an extraordinary statement, containing several rarely-seen features. The first one, of course, was the commitment by the Fed to keep policy interest rates at or near | Read More »
Just when you thought US Treasury debt couldn’t get more overpriced, it gets… more overpriced. The 10-year yield fell all the way to 2.95% yesterday. It held that level for part of this morning, and now is just under 3%. At least some of this has to be due to the supply disruption caused by the US hitting its debt ceiling. (Existing debt can be | Read More »
Dave Leonhardt has a piece in today’s New York Times (“Holding Bernanke Accountable,” no link due to paywall). I’m sad about this piece because Leonhardt is a very knowledgeable guy whom I always enjoy reading. But I find that he has a tendency to fall back on conventional wisdom. At times I feel that his research is limited to what he reads in his own | Read More »
I’ve been asked to give some basic perspective on what the Fed’s “quantitative easing” actually is. Since writing this piece, I’ve become more convinced that I was on the right track. So far, three different QE models have been observed in the wild: the Japanese (2001-06), the British (2008-09), and Bernanke I (2008-10). We’re about to see Bernanke II. All of them are forms of | Read More »
It’s been clear enough to everyone with eyes that the most visible effect of the Fed’s QE2 program would be to inflate the stock market, and possibly (because of the weaker dollar) commodities too. A view is starting to emerge that this is what Bernanke actually had in mind. Creating a huge amount of new "bank money" obviously did nothing to stimulate the creation of | Read More »
Historic days lie ahead, and not because the occupant of the Oval Office will soon be of an atypical color. The United States, throughout its early history, has been the only major trading nation to carefully avoid extensive government involvement in economics and finance. We went for more than 100 years without even a central bank (meaning, an official lender of last resort). And when | Read More »
The Federal Reserve’s tool of choice for setting and communicating its broad monetary policy has been the level of the “Fed Funds rate.” You’ve heard many times that the Fed raises or lowers interest rates to cool down or heat up the economy. “Fed funds” is the nickname for the reserve balances that banks are required to hold on account with the Fed itself. Banks | Read More »
This is just a brief note to make you all aware that it’s being a very remarkable week in the Land of Fixed-Income and Monetary Policy. I’ll post much more on this topic as soon as I can, but the Federal Reserve has qualitatively changed the nature of their response to the financial crisis. As of this week, they’ve embarked on what is called “quantitative | Read More »
There are words you don’t ever want to use in polite company, and deflation is one of them. Unfortunately, it’s a serious possibility that we now need to consider. Yesterday, the Bureau of Labor Statistics reported that the overall level of consumer prices declined by about 1% in October. The so-called “core inflation rate” declined by 0.1%, the first such decline in more than twenty-five | Read More »
We’re now well into the third week of extremely disordered conditions in global capital markets, with no end in sight. The world’s stock markets have started to respond to the prospect that a long period of capital-unavailability will reduce economic growth. Henry Paulson’s $700 billion rescue plan, which seemed so radical mere days ago, is now seen to be too little, too late. Had Congress | Read More »
Here it is. That’s the Fed’s announcement of two new facilities. The Commercial Paper Funding Facility (CPFF) will create credit, to be made available to a “Special Purpose Vehicle” (SPV), as authorized under Section 13(3) (the “unusual and exigent circumstances” section) of the Federal Reserve Act. The SPV is authorized to purchase three-month dollar-denominated commercial paper from eligible issuers. There isn’t a lot of detail | Read More »
So why is the stock market up this morning? Because the Fed released a plan under which they will become direct purchasers of term commercial paper. CP, loosely, is a short-term borrowing (less than 270 days) by creditworthy businesses, and it’s unsecured more than half of the time. (Sometimes it’s secured by assets.) Over the last three weeks, issuance of CP has been severely impaired, | Read More »
Today is Day 6 of the “New Trade”: the death and rebirth of the financial system as we know it. Every single day this week has brought things that no one working today has ever seen before. Yesterday was no exception It was a day of unprecedented volatility in the credit and money markets. The prices of short-duration Treasury securities traversed ranges that are usually | Read More »
A vast movement involving enormous amounts of capital is now underway. Investors around the world are buying dollars again. And they’re selling the oil, gold and other commodities that have been serving as a hedge against dollar weakness since the Federal Reserve started aggressively cutting interest rates eleven months ago. As I write, the US dollar is trading above $1.50 to the euro. The dollar’s | Read More »
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