fed´s gamble graphs nov reuters

8/8/2019 FEDs GAMBLE GRAPHS NOV REUTERS

1/8

the feds big gamble

REUTERS/JASON REED

The Federal Reserves latest eort to bolster the U.S. economy -- a new, $600 billionround o buying U.S. government debt -- takes it deeper into uncharted waters

november 2010

fOmC

THE FED'S LATEST MOVE is aimed at

lowering borrowing costs even urther

or consumers and businesses, who are still

suering the eects o the Great Recession,

thereby giving a boost to the U.S. recovery.

Some worry that this may not be enough

and the Fed may have to spend yet more

money i it is to make a big dent in the

unemployment rate, at nearly 10 percent,

and stave o deation.

But others warn that this second round o

so-called quantitative easing is a dangerous

gamble by the worlds most powerul

central bank, one that could cause a spike in

ination and put the credibility o the dollar

at risk without delivering much growth.

China, other developing powerhouses

and even Germany have criticized the

United States or the impact o its economic

policies on currencies around the world

President Barack Obama can expect more

protests when he attends a summit o

leaders rom the Group o 20 big economies

in Seoul, South Korea on Nov. 11-12.


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fOmc NOvEmbER 201

fed gOes big aNd bOld

bUt maY fall flat

bOND bUyER: U.S. Chaia th Fdal

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aks at a Fdal rs Syst

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oct 25, 2010. REUTERS/Jim yOUNG

Emily KAiSER AND mARK fElSENThAl

WASHInGTon, nov 3

THE U.S. FEDERAL RESERVE'S second

round o money printing looks larger

at rst glance than many on Wall Street had

anticipated, but concerns lingered that it

would not accomplish much.

The pledge to buy an additional $600

billion in long-term Treasury bonds by the

middle o next year was slightly larger than

the median expectation o $500 billion in a

Reuters poll.

But this would work out to about $75

billion a month, which was a smaller monthly

amount o new purchases than many analysts

had expected.Stock investors greeted the news with

indierence, which may simply reect the

act that the Fed clearly telegraphed this

move and markets had priced it in.

What may be troubling or Fed ofcials

is that the program's success relies in part

on markets strengthening, so the ho-hum

response blunts the impact.

Kansas City Fed President Thomas Hoenig

remained the lone dissenter, suggesting that

the core o the committee remains united

behind Chairman Ben Bernanke despite

the cacophony o voices heard beore this

meeting.

The Fed said the economic recovery

"continues to be slow," which was somewhat

less gloomy than in its Sept. 21 statement

when it said the recovery "has slowed in

recent months." Indeed, recent readings on

manuacturing and consumer spending have

been slightly better than expected.

The bind or the Fed, however, is that this

strength has not been reected in the two

categories that count under its dual mandate

-- employment and ination.The new buying program has a nite end

o June 2011, but the Fed said it was open

to adjustments depending on the path o

recovery, giving it some wiggle room to go

even bigger should the economy alter.

The New York Fed said the $600 billion,

combined with an ongoing program to

reinvest maturing securities, meant the

grand total could reach $900 billion, or $110

billion per month.

factbox

The Fed said it will buy $600 billion o

Treasuries between now and June 2011

-- or $75 billion a month.

It is also continuing to reinvest the

maturing proceeds o its rst round o

mortgage-related and Treasury buying

That's another $250 to $300 billio

between now and June.

The Fed said it will regularly review

the pace o purchases and size o the

program and will adjust it as needed.

The purchases will be more ocused onthe 4-7 year range than the rst round o

purchases (see graphic).

The Fed said it is temporarily relaxing

its limit o not owning more than 35

percent o any one issue, but holdings

will only rise modestly above that levle.

The New York Fed plans to publish its

monthly schedule or Treasury purchases

on Nov. 10 at 2 p.m. EST (1900 GMT) .


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fOmc NOvEmbER 201

q & A

DiSSENTER: Kasas City Fdal rs Psidt Thas Hig spaks gadig edig Gt bailuts at th

Aica ecic Assciati Cc i Atlata, Ggia Jauay 5, 2010. REUTERS/TAmi chAppEll

WhAT iS QE2?QE2 is market jargon or the second big

round o Fed long-term asset purchases --

also known as quantitative easing. In essence

the Fed is printing money and buying

government debt, hoping to drive down

borrowing costs urther ater having already

cut benchmark U.S. interest rates to near zero.

The Fed said it will buy another $600 billion

o Treasury bonds as part o this program

between now and June next year. That's on

top o the $250 billion to $300 billion that the

Fed is going to reinvest rom maturing debt

rom its rst round o quantitative easing

over that period. The Fed earlier bought $1.7

trillion o mortgage-related and Treasury

debt.

Why DOES ThE fED ThiNK iT NEEDED

TO DO mORE?

The Fed thinks the unemployment rate is

too high and ination is "somewhat low"

relative to what it deems consistent with

its dual mandate o price stability and ull

employment over the long run. There's

also the worry that slowing ination could

ultimately slide into an economically

troubling deation, a sustained period o

alling prices that could deter consumers rom

spending and businesses rom investing.

hOW lONG Will ThE pROGRAm lAST?

The Fed says it will buy the $600 billion by the

end o the second quarter o 2011 -- or about

$75 billion a month.

hOW Will iT WORK?

Fed ofcials disagree on how it will work and

how eective it will be. Some ofcials sayit will primarily work by lowering yields on

U.S. Treasuries, pushing investors into more

risky assets in a move that will lower rates

more widely. Lower U.S. borrowing costs

could stimulate home buying and building,

business investment and, ultimately, hiring.

Other ofcials say urther asset purchases

could work primarily by raising ination

expectations and bolstering condence by

signaling to markets the Fed's commitment

not to let prices all.

WhAT ARE SOmE cONcERNS AbOUT

ThE pROGRAm?

Some Fed ofcials, including Philadelphia

Fed President Charles Plosser, have voicedconcern about the possibility the Fed's

credibility could be damaged i it launches

resh action and is not successul in lowering

the unemployment rate. He and others also

worry about distorting markets and laying

the groundwork or uture ination by

complicating the Fed's eventual exit rom

its accommodative policies. There is also a

concern that some investors might interpret

the Fed's purchases as a monetization -- or

inating away -- o the national debt.

WhAT ARE ThE GlObAl implicATiON

Of ThE pROGRAm?

Expectations o resh bond buying by t

Fed have pushed investors overseas in searo higher returns in recent weeks, weakeni

the U.S. dollar. This ood o capital has driv

up asset prices in emerging markets a

strengthened other currencies.

a PRimeR ON qUaNtitatiVe easiNg


5/8

fOmc NOvEmbER 201

Feds purchases of Treasuries by maturities

Source: Thomson Reuters

Reuters graphic/Van Tsui

03/11/10

Quantitative easing 1 (QE1) purchase share of bonds by maturity - %

Quantitative easing 2 (QE2) purchase share of bonds by maturity - %

The Federal Reserve pulled the trigger on a second round of Treasury purchases, committing tobuy $600 billion more in government bonds by the middle of next year.

0 5 10 15 20 25

TIPS

17 years to 30 years


7 years to 10 years

5.5 years to 7 years



1.5 years to 2.5 years

TIPS




4 years to 6.5 years

3 years to 4 years

2 years to 3 years

1 year to 2 years

oPINIoN

eNteR the eRa Of deValUatiON

JAmES SAfT

neW YorK, nov. 3

WEVE ENTERED A NEW era in

global nancial markets: the U.S. is

intentionally devaluing the dollar.

For the United States, which has long

espoused a strong dollar but in reality had a

policy o benign neglect, this is the equivalent

o pushing the big red eject button in the jet

cockpit: something big is going to happen

and we will have to see how it will work out. The Federal Reserves pledge to purchase

$600 billion o longer-dated Treasuries

between now and the end o the second

quarter o next year, and reinvest $250-300

billion in the same period, means the central

bank will be buying up $110 billion a month in

Treasuries and creating a like amount o new

money out o the ether.

Perhaps the principal way quantitative

easing will boost the economy, the Fed hopes,

is by lowering eective interest rates, enticing

investors to move into riskier assets, some o

which may generate ination and jobs. As

well there is the wealth eect; the old canard

o spending more because your retirement

account and house have gone up in nominal

terms.

The bald act, though, is that by turning

on the printing presses the Fed will drive

down the value o the dollar absent a similar

move in another currency. Much o the new

investment created by quantitative easing

will be made not in the United States but willbe money borrowed in the United States,

exchanged into a oreign currency, probably

in emerging markets, and invested overseas.

That will drive the dollar down, which will help

to make U.S. industry more competitive.

There you have it; competitive devaluation,

a beggar-thy-neighbor policy. It is not much o

a lever, but it is one o the ew which the Fed

has let to pull.

Dont expect anyone rom the Fed or the

Treasury to tell you this in simple declarative

sentences, but its true nonetheless.

A currency war blossoming into a trade war

has to be one o the outside but signicant

risks o 2011. I global growth can recover

signicantly this may be averted, but this is ar

rom promised.

The second and maybe more important

risk is that the U.S., having lost control over

its own monetary policy many years ago

due to recycling o capital by the Chinese,

now loses control o its currency. Like going

broke, this can happen little by little andthen all o a sudden.

The alternative is that QE is not terribly

successul in improving U.S. growth but does

touch o a round o speculative investment

elsewhere, investments that make returns in a

shrinking dollar look worse day by day.

Extraordinary times surely call or

extraordinary measures, but those measures

sometimes bring extraordinary results, and

not always the ones we hope or.


6/8

fOmc NOvEmbER 201

INstaNt vIews

slightlY

UNdeRwhelmed

JOSEph bATTipAGliA

oF STIFeL nICoLAUS Theyre basically saying the economy

still too sot, its not generating new job

growth, there is a risk o deation . . .So thi

is the path were going to go down, risks be

damned.

RichARD fRANUlOvich

oF WeSTPAC

I dont think the Fed overdelivered

beyond June, theres nothing, there no

outlook. I am slightly underwhelmed. Th

dollar did sell o, but I dont think this spike

in the euro has legs.

JASON bRADyoF THornbUrG InveSTmenT

mAnAGemenT

Clearly they had to do something. It

possible some o the positive economi

data weve seen sotened it a touch. My

real question is how is this really helping

how much additional benet is there o

lowering rates? Maybe the thing they doing

is not about lower rates but orestalling the

potential or higher rates.

JEffREy pRiTchARD

oF ALTAveST WorLDWIDe TrADInG

This is going to be supportive or gold i

the long run. You may not see it right now

but we should see highs beore the end o

this year. I youre a company and youre

looking to get a return, youre not going to

the bond market.

JEff KlEiNTOp oF LPL FInAnCIAL This provides the market with addition

clarity. It now knows the size o thpurchases, how long theyre going to

take place and the pace at which the Fed

is going to conduct it. The question i

whether this is enough. The consensu

was $500 billion over the next six month

or so. This is just a little bit ahead. The gap

between disappointment and surprise is so

narrow, but I think they may have threaded

that gap with what they announced here.

bREAKiNG viEWS: beRNaNKes bONd

sPRee Raises mORe RisK thaN RewaRd

by mARTiN hUTchiNSON

WASHInGTon, nov 3

TheFederal Reserve's latest bond-buying

spree is one inefcient -- even dangerous

-- way to create jobs. The announcement that

it will buy $600 billion o Treasuries over the

next eight months was well signaled, so it did

not move markets much. But the liquidity

it will add to the international monetary

system is very likely to ow into commodity

speculation and overheated emerging

markets. Pointing a smaller money hose

directly at small business would have been

more eective and less risky.

The Federal Open Market Committee's

proposal involves bond purchases at the rate

o $110 billion per month until June 2011,

o which $35 billion monthly would consist

o reinvestment purchases, as previouslyannounced. Excluding that recycled money,

the buying represents about 72 percent o

the Treasury's unding needs during the

period, based on the government's 2009-

10 unding pattern. That's not quite Weimar

Republic levels o money-printing, but it

brings attendant dangers nonetheless.

The FOMC statement makes clear that the

purpose o these purchases is to promote a

stronger U.S. economic recovery, consistent

with the Fed's mandate o ostering ull

employment. However buying Treasuries

and relying on interest rate movements to

stimulate growth is a very inefcient means

o unding small businesses, where most

American jobs are created, as banks have so

many other ways to achieve higher returns.

Indeed, it's possible that much o the

excess money owing through the system

will ow into the global --not regional --

economy, increasing commodity prices and

ination in overheated markets. Petrobras

chie Jose Sergio Gabrielli remarked on CNBC,

immediately ollowing the announcement,

that "more liquidity is good or Petrobras."

For one thing, it increases oil prices. But that's

hardly the purpose o the exercise.

U.S. banks' commercial and industrial

loans, including those to small businesses,

ell by a quarter rom their 2008 peak to

around $1.2 trillion in the week ending Oct20. An injection into that market, perhaps

by purchasing sub-participations in banks'

business loan portolios, would require

special authorization. But it would attack

the problem directly -- and would arguably

be less inationary to the global economy.

For sure, it's not an easy solution -- but it's

time or the authorities to get creative, not

destructive.

fOllOW ThE lEADER:Tads i th S&P 500 ptis pit at th Chicag bad Tad sigal ds shtly at th Fdal

rss dcisi t la sht-t itst ats utuchd. Chicag, Illiis. n 3, 2010. REUTERS/fRANK pOlich

CLICK TO WATCH REUTERS REPORTER DAN BURNS, OR VISIT HTTP://LINK.REUTERS.COM/GAW53Q
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fOmc NOvEmbER 201

made iN ameRiCa, imPORted bY asia

by AlAN WhEATlEy

beIJInG nov 3

In a reversal o the trade ows that have sounbalanced the global economy, some o the

dollars that the Federal Reserve is expected to

start minting soon to buy U.S. Treasury bonds

will wash up on Asia's shores, presenting a

headache or policymakers already retting

about rising inationary pressure.

Resentment in emerging markets about

the global spillover eects o easier U.S.

monetary policy is likely to hang over next

week's summit o the Group o 20 leading

economies in Seoul.

"What will happen with another round o

quantitative easing by the Fed? It's creating

ination, alright. Just not necessarily in the

U.S., but on the other side o the globe," said

Frederic Neumann, an economist with HSBC

in Hong Kong.

In act, a lot o investors are counting on the

Fed to succeed where the Bank o Japan has

long ailed and generate ination at home.

U.S. core ination o 0.8 percent is lower

than it has been since the early 1960s, but

asset managers have been snapping up

Treasury Ination Protected Securities and

other hedges against rising prices.

On the ace o it, though, worries o ination

in the developed world any time soon are

akin to a malnourished man reusing to eat

more or ear o growing obese.

In a world o substantial excess capacity,

high unemployment and tightening scal

policy, ination is likely to remain low in rich

countries, the International Monetary Fund

said in its latest World Economic Outlook,

published last month.

It saw deation as a

more pertinent threat

and projected that excesssupply in the United

States and the euro zone

would not be used up

until 2014.

"For high ination to

emerge, there would

have to be multiple

shocks, including a

sudden move to nancial

or trade protectionism

that would undo much o

the integration o markets

that has taken place overrecent decades. Such a

scenario seems remote," the IMF said.

Indeed, without signicantly stronger nancial

and structural policies, potential output in rich

economies is likely to remain appreciably below

pre-crisis trends, the IMF said.

And, it added, any mistakes by governments

in rolling back public decits could cause a

long period o deation or low ination and

disappointing economic growth.

Jan Hatzius, chie U.S. economist at

Goldman Sachs, said there was so much slack

in the economy that U.S. interest rates might

stay close to zero or several years.

Speaking in Beijing this week, Hatzius said

the impact o more Fed quantitative easing

would be benign or Europe, where growth

is weak, because it would let monetary

conditions stay looser or longer.

"But in some parts o the world, it causes

more problems. And Asia is probably in the

latter camp," he said. "I there are spillove

into countries that are already on the verge

overheating, then domestic policymakers a

going to tighten more than they otherwi

would."

While politicians ocus on the nominal ra

o the yuan against the dollar, China's high

ination rate is already pushing up t

economically more important real exchan

rate.

Indeed, Bank o America Merrill Lynch la

week nudged up its orecast or ination acro

emerging Asia in 2011 to 4.0 percent rom 3

percent and said rising bond yields suggest

investors were already on the scent.

"This highlights one o the great iron

o QE2: it creates ination in the region th

least needs it," economists T.J. Bond a

Marcella Chow said in a report.

Aconsensus ell into place at the Fed in

avor o a second round o purchases

o U.S. government debt to stimulate the

economy in recent weeks, with a number

o ofcials rming their support or showing

more openness toward easing.

Supporters o more quantitative easing,

labeled doves, include Fed presidents in

New York, Chicago and Boston. Several

see a very low ination rate, lack o

momentum in the economy and worries

over deation.

Other Fed ofcials have reluctantly

come around to the idea o more easing,

though some have outright warned such

a move was dangerous and unlikely to

x the U.S. jobless problem.

hawKs aNd dOVes fight it OUt

GRAphic

For an interactive map o where policymakers stand click here http:

hp://r.rur.m/ry97p

iNTERESTiNG EXchANGE: Th Fds dcisi culd ha s udsial cts iati i Asia. n 1, 2010. REUTERS/pETAR KUJUNDZic
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8/8

fOmc NOvEmbER 201

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FOR MORE INFORMATION CONTACT:

wILLIaM scHoMbeRG,

ecoNoMIcs edItoR, aMeRIcas

+1 646 223 6194

[email protected]

tIM aHMaNN,

ecoNoMIcs edItoR, wasHINGtoN

+1 202 898 8370

[email protected]

PedRo da costa,

+1 202 354 5820

[email protected]

Fed explores ways to support economy

Source: Thomson Reuters

Reuters graphic/Van Tsui

02/11/10

Here are some steps the Fed could pursue to support a flagging economy characterized by

low inflation and high unemployment.

-1

0

1

2

3

20102009

Treasury breakeven rates - percent

10-year5-year

0

1

2

3

4

20102009

Treasuries vs. benchmark rate - percent

10-year TreasuryFederal funds target rate

0.0

0.51.0

1.5

2.0

2.5

201020092008200720062005

Fed balance sheet - $ - trillion

Agency debt

Treasuries MBS

Joblessness and inflation - percent

Unemployment rateCPI yoy change

-6

-3

0

3

6

9

12

20102008200620042002

0.00.51.01.5

2.02.53.03.5

201020092008200720062005

Index value

Price level target

98100102104

106108110112

Inflation - Core PCE prices Percent change, y-o-y

TREASURY PURCHASESThe Fed looks set to launch a new

program to purchase U.S. Treasury

bonds, althought the scope and

pace of such purchases remainsunclear. Advocates of further Trea-

sury purchases believe a greater

effort is needed to boost business

and consumer demand.

INFLATION TARGETThe U.S. central bank may choose

to set an explicit inflation target in

conjunction with a policy of asset

purchases. The goal would be to

clearly communicate to both the

public and financial markets that

policymakers are committed to

getting inflation back up to more

comfortable levels.

LOW RATES LANGUAGEThe Fed has said it could offer

further stimulus to the economy by

bolstering its commitment to keeping

interest rates low for an extended

period. This would force market

participants to price in lower long-

term borrowing costs, and prompt

some investors to buy riskier assets

as they seek higher returns.

PRICE LEVEL, GDP TARGETINGPrice-level targeting takes inflation

targeting one step further. By

targeting a specific price level, the

Fed would promise to generate

above-target inflation at times wheninflation is slowing or prices falling in

order to play catch-up. Like an

inflation target, a price-level target

could help lift inflation expectations.

SHOOT FOR HIGHER INFLATIONStaff at the International Monetary

Fund and a number of other promi-

nent economists have argued the

Fed should consider shooting for

inflation above 2 percent as a way to

raise price expectations and induce

consumers and businesses to go out

and spend. This approach is seen as

problematic within the Fed.

cOvER phOTO: Th Fdal rs buildig i Washigt, Jauay 26, 2010. REUTERS/JASON REED

The Fed launched a newprogram to purchase U.S.

Treasury bonds.

Here are some o the steps open to the Fed to support a agging economy.

fed´s gamble graphs nov reuters

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