De Beursvloer #93: Printed Dollars as green shoots

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Fed May Buy More Assets to Bolster Balance Sheet (Update1)

May 28 (Bloomberg) -- The Federal Reserve may step up asset purchases to prevent its balance sheet from contracting until policy makers are convinced an economic recovery has taken hold, Fed officials and analysts said.

Demand for some of the Fed’s emergency programs has waned as the grip of the credit crunch loosens, with loans to banks shrinking 38 percent since Jan. 1. The main tool to keep the central bank’s holdings from falling from the current $2.1 trillion would be more purchases of Treasuries, said analysts including former Fed Governor Laurence Meyer.

Until now, policy makers’ balance-sheet decisions have been driven by the emergency liquidity needs of banks, bond dealers, money markets and failing financial institutions. U.S. central bankers are now transitioning to a period where economic data and their implications for forecasts will play the key role.

“You wouldn’t want policy to reverse course dramatically or ramp up dramatically unless the outlook changed substantially,” John Weinberg, research director at the Federal Reserve Bank of Richmond, said in an interview. “It really hasn’t yet.”

Fed officials have said their Treasuries buying isn’t designed to target any specific yield levels. Last week’s release of minutes of the April 28-29 Open Market Committee meeting showed some members were open to bigger purchases to spur a more rapid recovery.

Bonds slumped yesterday on concern surging debt sales will overwhelm the Fed’s strategy. The yield on the benchmark 10-year bond increased 19 basis points to 3.74 percent, the biggest increase since Jan. 19. It slipped 6 basis points today. A basis point is 0.01 percentage point.

Mortgage Bonds

On May 26, mortgage-bond yields exceeded for the first time their levels before the Fed announced it would expand purchases of the securities to drive down interest rates on home loans.

The Fed’s asset holdings have fluctuated around $1.8 trillion to $2.1 trillion this year. So far, the Fed has completed about $691 billion of the $1.75 trillion of purchases of Treasuries and housing debt it has committed to.

It’s difficult for Fed officials to predict how fast liquidity and loan programs will contract as markets normalize; adding to Treasuries buying would ensure growth in the balance sheet.

Funds extended to financial institutions, such as term credit to banks, discount-window loans, currency swaps with foreign central banks, and direct loans to bond dealers, fell to $701.8 billion May 20, down 38 percent from $1.13 trillion at the start of the year.

Balance Sheet

Fed credit and securities loans to backstop markets for commercial paper, asset-backed commercial paper, and U.S. Treasuries fell to $216.9 billion May 20, down 59 percent from $529.5 billion at the start of the year.

The central bank shifted to using its balance sheet as the main policy tool after cutting the benchmark interest rate to zero to 0.25 percent in December.

“We have to go to the next stage of the monetary transmission mechanism, and we have to look at a lot of other interest rates,” said Glenn Rudebusch, associate director of research at the San Francisco Fed. “There are a lot of different avenues through which these balance-sheet policies can work.”

Fed Chairman Ben S. Bernanke, who once wrote about the need for aggressiveness and “Rooseveltian resolve” in dealing with financial crises, warned lawmakers this month that a “relapse” in financial strains could cause an incipient recovery to stall.

Narrow Spreads

“The committee is looking at the trend in financial conditions and whether private borrowing rates are narrowing,” said Meyer, now vice chairman of Macroeconomic Advisers LLC in Washington. “The recent run-up in Treasury rates is blunting the effect of the narrowing spreads that is under way.”

The yield premium investors demand to own investment-grade corporate bonds has fallen to 4.16 percentage points from almost 6 percentage points in March, bolstered by economists’ expectations for an end to the recession this year.

Rising Treasury yields threaten to curtail the decline in corporate borrowing costs. The spread between two-year and 10- year yields reached a record 2.76 percentage points yesterday.

Fed officials, in their most recent forecasts, signaled that both of their legally mandated objectives -- stable prices and maximum employment -- are under threat. Policy makers forecast the unemployment rate will be above their long-run preference range of 4.8 percent to 5 percent through 2011.

Inflation Goal

Similarly, Fed governors and district-bank presidents anticipate that inflation will be slower than their median long- run objectives of 1.7 percent to 2 percent in 2009, and 14 members expect the rate to be below the range next year.

Plugging those forecasts into a model to determine the right policy stance, “the funds rate should be near its zero lower bound not just for the next six or nine months, but for several years,” Rudebusch wrote in a research note released May 26.

“Markets are going to increasingly demand that there be some real green shoots” of an economic recovery, said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York. “They are going to have to step in at some point and put some more easing in.”

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Op donderdag 28 mei 2009 13:39 schreef pberends het volgende:
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