Friday, August 6, 2010


Federal Reserve could enact $1 trillion "rescue" as soon as next week.

Sources: Bloomberg:

A report U.S. companies hired fewer workers than forecast last month intensified a debate among economists over whether Federal Reserve policy makers will take an incremental step next week toward providing more stimulus.

U.S. central bankers said in June that more monetary stimulus "might become appropriate" if the economic outlook "were to worsen appreciably." Chairman Ben S. Bernanke said last month the Fed may at some point maintain stimulus by investing the proceeds from maturing bonds into U.S. Treasuries.

"I lean toward a result where the Fed talks about reinvesting mortgage-backed securities runoff at next week's meeting but decides to wait six weeks and see what the economic data bring," said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. "The economic recovery downshifted in May but activity is absolutely not hurtling toward a double dip."

Government figures showed today that private payrolls increased by 71,000 jobs last month, less than the 90,000 economists had forecast. While the data may not alone force the Fed's hand, other indicators including a slump in housing point to a slowing recovery and greater odds policy makers will move toward more easing at an Aug. 10 meeting, some economists said.

Retailers in the U.S. reported July sales gains that missed analysts' estimates as consumers reduced spending before the back-to-school season. A manufacturing gauge tracked by the Institute for Supply Management fell, while a similar index tracking service industries rose.

Reinvest Proceeds

"The labor report increases the chance that they make the decision to reinvest the proceeds of maturing mortgage-backed securities in short-term U.S. Treasuries at this meeting," said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York. "They were heading in that direction anyway."

Bernanke outlined three options for additional ease in response last month to questions from Senator Richard Shelby, an Alabama Republican. The Fed chairman said in semi-annual testimony to Congress that the central bank could strengthen its commitment to keep interest rates low, or lower the rate it pays on bank reserves.

"The third class of things, though, has to do with changes in our balance sheet, and that would involve either not letting securities runoff as they are currently running off, or even making additional purchases," Bernanke said.

The Standard and Poor's 500 Stock Index fell 0.8 percent to 1,116.71 at 2:53 p.m. in New York. Yields on U.S. 2-year notes fell below 0.5 percent for the first time as Treasuries rallied.

'Slow Drip'

"It's a slow drip of quantitative easing medicine rather than a big shot," said Robert Dye, senior economist at PNC Financial Services Group Inc. in Pittsburgh. "That’s going to be a mostly symbolic move telling the public that the Fed remains watchful."

Policy makers will probably "return to unconventional monetary easing by" late this year or early in 2011, Jan Hatzius, chief U.S. economist for Goldman Sachs Group Inc. in New York, said in a note to clients. Such steps may include "a more iron-clad commitment to low short-term policy rates" and more purchases of assets, probably Treasuries.

The Fed would purchase at least $1 trillion in additional assets, he said.

With 30-year mortgage rates trending around 4.5 percent to 4.75 percent, the Fed will have about $275 billion of its $1.1 trillion portfolio of mortgage-backed securities pay off over the course of this year, according to estimates by Barclays Capital Inc. That leaves about $23 billion a month for reinvestment if Fed officials choose that option.

$1 Trillion

Joseph Abate, Barclays' money market strategist in New York, said if the Fed chose to reinvest, that would signify they have a target for the level of excess bank reserves, currently at $1 trillion.

"Is the Fed trying to target a specific level of bank reserves?" he said. "I don’t think they are."

Barclays' economists don't expect the Fed to take more monetary policy steps at next week's meeting and for the remainder of 2010.

The Fed may communicate next week more attentiveness to downside risks to growth, said Laurence Meyer, senior managing director of Macroeconomic Advisers LLC and a former Fed governor. "We expect the committee to offer a more pessimistic assessment of the outlook in its statement," he said.

Meyer also said he hopes the Federal Open Market Committee will give consideration to the "risk management" strategy employed during the last deflation scare.

"The risk management approach calls for an easier policy today," Meyer said. "It is better to err on the side of being too easy when the risks to growth are decidedly to the downside and the costs of slower growth are high and the risks of higher inflation are low."

Still, Meyer said that, given the absence of any focus on the risk management approach so far, the threshold for taking action at the August meeting is high.

"It is a big deal to take a step toward easing after you have spent a year talking about the exit strategy," he said.


  1. The stock market crash of 1929 became the major global economic and financial crisis. Many remember that time now and have tried to re-explain to compare with what is happening nowadays. I, personally, think that the USA’s hard and painful experience of the past has been the upgrading factor, for the USA, to deal the crisis-conflict with efficiently. In Spain, it seems that we don’t learn from the past experiences and the problem remains for long not-desirable time, instead of making good efforts to encourage Spanish Economy.

    In the case of GOLD, in Spain, some business experts think, that “Gold Business” seems a good deal but it reminds and “dangerous” looks like another “Tulip Market Crash” like in the sixteenth century in The Netherlands.

    Speculative euphoria sparked by the tulip. Thus, the Dutchmen were crazy about the flower that would make them go down in history, and they came to pay exorbitant prices. The tulips reached Western Europe in the late sixteenth century, and initially were not too popular, because in its natural state is not a particularly attractive flower. However, after being hit by a virus, began to emerge a variety of colors and a means, ironically, more enjoyable, leading to a growing interest in them. It is clear that for situations like these happen, the economic and social climate must be conducive, and that was that the buoyant economic situation in the Netherlands, because of its large business, did the rest, and early seventeenth century, the bulbs tulip became collectors' items. The problem was that the production of tulips could not grow the same way to meet growing demand. We have to wait seven years to get a tulip from the moment the seed is planted. And while the bulbs can produce two or three clones annually, the mother bulb lasts only a few years. In this context, prices rose steadily during the decade of 1630, each time more speculators entered the market, even the common people were people who came to mortgage their houses to invent in the market. In 1633, a farm in Hoorn was exchanged for three special bulbs. With the craze generated by the new big deal, futures market for bulbs were created, selling only tulips that had just been planted and in some cases not even. Purchases and sales in this market were held in taverns, never took place at the Amsterdam Stock Exchange, but ran outside the formal economy.

    In 1637, 5 February, a set of 99 tulips of great rarity was sold for 90,000 guilders: it was the last big sale of tulips. The next day half a kilo priced 1,250 guilders no buyer found. Then the bubble burst. Prices fell and there was no way to recover the investment worldwide, no one was buying. They had committed huge debts to buy flowers now worthless. Bankruptcies succeeded and affected all social classes. The Netherland’s Economy ended in bankruptcy.

    (Any resemblance to today maybe no coincidence …...) Thanks Shan for your writings!


    María Eugenia Escudero Ugarte
    August 11, 2010
    Málaga (Spain)

  2. Hi Shan,

    Have you considered sending your writings to the New York Enterprise Report? (Twitter: @nyreport) They might be interested in an article based on one or more of your blog posts. Just a thought. Their website is