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Nomura Reckons The Fed Will Stop Shrinking Its Balance Sheet

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http://www.cnbc.com/id/38517193

Fed Will Ease Monetary Policy on Aug. 10: Economist

Published: Monday, 2 Aug 2010 | 3:17 AM ET

By: Patrick Allen

CNBC Senior News Editor

Japan's Nomura has become the first investment bank to predict the Federal Reserve will begin to ease monetary policy following the recent slowdown in growth in the world's biggest economy.

The deterioration in expectations for growth and inflation argues for an easing of monetary policy, Paul Sheard, the global chief economist at Nomura, wrote in his latest report.

"We expect the Fed to at least stop the passive contraction of its balance sheet," he added.

Pushed by lawmakers last month, Fed Chairman Ben Bernanke outlined three ways the Federal Open Market Committee (FOMC) could further stimulate growth.

First, Bernanke indicated he could change the Fed's language to convince the market it will not allow deflation. Second, the FOMC could endorse a decision by the Board of Governors to lower the interest rate it pays on required and excess reserves.

And the final option would be for the FOMC to restart the asset purchase program that ended in March. For any of these actions to be taken, would have to become clear that the recovery was no longer sustainable, according to Bernanke.

Last week, Federal Reserve Bank of St. Louis President James Bullard told CNBC that the central bank needs a plan for more quantitative easing if the situation will require it.

Stop Shrinking Balance Sheet

But action should be taken before it becomes obvious the recovery is likely to falter, according to the Nomura economist.

"Perceptions about sustainability are not binary, but lie along an unobservable continuum. A concerned and forward-looking policymaker would presumably take action some time before the economy had irreversibly slipped from sustainability," Sheard wrote.

"We now believe that current conditions have moved policymakers into action and that the FOMC will adopt a more accommodative stance at its 10 August meeting," he added.

The Fed is likely to stop shrinking its huge balance sheet for the moment, a subtler form of easing than just buying assets again, according to the research.

Sheard said that the Fed's current stated policy is to allow the redemption or pre-payment of agency debt and mortgage-backed securities to shrink its balance sheet.

"To the extent that the size of the Fed's balance sheet matters, this, in effect, amounts to a gradual tightening of monetary policy. Further shrinkage of its asset holdings now seems inappropriate in light of downside risks to growth," he explained.

"We therefore think the committee will return to the explicit language of early 2009, in which it articulated a commitment to 'keep the size of the Federal Reserve's balance sheet at a high level,'" he added.

"Whatever the precise form of easing, action would send a strong signal to the markets: the Federal Reserve has many tools available at its disposal and will not hesitate to use them if it looks like it is not meeting its full employment and price stability objectives," Sheard also said.

As predicted by many on here. More printy printy because the economy is rolling over too fast...

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I was hoping the DOW would crash before they printed again. unsure.gif

One last print to get everything looking good for the November elections.

Could be a biggy.

Gold to $1350?

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Don't forget the Fed is sitting on a paper profit for the moment.

http://www.bbc.co.uk/news/business-10816534

Assets bought by the US to bail out AIG and Bear Stearns are showing a paper profit for the first time, the Federal Reserve Bank of New York has said.

This increases the likelihood that US taxpayers will get repaid the tens of billions of dollars used to stop the financial giants going bust.

Only when the assets held by the bank are sold will any profit be realised.

Ben Bernanke, chairman of Federal Reserve, has long maintained that bail-out money would be repaid.

Until they actually sell these they haven't made anything or lost anything.

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Don't forget the Fed is sitting on a paper profit for the moment.

http://www.bbc.co.uk/news/business-10816534

Until they actually sell these they haven't made anything or lost anything.

There's that rather perverse argument that if they don't pump enough money in to the economy to keep asset prices up, the hit they take to balance sheet securities will mean that those "gains" have effectively been realised by commercial banks, i.e. the hit has been taken by the Fed and the "we can print all we want and nothing bad happens" game is lost.

If the asset market stays afloat, they can offload them at market prices or for a small profit and the confidence trick of keepy-uppy continues.

Which shall it be?

Edited by AvidFan

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Alternatively the market is being massaged into thinking they will, so they won't and then when it tanks on 10th August - they'll have their excuse to do it.

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  • 201 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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