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The longer the Federal Reserve continues its bond-buying stimulus, the higher the odds it will face a year without any money to give the U.S. Treasury after taxpayers received a record $88.4 billion profit in 2012.

The Fed’s financial-crisis actions -- from acquiring debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc. to three rounds of quantitative easing -- have led so far to the record payments. Now, the prospect of a stronger economy and rising interest rates means the value of the Fed’s bond holdings will fall at the same time its funding costs climb because the central bank pays interest on the excess reserves it holds for banks.

This could cause operating losses and invite increased scrutiny from lawmakers already critical of the central bank’s policies.

That’s a risk central bankers are grappling with as they consider when to slow the $85 billion monthly pace of their government and mortgage-backed securities purchases. Federal Reserve Bank of New York President William C. Dudley said in a speech last month that the central bank’s balance-sheet expansion does “create some budget risk” that threatens the institution’s independence.

Will these be the same lawmakers who are busy spending the money being printed by the Fed?


I think they'll look about as hard as this chap.

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Janet Yellen, nominated to be the next chairman of the Federal Reserve, said the economy and labor market are performing “far short of their potential” and must improve before the Fed can begin reducing monetary stimulus.

“A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases,” Yellen, the Fed’s vice chairman, said in testimony prepared for her nomination hearing tomorrow before the Senate Banking Committee. “I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

The remarks show Yellen is committed to the central bank’s strategy of attempting to boost the economy and lower 7.3 percent unemployment, more than four years after the economy began to recover from the longest and deepest recession since the Great Depression. She also signaled support for capital and liquidity rules to help reduce the perception that some banks are too big to fail.

The idea that free money might be the problem is clearly lost on this intellectual genius.

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Janet Yellen indicated she’ll press on with the Federal Reserve’s unprecedented monetary stimulus until she sees a robust recovery, downplaying risks the policy is inflating asset bubbles.

“I don’t see evidence at this point, in major sectors of asset prices, misalignments,” she said yesterday during her confirmation hearing to be the next Fed chairman. “Although there is limited evidence of reach for yield, we don’t see a broad buildup in leverage, where the development of risks that I think at this stage poses a risk to financial stability.”

Yellen signaled her determination to use bond buying to strengthen the economy and drive down the nation’s 7.3 percent unemployment rate. Testifying to the Senate Banking Committee as benchmark U.S. stock indexes rose to records, she sought to dispel concerns from senators that the central bank’s policy is pumping up the values of equities and housing to such an extent that it jeopardizes market stability.

“The possibility of there being a bubble isn’t going to keep her from doing more if she thinks that’s appropriate,” said Brian Jacobsen, who helps oversee $236 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. “She sees no problem in doing more asset purchases” or even expanding them, he said.

Yellen, the Fed’s current vice chair, endorsed the strategies of Chairman Ben S. Bernanke, whose term at the central bank will expire in January. Bernanke has argued that the first lines of defense against instability in financial markets are regulatory tools, including the powers granted to the Fed under the Dodd-Frank Act whose final implementation would fall to Yellen if she’s confirmed.

Excellent she sees no buildup in leverage.... She's clearly going to print like feck!

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Nov 14, 2013 10:17 PM GMT


The dollar rose from the lowest level in a week as investors wagered the Federal Reserve is still moving toward reducing its bond buying after chairman-nominee Janet Yellen said it “will not continue indefinitely.”

The yen weakened beyond 100 per dollar for the first time since September after a government report showed economic growth slowed, adding to the case for the Bank of Japan to boost stimulus. Emerging-market currencies rose on bets the Fed will continue its asset purchasing. Yellen said in Washington testimony she is committed to promoting a strong recovery and will ensure monetary stimulus isn’t removed too soon.


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So what will stop these markets rising? 2000 on the S&P looks like it could just be weeks away... and then what?

Nothing can stop markets rising if the Krugmanite wreckers print enough. But ultimately any additional inflation they introduce into financial assets runs the risk of waterfalling into commodity prices (again) and consumer prices after that.

OTH, we've had some respite in commodity price inflation and oil this year as the BRIC economies have blown up and slumped. Yellen and Carney would have to go into overdrive to reverse that.

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The main US share indexes have reached new record highs.

The main Dow Jones index rose above 16,000 points for the first time and the broader Standard and Poor's 500 index passed through 1,800.

Traders are optimistic about the prospect of the US central bank, the Federal Reserve, continuing its cheap money policy.

Lower interest rates mean investors are driven to find investments where they will gain higher returns.

In early US trading, the Dow Jones rose 0.3%, or 49 points, to 16,010.44.

The S&P 500 touched 1,800 but then slipped back to stand up 0.9 points on the day at 1,799.08.

A slam dunk by Bernanke.

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The sums that annually disappear into the vast bureaucracy that manages more than half of all annual government outlays approved by Congress.

The Defense Department's 2012 budget totalled $565.8 billion, more than the annual defence budgets of the 10 next largest military spenders. In its annual report of department-wide finances for 2012, the Pentagon reported $9.22 billion in "reconciling amounts" to make its own numbers match the Treasury's, up from $7.41 billion a year earlier. Pentagon is largely incapable of keeping track of its vast stores of weapons, ammunition and other supplies; thus it continues to spend money on new supplies it doesn't need and on storing others long out of date. It has amassed a backlog of more than half a trillion dollars in unaudited contracts with outside vendors; how much of that money paid for actual goods and services delivered isn't known. And it repeatedly falls prey to fraud and theft that can go undiscovered for years. Pentagon is the only federal agency that has not complied with a law that requires annual audits. That means that the $8.5 trillion in taxpayer money doled out by Congress to the Pentagon since 1996, the first year it was supposed to be audited, has never been accounted for. That sum exceeds the value of China's economic output last year. The main reason is rooted in the Pentagon's continuing reliance on a tangle of thousands of disparate, obsolete, largely incompatible accounting and business-management systems. Much of their data is corrupted and erroneous. "It's like if every electrical socket in the Pentagon had a different shape and voltage," says a former defence official who until recently led efforts to modernize defence accounting. No one can even agree on how many of these accounting and business systems are in use. The Defense Business Board, an advisory group of business leaders appointed by the secretary of defence, put the number at around 5,000.

And every month, they encounter the same problem. Numbers are missing. Numbers are clearly wrong. Numbers come with no explanation of how the money has been spent or which congressional appropriation it come from. "A lot of times there are issues of numbers being inaccurate. The data flood in just two days before deadline. As the clock tick down. For those, Woodford and her colleagues were told by superiors to take "unsubstantiated change actions" - in other words, enter false numbers, commonly called "plugs," to make the Navy's totals match the Treasury's. Supervisors are required to approve every "plug" - thousands a month. After the monthly reports were sent to the Treasury, the accountants continued to seek accurate information to correct the entries. In some instances, they succeeded. In others, they didn't, and the unresolved numbers stood on the books. Link

Edited by rollover
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One of Janet Yellen’s first challenges as Federal Reserve chairman will be figuring out how to cushion against a lurch in interest rates when she pares the pace of the central bank’s bond buying.

After sending 10-year Treasury yields more than a percentage point higher by fueling taper expectations in May and June, policy makers now are grappling with their options when they do reduce debt purchases that have swelled their balance sheet to a record $3.91 trillion.

The Fed’s failure so far to convince investors that tapering on its own doesn’t constitute a tightening of policy creates the risk of more market volatility as the central bank communicates about tools it’s never used.

Taper crash the market, don't taper crash the market. Tough choices but I'm certain Yellen will simply print.

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Federal Reserve Chairman Ben S. Bernanke said the Fed will probably hold down its target interest rate long after ending $85 billion in monthly bond buying, and possibly after unemployment falls below 6.5 percent.

“The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after” the jobless rate breaches the Fed’s 6.5 percent threshold, Bernanke said yesterday in a speech to economists in Washington. A “preponderance of data” will be needed to begin removing accommodation, he said.

In deciding when to wind down open-ended purchases of bonds, Fed officials are weighing both the “cumulative progress” since they began the program in September 2012 as well as “the prospect for continued gains,” Bernanke said. The labor market has shown “meaningful improvement” since the start of the program, although recent job reports have been “somewhat disappointing,” he said.

Fed going for a lower unemployment level than Carney. Will he have to revise in response?

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Fed going for a lower unemployment level than Carney. Will he have to revise in response?

What what they do. not what they say.

They wont raise rates till they are forced too. it's that simple.

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Reaction to Fed minutes

20.13 There does not seem to be much surprise at today's minutes the suggestion that tapering will start in the 'coming months'.

But there does some to be a lot of different opinions among the FOMC members. Here experts give there view.

Randy Frederick, Schwab Center for Financial Research

Quote I don't see any huge surprise here but it seems like there are a lot of different opinions among the committee members, not just about the tapering but also about which threshold they might set and other stuff.

It's as if they are throwing everything on the wall to see what sticks. One could be asking how much credibility have they lost with the investing community.

Jacob Oubina, RBC Capital Markets

Quote They could have been a lot less constructive if they wanted to and this came before the strong payrolls report. Data since the meeting has been infinitely better and while policy will be data driven, their inclination at some point will be to taper in the not-too-distant future.

It was a little more hawkish than anticipated; given the backdrop it was not as bad as it could have been

Michael Woolfolk, BNY Mellon

Quote We take these minutes as meaning March is the most likely scenario for tapering. There's no overwhelming case to be made for them to act in December.

We are surprised at the relatively little attention given to the impact of the government shutdown. Maybe it really was a non-event, judging by today's retail sales data and the October nonfarm payrolls.

Fed discussed how to improve its communication

19.50 Officials also discussed how to clarify or strengthen their communication about the economic thresholds guiding how long interest rates will stay low.

Quote A couple supported reducing the 6.5pc unemployment rate threshold, while others said that change may cause concern about how committed the Fed is to the thresholds.

Currently the committee has said it will hold rates near zero at least as long as unemployment remains above 6.5pc and the outlook for inflation is subdued.

Several members said it “could be more helpful” to give more qualitative information on the central bank’s intentions for the fed funds rate after the jobless rate falls below the threshold.

Quote Such guidance could indicate the range of information that the committee would consider in evaluating when it would be appropriate to raise the federal funds rate.

Rate cut discussed at Fed meeting

19.39 Policy makers discussed whether to cut the interest rate the Fed pays on excess reserves, currently 0.25 pc.

Most FOMC members said:

Quote [Lowering the rate] could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions.

Janet Yellen, current vice chair and the nominee to replace Chairman Ben Bernanke, whose term expires in January, told lawmakers last week doing so “certainly is a possibility” even as some Fed officials have been concerned that lowering the rate would damage the functioning of the money market.

Wall Street falls after Fed minutes

19.30 With tapering likely in the coming months, investors are pulling their money out of the market.

Excellent news, something for everyone. It certainly makes out they are serious about giving the impression that there is a discussion about what to do other than print....

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Excellent news, something for everyone. It certainly makes out they are serious about giving the impression that there is a discussion about what to do other than print....

Long-dated treasury yields up again, that's the only thing that matters.


Treasury 10-year yields rose to the highest level in two months as Federal Reserve officials said they might reduce $85 billion in monthly bond purchases "in coming months" as the economy improves, minutes of their last meeting show. The difference between the yields on three-year notes and the 30-year bond widened to the most in more than two years as the policy makers expect "ongoing improvement in labor market conditions."

Fed Bank of St. Louis President James Bullard said earlier a cutback in the central bank's purchase program is "on the table" for the December meeting, while 5 percent of investors surveyed are looking next month for a Fed decision to taper, according to the latest Bloomberg Global Poll.

Yield Difference

The extra yield on 30-year bonds compared with three-year notes, known as the yield curve, expanded to 3.34 percentage points, the widest since August 2011. The difference has averaged 2.83 percentage points in the past 12 months. The steeper curve suggests investors are demanding a higher premium to hold longer maturities amid signs growth will pick up and spur inflation.

Edited by zugzwang
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