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Sancho Panza

Fed Officials Saw Declining Benefits From Qe, Minutes Show

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Bloomberg 8/1/14

'Federal Reserve officials saw diminishing economic benefits from their bond-buying program and voiced concern about future risks to financial stability during their last meeting, when they began to cut the pace of purchases. “A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue,” the record of the Federal Open Market Committee’s Dec. 17-18 meeting showed. Participants also were “concerned about the marginal cost of additional asset purchases arising from risks to financial stability,” citing the potential for “excessive risk-taking in the financial sector.”

“A lot of people in the market think asset purchases have had declining benefits over time, and this is the first time I can recall the committee as a whole has really come out and agreed with that sentiment,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

“The economy seems to be able to stand more on its own now,” Feroli said.

‘Substantial Improvement’

Some Fed officials “expressed the view that the criterion of substantial improvement in the outlook for the labor market was likely to be met in the coming year if the economy evolved as expected,” the minutes said.

At the same time, “several” officials noted that “a range of other indicators had shown less progress toward levels consistent with a full recovery in the labor market, and that the projected pickup in economic growth was not assured.”

The committee cut monthly purchases to $75 billion in December, from $85 billion, citing improvement in the labor market that pushed the jobless rate down to a five-year low of 7 percent.

The yield on the benchmark 10-year Treasury note rose 0.05 percentage point to 2.99 percent at 2:52 p.m. in New York, while the Standard & Poor’s 500 Index fell 0.1 percent to 1,836.41.

Recent progress on jobs, manufacturing and housing has affirmed the FOMC’s view that the economy is improving enough to take the first step toward exiting stimulus that has swelled the Fed balance sheet to more than $4 trillion.

‘Measured Reduction’

Fed Chairman Ben S. Bernanke on Dec. 18 said the Fed will “continue to do probably at each meeting a measured reduction” in the pace of purchases. The FOMC will probably taper buying in $10 billion increments over the next seven meetings before ending them in December, according to a Dec. 19 Bloomberg News survey of economists.

The minutes said “many participants expressed concern about the deceleration in consumer prices over the past year.” The personal consumption expenditures price index rose 0.9 percent for the 12 months ending November, more than a percentage point below the Fed’s 2 percent target. Some participants said inflation was unlikely to slow further.

The FOMC lowered its target interest rate to near zero in December 2008 and says it will stay there as long as the unemployment rate remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.

Unprecedented Easing

Policy makers met in the final weeks of Bernanke’s eight-year tenure, which ends Jan. 31. Vice Chairman Janet Yellen, an architect of the unprecedented easing, was confirmed this week by the Senate to succeed Bernanke.

Interest rates climbed after the Fed’s Dec. 18 tapering announcement, with the yield on the 10-year Treasury note rising to 3.03 percent on Dec. 31, a more than two-year high. The average 30-year fixed-rate mortgage rose to 4.53 percent last week from as low as 3.35 percent in May, according to Freddie Mac data.

Officials discussed and rejected the idea of lowering the unemployment threshold, opting instead to “provide qualitative guidance regarding the committee’s likely behavior after a threshold was crossed.”

Bernanke has said bond buying by the Fed helped bolster the recovery, reducing unemployment in November to a five-year low of 7 percent. Monetary stimulus last year helped push up the Standard & Poor’s 500 Index 30 percent to a record 1,848.36 on Dec. 31.

Bernanke said in a Jan. 3 speech that the country may be poised for faster growth.

Less Restraint

“The combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters,” he said in Philadelphia.

Recent economic reports have reinforced Bernanke’s outlook.

Companies added more workers than projected in December as U.S. employers grew more optimistic about the prospects for demand, a private report based on payrolls showed today.

The 238,000 increase in employment was the biggest since November 2012 and followed a revised 229,000 gain in November that was stronger than initially estimated, according to the ADP Research Institute in Roseland, New Jersey.'

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'Federal Reserve officials saw diminishing economic career benefits from their bond-buying program and voiced concern about future risks to financial stability their reputation during their last meeting, when they began to cut the pace of purchases. “A majority of participants judged that the marginal efficacy political leverage of purchases was likely declining as purchases continue,” the record of the Federal Open Market Committee’s Dec. 17-18 meeting showed.

Corrected.

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"A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue," the record of the Federal Open Market Committee's Dec. 17-18 meeting showed. Participants also were "concerned about the marginal cost of additional asset purchases arising from risks to financial stability," citing the potential for "excessive risk-taking in the financial sector."

"A lot of people in the market think asset purchases have had declining benefits over time, and this is the first time I can recall the committee as a whole has really come out and agreed with that sentiment," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

"The economy seems to be able to stand more on its own now," Feroli said.

...The yield on the benchmark 10-year Treasury note rose 0.05 percentage point to 2.99 percent at 2:52 p.m. in New York, while the Standard & Poor's 500 Index fell 0.1 percent to 1,836.41.

...concerned about the marginal cost of additional asset purchases, risks to financial stability... potential for excessive risk-taking.

Wonder what they mean? Seriously, I'm not sure where their main concern would be, although they only say 'potential;. Doesn't seem to be concern about US house prices out there, even in SoCal. As far as I knew, QE was mostly to lower borrowing costs, encouraging market participants to participate with their own money.

Stocks? I watched the market before the minutes were released. In the morning the Dow was fairly constant at 16,530. Then it edged lower, steady at 16,500 for 10 minutes until the Fed release. Flash movement on release down to 16,460 range, before bouncing back to the 16490 range, then sliding back to 16470, and then falling quick and fast to 16,416. Climbed back minutes later, and closed at 16462.74.

Today/yesterday about the Fed minutes and other: http://washpost.bloomberg.com/Story?docId=1376-MZ2SPK6K50XX01-6HUJM5C3VOPER4PQ51RA8R0M78

High Valuations “We’re looking at a situation where equities are still likely to outperform most other markets,” Cam Albright, director of asset allocation at Wilmington Trust Investment Advisors, said in a phone interview from Wilmington. His firm oversees about $79 billion. “The question is whether if we see a jump in growth in jobs, is that going to accelerate the tapering process?”

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, slid 0.4 percent to 12.87.

Global equity values are close to reaching a record for the first time since 2007. The total market capitalization of stocks around the world has risen to $61.5 trillion, near the all-time high of $62.6 trillion from October 2007, according to data compiled by Bloomberg.

... HSBC Holdings Plc cut U.S. stocks to underweight from neutral, citing high valuations compared with the rest of the world, earnings near record highs and the possible removal of monetary stimulus at a faster rate than in other developed markets. Companies in the S&P 500 are trading at 17.3 percent reported earnings, up from 14.5 at the start of 2013.

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"A lot of people in the market think asset purchases have had declining benefits over time, and this is the first time I can recall the committee as a whole has really come out and agreed with that sentiment," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

"The economy seems to be able to stand more on its own now," Feroli said.

The banks maybe? Businesses on the sidelines, waiting for some normality, to see how (global) economy reacts after QE, before committing to investment?

Jamie Dimon's $5 billion bet against bonds

By Stephen Gandel, senior editor

June 3, 2013: 5:00 AM ET

Most of the big banks say they will make money from rising rates.

"Something like 20 of the 25 biggest banks in the nation will tell you they will make money when interest rates rise," says Glenn Schorr, a top bank analyst at Nomura. "But when you listen to regulators you still hear fear."

Greenspan / Dimon? Another source I can't find now, of a banker saying QE isn't helping them at all. Thread: http://www.housepricecrash.co.uk/forum/index.php?showtopic=190726

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Mish's Take

'

Fed's Optimism

In aggregate, the Fed seems to believe the economy has turned the corner.

I take the other side of the coin citing rising mortgage rates, no pent-up demand for autos, declining lending standards, and lack of genuine pricing mechanisms as the Fed has grossly distorted all price signals with its QE programs.

Falling inflation is actually a good thing, but no one on the Fed sees things that way. Nor do any of the Fed governors see the enormous bubbles in stocks and corporate bonds they have created.

Excessive Risk Taking

A few participants worried about the "incentive for excessive risk-taking in the financial sector"

I suggest it's far too late for that worry. The incentive for excessive risk-taking has been operative for years. It is reflected in economic bubbles of all sorts. One only has to open one's eyes to see them.

Fed forecasts are exceptionally wrong at economic turns, as past minutes from 2000 and 2007 show.

And here we are again, at yet another 7-year interval, with the Fed unable or unwilling to see the bubbles they created, just as they failed to see the dotcom bubble in 2000 and the housing bubble in 2007.'

Edited by Sancho Panza

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Fed forecasts are exceptionally wrong at economic turns, as past minutes from 2000 and 2007 show.

And here we are again, at yet another 7-year interval, with the Fed unable or unwilling to see the bubbles they created, just as they failed to see the dotcom bubble in 2000 and the housing bubble in 2007.'

I like the 7 year cycle idea. It suggests that 2014 will be the top this time, with a 2015 crash. Fits with my thinking. :)

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Participants also were “concerned about the marginal cost of additional asset purchases arising from risks to financial stability,” citing the potential for “excessive risk-taking in the financial sector.”

Wasn't all that sort of stuff supposed to have been sorted out after the 2007 global economic collapse - yet there they are again concerned about “excessive risk-taking in the financial sector.”

Back to square one.

If it's excessive then what are the regulators doing about it.

In private and on the quiet they'll all be patting themselves on the back congratulating themselves on “excessive risk-taking in the financial sector” and working out the size of the next bailout they're going to demand.

Edited by billybong

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More like their cronies in the banking sector stopped seeing such large gains from all the cheap money and have decided that the best way to maximise their profits is with a planned asset price slump - allowing them to cash in their assets before it and then buy up assets cheap once the price falls.

A good asset price crash will also provide a good pretext for a renewed round of money printing which will allow the insiders to make whopping profits once again as asset prices are pushed back up.

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And here we are again, at yet another 7-year interval, with the Fed unable or unwilling to see the bubbles they created, just as they failed to see the dotcom bubble in 2000 and the housing bubble in 2007.'

"But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?"

Alan Greenspan Dec 5th 1996.

Perhaps Mish would prefer price controls on every asset class on the planet.

Nobody forced people to buy gold at $1900, for instance, but they still did (and many on here urge others to do the same). In fact iirc MISH is a gold bug/recommends miners.Perhaps he'd prefer it if the FED told him he can't.

Edited by R K

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Perhaps Mish would prefer price controls on every asset class on the planet.

Nobody forced people to buy gold at $1900, for instance, but they still did (and many on here urge others to do the same). In fact iirc MISH is a gold bug/recommends miners.Perhaps he'd prefer it if the FED told him he can't.

It's a fair point.

[Mish guy]I suggest it's far too late for that worry. The incentive for excessive risk-taking has been operative for years. It is reflected in economic bubbles of all sorts. One only has to open one's eyes to see them.

All I ask is to see how those asset classes fare without extraordinary stimulus measures.

I did my financial planning toward saving for a house, during runaway years of HPI and reckless borrowing to pay and set higher house prices, in the context of a free-market. Instead Government/BoE stepped in to protect certain values from falling, and indeed in my areas of preference, push them up even more. Pay what you want for anything, borrow as much as banks will lend you, tell the forums it's going to go up more, or doubles every few years, but it's your own decision and take the consequences if market conditions change, and values fall.

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More like their cronies in the banking sector stopped seeing such large gains from all the cheap money and have decided that the best way to maximise their profits is with a planned asset price slump - allowing them to cash in their assets before it and then buy up assets cheap once the price falls.

A good asset price crash will also provide a good pretext for a renewed round of money printing which will allow the insiders to make whopping profits once again as asset prices are pushed back up.

It would still be totally worth it, even if there really is a small group of "informed" people, which I doubt there is. There may be smarter people, who understand the market better than others. I notice reports that a bank's report wealthy families are resisting taking big risks, with a big chunk in cash, earning little interest.

For my pov, many of the people who think they're informed, tuned in, have been piling into property and other assets at very high prices, including many banker types themselves.

I hope QE is widely misunderstood (whilst accepting it could be me who misunderstands it though). All the reflation we've seen since global QE, got to hope there will be consequences for asset values coming.

Won't be money printing. It's done. US banks at least have loads to lend against distressed/reassessed asset values, at lower prices, to market participants. It will be loads of new volume lending I would have thought. Too many large greedy asset holders need to be broken up. Too many people complacent about the super-inflated values of their own homes, where they are equity/paper rich, even own outright.

Even the banks have experienced this, acquiring too much in the boom, quietly selling off divisions, making themselves leaner, during the reflation.

Edited by Venger

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It's a fair point.

All I ask is to see how those asset classes fare without extraordinary stimulus measures.

Nail squarely whacked on it's head.

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