Federal Reserve

This is a load of crap folks:

For release at 4:30 p.m. EDT

We just made sure that anyone who was long into Options Expiration - which is tomorrow - especially on index options which cannot be hedged or traded now, is screwed.  Just like in August of 2007 when we did the opposite.

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Of course we couldn't wait until Friday after the close when it wouldn't hose people - instead, we timed this for maximum pain.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

We gave no warning either.  Ha ha.  You did wear your titanium plate in your pants, right?

The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.

That's "right now", in case you didn't figure it out yet.

In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010.

This is something we did warn about, and in addition we're giving notice.  See?  Hope you don't get a margin call in the morning - BOOYA!

Easing the terms of primary credit was one of the Federal Reserve's first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC's target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days.

See above.

Subsequently, in response to improving conditions in wholesale funding markets, on June 25, 2009, the Federal Reserve initiated a gradual reduction in TAF auction sizes. As announced on November 17, 2009, and implemented on January 14, 2010, the Federal Reserve began the process of normalizing the terms on primary credit by reducing the typical maximum maturity to 28 days.

The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC's 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.

This is something we said we'd do, but heh, you gotta love our timing.  We make a practice of burning people - a few years ago it was the shorts (who were right), this time it's the longs (who were also right - well up until this evening!

BTW, I shorted the close on the technicals in the futures (which if this reverses I can hedge and of course can't lose on now) - the market was heavy and it looked overbought, so you'd think I'd be happy. 

I'm not - this sort of action, whether I personally make money or lose money, is not the point.  The point is that this release was intentionally timed to hurt people, just as was the August 2007 one.

Bernanke and his pals ought to be run out of town on a rail for this sort of repeated abuse.  They seem to think that the markets are their plaything, and all they're doing is destroying confidence with each and every move of this sort.

It is not what you do, it is how you do it, and this sort of thing is just yet another reason why The Fed must be audited.  The timing on this is too damn suspicious - never mind that someone sold a metric ton of SPY right in front of the announcement - literally by seconds, 2 million shares were unloaded.

Betcha you can't find a cop.

Amusing....

Feb. 18 (Bloomberg) -- Federal Reserve officials set a long-term goal to keep only U.S. government securities in their portfolio as they debated how and when to pull back on the most aggressive monetary policy in U.S. history.

Central bankers are planning to eventually remove $1.43 trillion of housing debt from the balance sheet after critics such as Stanford University economist John Taylor accused them of straying beyond monetary policy. Philadelphia Fed President Charles Plosser said yesterday that the Fed’s purchases of housing debt expose it to demands from politicians to support other industries.

Taylor may have accused them of straying beyond monetary policy but stopped short of saying what I have - that The Fed's mandate and lawful authority stops at monetary policy.

Yes, I know all about 13(3).  That section of the Federal Reserve Act allows them to make loans to anyone (including individuals!) in "unusual and exigent circumstances."  They've done a lot of that too, and whether distasteful or not, it is clearly within the (current) confines of Fed authority.

But asset purchases are another matter.  I know all about the debate over the so-called CFRs but a CFR does not override a statute, and the statutes are clear - you need a full faith and credit guarantee for an asset to be able to be owned by The Fed.

The purpose behind this is clear on it's face as well - only such an irrevocable guarantee prevents the possibility of The Fed being used as a vehicle to subsidize losses taken on credit instruments by The American People without the consent of Congress.

Since all revenue bills must (by The Constitution) originate in The House, such a position and clause is necessary for The Federal Reserve Act to be Constitutional on its face.  Absent that requirement (in fact and practice, not in principle) The Fed is a blatantly unconstitutional body in that it has usurped the constitutional requirements for imposition of a tax or impost on the American People.

Plosser claims:

Some of the Fed’s emergency actions “blurred the line between monetary policy and fiscal policy, thereby increasing the risk to the Fed’s independence,” Plosser said in a speech. “These policies have veered toward deciding how public money should be allocated across firms and sectors of the economy.”

These "blurring of the lines" are not a risk to Fed independence they are blatantly unlawful as a violation of the Constitutional prohibition on the imposition of revenue and spending except through a bill originating in the House of Representatives.

What Plosser and others in The Fed (and beyond it) refuse to recognize and admit is that these "threats" to Fed independence have and are coming about as a direct consequence of The Fed's wanton violation of the highest law of the land - The US Constitution. 

By effectively appropriating funds, beginning with Maiden Lane I (Bear Stearns) which, by the way, is now showing a huge mark-to-market loss (despite claims by Bernanke that such a loss would not happen) and continuing through what I argue is an artifice of a structure with the Maiden Lane vehicles related to AIG, along with the Fannie and Freddie MBS subsidies The Fed has stepped beyond the bright white line that delineates its power and has decided to arrogate to itself the power of the purse - a power that under the Constitution is restricted to The House of Representatives.

That our Congress and Executive is too spineless to stand up to these clowns and throw the lot out on their ear, revoking The Federal Reserve Act due to the willful and wanton violation of the boundaries thereupon along with willful disregard for The Constitution, is where the real problem lies.

Plosser's bleating is amusing, but The Fed finds itself with this pressure as a direct and proximate consequence of its own actions, much like someone who complains about their thumb being in pain - after they hit it with their own hammer.

Wake up Chuck; you're well beyond requests that you smell the coffee - you spilled it down your shirt!

KC Fed's Hoenig said:

You have to love the hubris:

Also, before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate. These changes, like the closure of a number of lending facilities earlier this month, should be viewed as further normalization of the Federal Reserve's lending facilities.....

Yeah, as if you have control of this Bernanke.....

That's up 500% in the last few weeks.  Yes, it's very low (0.1%) but remember the target is 0 - 0.25%, and the discount rate is supposed to be above that.

So in reality there's some pressure building here, and when the IRX gets to, oh, 3 or so (which at this rate of change it will rather soon) The Fed will be forced to either crank up more QE or raise the rates to follow!

The Fed sets rates eh? What's this chart say?

The red line is the 13-week T-Bill rate, and the blue line is the Fed Funds rate (now discontinued since they went to the "range rule", but it shows the point.)

Which leads which Bernanke?

In virtually every case the market rate moves first, and The Fed FOLLOWS the market, not the other way around.

This, by the way, is rather obvious.  If The Fed was to try to move the market when it did not want to move, it would have to expend an infinite amount of funds to do so - either printing an infinite amount of money (destroying the dollar) or soaking up an infinite amount of dollars (destroying itself.)

Those who pray at the alter of Fed Omnipotence are rabid idiots; The Fed's own data, which is produced above, proves it.

Moving onward...

These loans were made with great reluctance under extreme conditions and in the absence of an appropriate alternative legal framework. To preclude any future need for the Federal Reserve to lend in similar circumstances, we strongly support the establishment of a statutory regime for the safe resolution of failing, systemically important nonbank financial institutions.

As opposed to willful and intentional blindness when it came to the creation of fully synthetic CDOs written by primary dealers, over which The Fed has regulatory jurisdiction, which were then "swapped off" to an alleged "insurance company subsidiary" which had no money to pay?

While it is true that The Fed had no regulatory power over AIG it is absolutely false that The Fed had no ability to stop this abuse, since the abuses originated in and were promulgated through firms over which The Fed did and does have regulatory power.

Of course admitting that you missed this would be equivalent to admitting that you really are either stupid or bought (whether monetarily or simply by ideological bias) and that won't do, will it?  You'd prefer to simply ignore this like you ignore your plethora of false and outrageously-blind pronouncements on the economy in general, including your claim that there was no housing bubble, that we would not slip into recession and that "subprime is contained."

Keep flapping your jaws Ben - it's what you're best at.

Tickerguy's translation of the FOMC statement:

Release Date: January 27, 2010

For immediate release

Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating.

We used the crooked durable goods numbers which were later admitted to be a "statistical error", and what's better, we think that nearly a million people leaving the labor force last month was a good thing - not bad.

Don't worry, you don't need jobs - government handouts work just fine.

Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.

Households are spending the handed-out money.  However, credit is and continues to contract as households are rejecting the continual bending over they're taking by the banks, especially on their credit cards.

Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls.

Businesses are buying boxes to give to their employees so they can box up their stuff as they're fired and shown the door.  We count this as both "equipment" and "software".

Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth.

We buy futures in the overnight every time the market threatens to go down.  Oh wait, we're not supposed to talk about that, right? 

Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

You're going to take it in both holes and like it.

With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.

Deflation is winning.  Rates are still zero which denotes an emergency.  But after two years, saying that really pisses people off, especially when we just got skewered by Paulson in sworn testimony (that bastard!) who said we printed money.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The emergency is not over.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

We bought $1.25 trillion of securities in a box but when we opened it we found that it was in fact dead and decomposing fish.  The old saying about "throwing good money after bad" comes to mind.

In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit wil be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

We're shutting all the crap down - it didn't work.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

Tom Hoenig is the only one with a brain.  The rest of us like lying to the public - "its all getting better but we still have an emergency!"

Yeah.