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The Federal Reserve will roll out a third round of quantitative easing — asset purchases from banks — and steer the economy away from a fresh recession, says Goldman Sachs Chief Economist Jan Hatzius.
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Get ready for QE3, Hatzius tells Forbes.
"We expect QE3 in six to nine months, probably in a seamless transition from Operation Twist," he says, referring to Operation Twist, another Federal Reserve policy under which the Central Bank shuffles its Treasury holdings around to keep long-term interest rates low.
With QE3 and other loose monetary policies, the U.S. economy should grow 0.5 percent in the first quarter of 2012, narrowly avoiding a recession, Hatzius says.
"It won't be largely effective, but it helps at the margin," Hatzius says, adding that "the idea of monetary easing in response to a weak economy hasbeen the right strategy, and it hasbeen useful."
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When we first reported on Bill Gross' massive surge in duration and accelerated purchase of Mortgage Backed Securities a week ago, we said, "That's either what is called betting one's farm on Operation Twist, or, betting one's farm that the next thing to be purchased by the Fed in QE3 or QE4 depending on how one keeps count, will be Mortgage Backed Securities." It was the letter. Confirmation that Bill once again frontran the Fed comes courtesy of Daniel Tarullo who in a speech at Columbia University, talking about the labor market of all things, just said the following: "I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities (MBS), something the FOMC first did in November 2008 and then in greater amounts beginning in March 2009 in order to provide more support to mortgage lending and housing markets." ...
Federal Reserve Vice Chairman Janet Yellen said a third round of large-scale securities purchases might become warranted if necessary to boost a U.S. economy challenged by unemployment and financial turmoil.
The central bank should also give “careful consideration” to Chicago Fed President Charles Evans’s proposal to tie the near-zero interest-rate pledge to specific levels of unemployment and inflation, Yellen said today in a speech in Denver.
The remarks signal Fed officials may be prepared to delve further into unprecedented monetary territory and take criticism inside and outside the central bank for expanding the balance sheet. ...
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Actions by the U.S. Federal Reserve appear to be helping fuel a shift among central banks toward a more benign stance, according to Hastings.
Such a path implies policies of lower interest rates, which favor economic growth, as opposed to a hawkish stance, which implies higher interest rates to fight inflation.
The Fed is considering a range of tools to boost growth, William Dudley, the president of the New York Fed Bank, said in a speech Monday, hinting at the option of a third round of quantitative easing.
“The Fed seems to be pushing the global agenda towards continued dovishness and accommodation and easing,” Hastings said. The Fed also is “pressuring the global yield curve lower in order to force easing around the world, which would of course prevent the U.S. dollar from declining too much against other currencies.”
The need to push the yield curve lower, he added, is “logical” since, regardless of how Europe and Italy play out this week, “there is a need for global central bank collaboration on more stimulus and more long-term funding of various initiatives.”
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--Kocherlakota: Fed should provide clarity about policy under different scenarios
--Says Fed still has easing tools at its disposal
--Adds Fed could respond with accommodative policies if financial panic develops in Europe
--Kocherlakota one of more outspoken internal critics of Fed policy
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The "lackluster" recovery of the U.S. economy, dragged down by a weak housing market and high unemployment, may require additional monetary policy accommodation by the Federal Reserve if it continues, a central bank official said Tuesday.
Though the U.S. recovery is on slightly firmer ground, as seen in recent economic data, its "story is one of slow recovery from an especially severe financial crisis and recession, painfully gradual progress on unemployment, and receding inflation," said Federal Reserve Bank of San Francisco President John Williams in prepared remarks. He expects moderate growth, high unemployment and low inflation to most likely continue, rather than a rapid improvement in economic condition. He expects U.S. real gross domestic product to grow at about a 2.25% pace in 2012 and pick up to around 3% in 2013, though he said the unemployment rate will only drop to around 8.75% by year-end 2012 from the current 9%.
This scenario calls for "continued action" by the Fed to support a "fragile economy," he said.
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Rates could be held lower past the Federal Reserve's current guidance of mid-2013, said Charles Evans, president of the Federal Reserve Bank of Chicago.
Evans was speaking Tuesday with reporters after a speech at the Council of Foreign Relations in New York.
Evans said he is comfortable with having an accomodative policy until inflation reaches 3% and unemployment is at 7%.
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Some Federal Reserve policy makers said the central bank should consider easing policy further, according to minutes of their Nov. 1-2 meeting.
“A few members indicated that they believed the economic outlook might warrant additional policy accommodation,” the Fed said in minutes released today in Washington. “However, it was noted that any such accommodation would likely be more effective if it were provided in the context of a future communications initiative, and most of these members agreed that they could support retention of the current policy stance at this meeting.”
Thus, the boom actually created huge increases in the money supply. And I mean huge. But all this "fake" money went poof in the crash, almost instantly.
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I have not made up my mind about the wisdom of a Fed rescue. It is fraught with dangers, and one might argue that resources are better deployed breaking EMU into workable halves with minimal possible damage.
However, debate is already joined -- and wheels are turning in Washington policy basements -- so let me throw this out for readers to chew over.
Nobel economist Myron Scholes first floated the idea over lunch at a Riksbank forum in August. "I wonder whether Bernanke might not say that 'we believe in a harmonized world, that the Europeans are our friends, and we know that the ECB can't print money to buy bonds because the Germans won't let them. And since the ECB will soon run out of money, we will step in and start buying European government bonds for them.' It is something to think about," he said.
This is not as eccentric as it sounds. The Fed's Ben Bernanke touched on the theme in a speech in November 2002 -- "Deflation: making sure it doesn't happen here" -- now viewed as his policy "road map" in extremis.
"The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations," he said.
Berkeley's Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. "The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash," he said.
The Fed could buy E2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world's paramount monetary force might alone bring Italian and Spanish yields back down below 5 percent before one bent nickel is even spent.
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Though any Fed intervention in Europe would guarantee a nice stock market rally into the New Year, it’s unlikely to occur. The Fed has already been stung by conservative criticism of its domestic quantitative easing policies, and with Republican primaries looming ahead of the presidential election in November 2012, moves by the Fed to support the European bond market by further debasing the dollar would be hugely controversial. Though the Fed propped up foreign financial institutions during the depths of the crisis in 2008, the lengths it went to to conceal this from the public shows that Bernanke and Co are well aware of the serious political risks that come – not surprisingly – from bailing out foreigners.
There are, moreover, issues with the Fed’s balance sheet. As Tangent Capital’s James Rickards points out in both his new book Currency Wars and in a piece for the King World News Blog, the Fed is leveraged by around 50 to 1. A mere 2% decline in the value of the Fed’s assets would be enough to wipe out its capital. Piling more leverage on to its books by printing money to buy European bonds would risk the remaining confidence financial markets have in the Federal Reserve System – and by extension, the US dollar itself.
Thus, it seems implausible to expect the Fed to act as a “white knight”, riding to the eurozone’s rescue. As Rickards has discussed on numerous occasions, and mentioned on this website previously, the IMF remains the eurozone’s best hope as far as any rescue deal is concerned. ...
The biggest bond dealers in the U.S. say the Federal Reserve is poised to start a new round of stimulus, injecting more money into the economy by purchasing mortgage securities instead of Treasuries.
Fed Chairman Ben S. Bernanke and his fellow policy makers, who bought $2.3 trillion of Treasury and mortgage-related bonds between 2008 and June, will start another program next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the central bank said in a Bloomberg News survey last week. The Fed may buy about $545 billion in home-loan debt, based on the median of the firms that provided estimates.
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Yep.@Swiss..
All indications point to further Central Bank cooperation.
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Here's a primer to what the swaps are and why the step was so important:
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Q. What did the central banks actually do?
A. They made it easier and less costly for banks to get U.S. dollars. The central banks already had in place agreements -- going back to December 2007 and emergency actions they took in the early days of the global financial crisis -- to swap local currencies with the Federal Reserve for dollars for, typically, up to three months. On Wednesday, they reduced the charge for doing that and extended the size and timing of the swap lines.
The lower price should encourage European commercial banks to go to the European Central Bank to borrow, through repurchase trades, the dollars that came from the swaps. The ECB also announced that it was reducing the amount of margin the banks have to post on those deals.
The steps are "designed to both remove the stigma and costs associated with the use of cross border swap lines," according to a report from bank analysts at Keefe, Bruyette & Woods.
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Jim Rogers said:...
Since August - well, this whole year - the M2 has jumped up. They're in the market. They're lying to us.
We already have QE 3. Get out the Federal Reserve‘s balance sheet. You’ll see that they’ve been pumping up – you can see unadjusted M2 is going through the roof. Look at their balance sheet.
All sorts of assets are suddenly appearing on their balance sheet. Where did they come from? They didn’t come from the Tooth Fairy; they came because they’re in there buying in the market as fast as they can. There Is QE 3 already. They don’t call it that but it’s there.
NEW YORK (Bullion Bulls Canada) -- Gold and silver prices plummet because the U.S. economy is so healthy that the Federal Reserve won't have to print any more money, and so there won't be any more inflation. Laughter, please.
The U.S. economy is healthy? As I have pointed out on previous occasions, 0% interest rates are nothing less than an economic defibrillator -- a temporary desperation measure to attempt to breathe life into a dying economy. Permanent 0% interest rates simply mean that economy is already dead, as we have seen with Japan. All that remains to be done is to put these zombie economies out of their misery, through debt default followed by massive restructuring.
As I have stressed in my recent commentaries, it is also beyond absurd for Bernanke to pretend that the Federal Reserve has ceased its money-printing. The gravity-defying U.S. Treasuries market provides conclusive, mathematical proof that such a claim is false.
Maximum bond prices at a time of maximum supply defy every economic principle in the books. Maximum bond prices at a time of maximum supply, when the largest buyer (China) has been selling Treasuries for more than a year, when the "economic surpluses" which financed Treasuries-buying have nearly vanished, when Treasuries auctions have been rigged so that no one knows who the buyers are, and at a time when the U.S. economy is obviously and hopelessly insolvent defies legality.
Someone, somehow is financing the totally opaque purchases of $trillions in U.S. Treasuries, and the list of suspects is rather short: the Federal Reserve. If the Fed is not financing those purchases with its officially/legitimately created funny money, then in must be doing so in some less than legitimate manner.
The only other mathematically possible scenario is debt default: bonds immediately going to zero (or close to it). Otherwise, exponential money-printing takes the underlying currencies to zero, also making the bonds worthless. Either way, we are 100% certain to get to the same result. Paying maximum prices for any of these paper time-bombs goes well past idiocy and all the way to deliberate economic suicide.
As I have explained on a number of previous occasions, in either a debt default or hyperinflation scenario, gold and silver prices will explode in an equally exponential manner -- again as a function of basic arithmetic (along with supply and demand). Thus the long-term upward revaluation of precious metals is as certain as sunrise following sunset.
Thus, the boom actually created huge increases in the money supply. And I mean huge. But all this "fake" money went poof in the crash, almost instantly. We all feared hyperinflation from the Bernanke's printing - but it didn't happen, though there is some inflation (particularly in the things we need vs the ones we merely want). The reason is - get this -- all that printing has yet to make up for the loss of the fake, imaginary money created by various institutions during the boom!
Steven Douglas said:So a massive influx of money into "the economy" (snicker - whose economy?) doesn't show up as inflation yet, because all it's really doing is filling the reserve vacuum created by all the money that went 'poof'. This only buys the banks time - the time it would never extend to those it wants/needs to foreclose on in a grab for liquidity.
you cannot fill the hole with earth dug out from the same hole.
Click: http://www.crystalbull.com/stock-market-timing/Velocity-Of-Money-chart/M2/This chart shows the year-over-year changes in the M2 Velocity of Money (defined as nominal GDP divided by M2), in relation to the S&P 500.
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