Saturday, June 21, 2014

The Fed’s Stealth Tightening

Bud Conrad, Chief Economist

As expected, the Fed tapered its purchases of mortgage-backed securities on Wednesday to $15 billion per month and its purchases of longer-term Treasury securities to $20 billion per month. That means total monthly purchases, which were $85 billion last year, are now down to $35 billion. That’s a significant cut.  The Fed also cut the range of its full-year 2014 real GDP growth forecast, from 2.8%-3.0% down to 2.1-2.3%. That was no surprise, considering that GDP in Q1 was negative 1%, and it may have been a bit of a warning......

·         Housing in California is back to its pre-crisis peak;
·         Stocks are at record levels;
·         Food prices jumped 0.7% in May alone; and
·         Anyone who drives knows that a tank of gas is far more expensive than it was a year ago.

.........My point is that the Fed and the media tell us things are better than they actually are. Meanwhile, the Fed is taking secret actions that reveal where Yellen and friends really think the economy might be headed.

The Fed’s New Tool: Reverse Repo……The Fed has announced that it’s using “reverse repos” as a new tool to manage monetary policy. Don’t let “reverse” confuse you: Reverse repos are just a way the Fed soaks up cash from financial institutions. The Fed is the “borrower,” swapping its Treasuries for banks’ cash. You might call it the opposite of quantitative easing: (link not in original article) reverse repos drain money from the financial system…..There’s Much More Here…..

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