# Fed Maps Exit From Stimulus



## BillS (May 30, 2011)

http://online.wsj.com/article/SB10001424127887324744104578475273101471896.html

Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy-an effort to preserve flexibility and manage highly unpredictable market expectations.

Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.

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The Fed's strategy for how and when to wind down the program is of intense interest in financial markets. While the strategy being debated leaves the Fed plenty of flexibility, it might not be the clear and steady path markets expect based on past experience.

Officials are focusing on clarifying the strategy so markets don't overreact about their next moves. For example, officials want to avoid creating expectations that their retreat will be a steady, uniform process like their approach from 2003 to 2006, when they raised short-term interest rates in a series of quarter-percentage-point increments over 17 straight policy meetings.

"I don't want to go from wild turkey to cold turkey," Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an interview Friday. "I think we ought to dial it back." Mr. Fisher is part of a contingent of Fed hawks who are wary of the central bank's easy-money policies.

Stocks and bond markets have taken off since the Fed announced in September that it would ramp up the bond-buying program, and major indexes closed at another record Friday. An abrupt or surprising end to it could send stocks and bonds in the other direction, but a delayed end could allow markets to overheat. And some officials feel they've ended other programs too soon and don't want to repeat the mistake.

The Fed's strategy on how to unwind the program has emerged as a source of some uncertainty in markets in the wake of its policy meeting earlier this month. The Fed said in its postmeeting statement that it was "prepared to increase or reduce the pace of its purchases" as the economic outlook evolved.

The suggestion that the Fed might boost its bond buying was a change in the policy statement that seemed to some an acknowledgment that more aid for the economy might be needed. Employment data in April were weak and inflation has fallen well below the Fed's 2% inflation objective, both points that allow leeway for more stimulus.

But many officials believe the recovery is on track and aren't yet concerned about the inflation slowdown. Instead, the most recent statement seems more aimed at signaling the Fed's broader flexibility in managing the programs.

Charles Plosser, president of the Philadelphia Fed, said in an interview Friday that the change in the statement was meant "to remind everybody" that the Fed has "a dial that can move either way."

The dial can also pause. Fed officials could shrink the size of their purchases and hold it at that level for a while as they assess the effects, or they could make several moves in a row if that seemed right. They could also boost their buying if they lose confidence about the economic outlook. The strategy is meant in part to ensure flexibility in an uncertain economy.

Yet while officials appear increasingly settled on a strategy for how to dial back the program, they haven't decided when to start.

Mr. Fisher said he advocated starting right away at the last Fed meeting. Some officials can envision taking a first step this summer, if strong data show the economy is weathering the tax increases and federal spending cuts that appear to be weighing on growth. But they might wait longer, especially if the economy disappoints, as it has for several years during the spring and summer months.

A Wall Street Journal survey of private economists this week showed that 55% expect the Fed to start shrinking its bond purchases in the third or fourth quarter this year, while 45% expect the Fed to wait until next year or later. None expected the Fed to increase its purchases as its next step.

The bond-buying programs are aimed at pushing down long-term interest rates and boosting financial markets to encourage more borrowing, spending and hiring in the broader economy. The Fed's securities holdings have increased from $2.58 trillion to $3.04 trillion since September.

Clearer signals about the Fed's plans could emerge next week. Five regional Fed bank presidents, including Mr. Fisher and Mr. Plosser, and Fed governor Sarah Bloom Raskin are scheduled to speak. Fed Chairman Ben Bernanke will discuss economic prospects for the long-run in a commencement address at Bard College at Simon's Rock next Saturday.

Central bank officials want to see substantial improvements in the job-market outlook before the programs are ended all together. And then, efforts to boost short-term interest rates might not occur for months or even years later.

The unemployment rate has fallen to 7.5% from 8.1% since August, both because of hiring and people leaving the workforce. Payroll employment has increased on average by 193,000 per month during the eight months since the program was launched, compared with average gains of 157,000 before it began. "It is pretty hard to say we haven't seen an improvement in the labor market," Mr. Plosser said.

Many economists believe economic growth will slow in the second quarter-in part because of fiscal drags-from a 2.5% annualized rate in the first quarter, but then accelerate in the second half. If growth remains firm in the weeks ahead that could give officials more confidence about starting to pull back.

Fed officials aren't very concerned about the annual rate of inflation falling toward 1% in recent months, well below their 2% objective. Because expectations of future inflation have remained steady, many Fed officials expect inflation readings to move back up toward 2% in the second half of the year. "I'm not too worried about it," Mr. Plosser said. "Expectations remain pretty stable."

The Fed has policy meetings in June, July and September, and Mr. Bernanke will have a chance to explain its actions at news conferences in June and September.

Some of the bond-buying program's most vocal proponents have signaled more optimism about the outlook and a willingness to consider pulling back from the programs. John Williams, president of the Federal Reserve Bank of San Francisco, said in an interview last month that he anticipated pulling back this summer.

"I'm looking for continuing signs of improvement in the economy," he said, "sustained, ongoing improvement in the economy."

Corrections & Amplifications 
Federal Reserve Chairman Ben Bernanke will discuss economic prospects for the long-run in a commencement address at Bard College at Simon's Rock in Massachusetts next Saturday. An earlier version of this article incorrectly said the address would be at Bard College of New York.

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So does this mean the Fed will stop buying bonds in order to make the stock market crash? Or is this just a head fake when they really plan to do QE until the dollar dies?


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## mojo4 (Feb 19, 2012)

They can't stop it or the economy stalls and dies. They can't continue or the economy will drown in devalued currency and die. There is no future but economic death because you cannot prop up a failed economic system. Either we fix the problem (impossible because the majority of the country don't even see a problem) or we continue our course of economic suicide. I feel sorta like a passenger riding along with a suicidal driver. If he wants to drive off a cliff and die that's fine by me but please slow down so I can jump outta the dang car!! Time to spend your greenbacks before they go the way of the peso.


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## hiwall (Jun 15, 2012)

> the economy will drown in devalued currency


Right now with most larger countries "printing" new money at unheard of amounts changes the scenario. We are kinda in uncharted waters with the "currency wars" going on now. It obviously has to end badly for all countries but this could drag out for awhile. We know what happens when one country prints a huge amount of new currency but when many countries do it at the same time things are different(at least for awhile). These are interesting times. In history "interesting times" have often led to "bad times". We will see what happens today.


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## Tweto (Nov 26, 2011)

I see a colonoscopy in everybody's future. Only this time it will be without anesthetic.


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## invision (Aug 14, 2012)

Well that article is interesting, considering 2 months ago Ben B was considering leaving the bad debt "off the books" until they mature and simply disappear.... Only time will tell how they play it, but "creating a dial" allows them some wiggle room, so they can try to lower it to say $65B and if that negatively impacts then they can dial back up to say $75B.... Kinda smart but the whole situation is BS... Also on a side note, watch for Ben B and the Fed Reserve start mandating the breakup of the top 5 over the next 6 months... That was a blurb on Reuters after the last meeting of the Fed.... So this would potentially lesson the impact when the cards start falling down again...


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## Hooch (Jul 22, 2011)

could it have anything to do with the dollar loosing reserve status n all that money flooding back home?? I cant see how they can stop..either way now it seems it will all fall apart ...yikes..


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## invision (Aug 14, 2012)

Hooch said:


> could it have anything to do with the dollar loosing reserve status n all that money flooding back home?? I cant see how they can stop..either way now it seems it will all fall apart ...yikes..


That is a good question... Right now we are getting a little ticked at Japan for their devaluation cause that means what we are paying them back, is worth a lot more Yen in comparison to 6-12 months ago...

What we have is a flood of money that is creating several bubbles - equities, fed reserve debt, national debt, usd, personal debt, and even housing (value of homes between $100k-$500k)... The main problem is when you have such a large outlay that it doesn't justify the returns is when you see the bubble go pop... Right now, with the equities markets reaching breath taking new heights, I can't see a value on return to buy for long term gains... Short terms, yes... but not long term 4-10 years... And as they slow or dial down, unless GDP goes up significantly, and employment numbers - both wages and true number employed go up, I don't see how the market will retain the numbers reached... There will be less buys to sustain the growths seen... So instead of one pop, it will be like the 4th of July - pop pop pop pop pop....


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## Hooch (Jul 22, 2011)

I guess a big question in when the popping happens.. that said, I wouldnt doubt that some big event happens that will be so awful that tptb will be able to blaim the economic failure on it and afterwards...come to the "rescue" with a new n improved "plan" for all us lil folk...


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## Immolatus (Feb 20, 2011)

mojo4 said:


> They can't stop it or the economy stalls and dies. They can't continue or the economy will drown in devalued currency and die.


I think this is what they want us to think. I'm not sure youre necessarily wrong (certainly not about the second part) but I dont buy the first part. To accept that is saying that they are propping up the economy. I say they are not. They might be propping up a perception of such through the stock market, but that doesnt equal reality. They are loaning money to the gubt and bailing out their shareholder banks at a furious pace, but I dont think that trickles down to everyone else.
Where this touches on reality is only for the rich. Half of the people dont own stocks at all. Most of the rest only own through pensions and retirement funds. Obviously there is a big psychological effect when the market tanks (which it will, for how long is the question) but it only matters if you (have to or are forced to) sell. For the older wealthy folks who are relying on that stock market wealth there will be significant pain if they have to liquidate, but the bulk of the people are really unaffected in reality. Since Im nowhere near my true retirement age my IRA weathered the last dip in 08 pretty well. If that had happened as I was retiring, I mighta been in panic mode. Demographics will be a key issue in all of this. As populations age, which is happening in the West and Japan, gubts will be in a lot of trouble generally, but when those people start to liquidate their market holdings (they already have to some degree), I think the stock market will be become (even) further removed from reality in that there will be a lot less individuals involved. Therefore the effects of the market on the average Joe will be less.
I realize I'm rambling...
My point overall is that the F3D is propping up a lot of things, but the market overall does not equal the economy.


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## invision (Aug 14, 2012)

Immolatus said:


> I think this is what they want us to think. I'm not sure youre necessarily wrong (certainly not about the second part) but I dont buy the first part. To accept that is saying that they are propping up the economy. I say they are not. They might be propping up a perception of such through the stock market, but that doesnt equal reality. They are loaning money to the gubt and bailing out their shareholder banks at a furious pace, but I dont think that trickles down to everyone else.
> Where this touches on reality is only for the rich. Half of the people dont own stocks at all. Most of the rest only own through pensions and retirement funds. Obviously there is a big psychological effect when the market tanks (which it will, for how long is the question) but it only matters if you (have to or are forced to) sell. For the older wealthy folks who are relying on that stock market wealth there will be significant pain if they have to liquidate, but the bulk of the people are really unaffected in reality. Since Im nowhere near my true retirement age my IRA weathered the last dip in 08 pretty well. If that had happened as I was retiring, I mighta been in panic mode. Demographics will be a key issue in all of this. As populations age, which is happening in the West and Japan, gubts will be in a lot of trouble generally, but when those people start to liquidate their market holdings (they already have to some degree), I think the stock market will be become (even) further removed from reality in that there will be a lot less individuals involved. Therefore the effects of the market on the average Joe will be less.
> I realize I'm rambling...
> My point overall is that the F3D is propping up a lot of things, but the market overall does not equal the economy.


Immolatus - you have to look at it on a macroeconomic level. Right now the following is occurring:

1) the fed is adding $85B of bad debt to its own balance sheets a month - now over what $2T. At the same time, by creating this money it is doing two things - creating devaluation of the USD and creating debt for our country.
2) the bank and asset management firms are using this money to invest in: equities and housing. In return we are seeing a bubble return for housing market for the middle class homes ($100-500k values) - let me site proof - in 2011 there was 2.1 million homes in shadow inventory along with 4.5 million for sale. That is 8 months and 4 months of inventory. If you look now in certain markets there are almost no houses in inventory, where did it all go? Investment cash purchases.
3) the more money created that over blows the ratio in regards to GDP is bad because that money isn't being recreated or expanded by growth. 
4) equities are hitting new highs, well, a large percentage of the market should be you and me type buyers through 401ks pensions, etc - but that would mean salaries have gone up, which they haven't and I doubt that many have instead of increasing their 401k contributions are instead doing the opposite or keeping it the same. So where is that money coming.
5) personal debt bubble - in 1990, a household had a combined credit card debt of $4000, in 2000 it grew to 8000, by 2005 it was 14000, and in 2007 it was 19000 went down to 16000 by 2010, and now is climbing back up. This is risky because the personal debt of our nation is equally our GDP as well.
6) right now inflation numbers are being manipulated, but I am sorry I don't agree with the numbers - last night I went to Wendy's 2 chicken sandwiches, one hamburger, 2 large fries and a large frosty - $23.50. Last week I saw hamburger hit $4.05 a pound up .07 from two weeks ago, 2 liters went from $1.68 to $1.72 last week. Oil per barrel went down, but gas shot up 10 cents in atlanta.
7) we have a national debt greater than any other nation - less than $200B from $17Trillion
8 ) we have a currency war on several fronts along with a very strong rebellion to remove the USD from worlds reserve currency.

Bubbles are like balloons, keep filling them with air and they will pop. In 07/08 we were lucky in a way... We had the ability to start the printing presses, and pass laws and a controlled media outlet that didn't dig deep into the real issues. But if #8 hits, massive devaluation will occur to USD - number 6 will get worse, much worse. And all those bubbles go pop at one time. That is the difference... And #8 is the worst of the worst to occur.

The thing is, this next go around wont be housing and equity... It will be USD value related, that explodes so many bubbles the Great Depression will look like a hiccup.


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## BillS (May 30, 2011)

invision said:


> That is a good question... Right now we are getting a little ticked at Japan for their devaluation cause that means what we are paying them back, is worth a lot more Yen in comparison to 6-12 months ago...


Actually, the yen we're paying back is worth less than 6 - 12 months ago. I doubt that the US government is really unhappy with Japan. The yen, the dollar, and the euro are all being destroyed at the same time. I believe it's a deliberate plan to destroy the world economy and usher in the one-world government described in Revelation.

If you don't believe that then you're forced to conclude that everyone at the highest levels of government around the world are too dumb to even understand economics 101 and to know what happens when you create too much money.

Ben Bernanke has told lie after lie after lie. Remember when he said there wouldn't be a nationwide housing bubble? Yet if you look at his bio it's clear that he's extremely intelligent. This is part of it from wikipedia:

Bernanke was educated at East Elementary, J. V. Martin Junior High, and Dillon High School, where he was class valedictorian and played saxophone in the marching band.[17] *Since Dillon High School did not offer calculus at the time, Bernanke taught it to himself*.[18][19] *Bernanke achieved an SAT score of 1590 out of 1600*.[18][20]

Bernanke attended Harvard University, where he lived in Winthrop House with the future CEO of Goldman Sachs, Lloyd Blankfein, and graduated with a Bachelor of Arts in economics summa cum laude in 1975. He received the doctor of philosophy degree in economics from the Massachusetts Institute of Technology in 1979 after completing and defending his dissertation, Long-Term Commitments, Dynamic Optimization, and the Business Cycle. Bernanke's thesis adviser was the future governor of the Bank of Israel, Stanley Fischer, and his readers included Irwin S. Bernstein, Rudiger Dornbusch, and Robert Solow of MIT and Peter Diamond and Dale Jorgenson of Harvard.[21]


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## invision (Aug 14, 2012)

BillS said:


> Actually, the yen we're paying back is worth less than 6 - 12 months ago. I doubt that the US government is really unhappy with Japan. The yen, the dollar, and the euro are all being destroyed at the same time. I believe it's a deliberate plan to destroy the world economy and usher in the one-world government described in Revelation.


Um... correct me if I am wrong, but we are paying back not in yen, we are paying back in USD... Say the bond is for $100, we pay back the bond in full with interest and it is $110 USD... they can then convert this USD to equate to 11267.30 Yen... 2 years ago, that $110 USD would have only converted to say $8800 Yen... So for Japan this is good, for US it is bad..

Am I wrong???


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## readytogo (Apr 6, 2013)

mojo4 said:


> They can't stop it or the economy stalls and dies. They can't continue or the economy will drown in devalued currency and die. There is no future but economic death because you cannot prop up a failed economic system. Either we fix the problem (impossible because the majority of the country don't even see a problem) or we continue our course of economic suicide. I feel sorta like a passenger riding along with a suicidal driver. If he wants to drive off a cliff and die that's fine by me but please slow down so I can jump outta the dang car!! Time to spend your greenbacks before they go the way of the peso.


*impossible because the majority of the country don't even see a problem
*I like this, finally the truth comes out, everybody is playing with their cell phones my friend, people have forgotten the past, the wisdom and logic of our grandparents has been put aside, we are more worried about who makes the most money, Oscar night, football night, than learning how to manage our own money and stop buying junk.


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## Marcus (May 13, 2012)

Here is a really interesting article about this on a website I read frequently: http://seekingalpha.com/article/1440211-treasury-yields-rising-makes-mockery-of-qe-exit-talk










"Since December net credit growth per month by the Fed has *accelerated* from $64.07 billion in December to $108.95 billion in April. Instead of tapering off, QE III/IV looks like it is accelerating."

"The question is, however, whether there is any room for The Fed to continue slowing down its bond-buying program?

I'd say absolutely not. Look at the above chart closely and you'll see that it took the Fed four months of concerted buying / credit creation to halt yields rising as a result of lower appetite for U.S. debt by foreign central banks and investors. April's nearly $109 billion was enough to finally soak up the supply and begin pushing yields lower again. Nearly all of those gains were wiped out in a couple of days this week on an article from the WSJ that was not corroborated by FOMC Chairman Ben Bernanke when he spoke to the media the same day. That does not instill confidence in the tapering thesis.

No, I suspect there was real selling and the question will be what will this week's change in Fed credit look like? If it's as large as the corresponding peaks from previous months then there was some serious selling in the overseas bond market this week in response to the underlying economic data. If it isn't and the Fed is testing the waters on scaling back QE then we've gotten our answer on how the market will react to that. The early lack of follow through means the Fed is likely intervening heavily.

Either way the Fed is trapped and is simply reduced to verbal intervention and its quislings doing its bidding front-running its moves. Last week's close of 3.096% on the 30-year bond puts that market in a high probability position to break April's high yield of 3.14%, which would be a very rare engulfing bar on the monthly chart, having already violated the April low."

There is a discernible developing that is shown in the other chart in the article. Why is this pattern noteworthy to us? It shows the Fed is having a harder and harder time of controlling Treasury yields and thus inflation. It may be very, very interesting this summer.


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## invision (Aug 14, 2012)

Ok, so I am a little confused here... According to news releases inflation went down and the Fed isn't worried to much about it - http://www.foxbusiness.com/markets/2013/05/16/fed-not-concerned-about-falling-inflation-wsj/

Federal Reserve officials are not concerned about the sharp drops in a variety of inflation measures, The Wall Street Journal's Jon Hilsenrath wrote Thursday. The Fed usually prefers a measure called the personal consumption expenditure price index, but there are quirks in it that imply the core PCE 12-month growth rate of 1.1% is softer than what it would normally be. The Labor Department's core CPI index, released earlier on Thursday, grew at 1.7% 12-month rate. The Fed targets inflation of 2%​
Are we talking two different types of inflation here? This is the one area where I know that I am weak in (Bonds/Fixed Income)... Anyone care to explain it?

Oh, and BTW - I don't agree with the Core Index numbers - just saying... I think if they would add Gas/Food into the equation for a real measurement we would see that inflation is way up... but am I wrong, they need inflation down to keep interest rates down... If interest rates go up, then the actual cost the the US Government for all the outstanding Bonds go up on their monthly payments - AM I RIGHT?


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## Marcus (May 13, 2012)

I'll give it a try, invision.
I don't agree with the Core Index numbers either since the numbers now exclude significant costs for the average household.

One thing to understand from the outset is that inflation is, by definition, a result of monetary policy.

As interest rates rise, the cost of financing debt also increases. The national debt is financed in roughly thirds: 1 third is long term (30 years), one third is medium term (10-20 years), and 1 third is short term (3-5 years.) So if interest rates rise, debt service costs also rise. Since roughly 1 third of the debt is short term, every 1% increase in interest rates is an additional 60 Billion in interest costs. If interest rates should return to historical norms (~6% from today's 3%), borrowing costs for the national debt would escalate to an extra $180 Billion/year within 5 years and continue to grow from there. Over time, these costs will rise to nearly $500 Billion/year. Note: Some of the government debt is financed through TIPS (Treasury Inflation Protected Securities) which are Treasuries indexed to inflation. So the costs rise a bit quicker. Given the current breakdown of government spending, much of the discretionary part of the budget will be used to just service the accumulated debt we already have. So taxes will have to rise and rise substantially (~100%.) But we're continuing to add to the debt via deficit spending. So it becomes a vicious circle where taxes keep going up to service long term debt and current debt. Unfortunately, government doesn't create anything. They take from others and spend it. So as taxes increase, the standard of living falls. Plus, businesses make economic decisions based on ROI (return on investment.) As taxes increase, returns fall which deters further investment since businesses can always just purchase safe government bonds and forego risk. This will eventually mean that unemployment will go up as businesses fail to expand which means that government revenue falls since fewer people are working. So taxes will go up again and the cycle will repeat.

The other side of the problem is the value of bonds and fixed interest investments. As interest rates rise, all bonds fall in value since the value of a given bond is a function of the prevailing interest rate and the interest rate the bond pays. For instance, you buy a new 30 year Treasury bond today thats pays 3%. If, in a year, prevailing rates are 4%, then your bond is worth less than face value. How much less? 1% compounded for the remainding 29 years or roughly 35% off of face value. So you have a significant risk of losing part of your capital (capital risk) that you invested today. So as interest rates rise, fixed investments lose value; conversely, if interest rates fall, fixed investments gain value (as has happened in the last 30 years.)

A responsible central bank(CB) only increases the money supply to reflect growth in the GDP of a country. If a CB fails to increase the monetary supply as the economy grows, deflation results (prices get cheaper since money is more scarce.) If a CB increases the monetary supply faster than the economy grows, inflation results since more money is chasing fewer goods. Since 2008, the Fed has increased the money supply by roughly $3 Trillion. The GDP may have grown by half that much at best.

The Fed is trying to force people into the stock market by making every other type of investment unattractive. They have succeeded in making all other investments unattractive, but people are still resisting getting into the market given the 2 bear markets since 2000. That's also one of the reasons PMs are getting hammered.


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## db2469 (Jun 11, 2012)

Thanks for taking the time to explain!


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## invision (Aug 14, 2012)

Marcus - thanks man... I knew most except the fixed or bond part... Makes total sense now..


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