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Sunday, September 16

16th Sep - Fed Extra

A running linkfest on the Fed's QE3 (last update 19-Sep 23:00 GMT)

Click for a larger version, honey!

FOMC StatementCalculated Risk
QE3 $40 Billion per Month, Extend Guidance to mid-2015

Redacted Version of the September 2012 FOMC StatementThe Aleph Blog

QE3 is on!Wonkblog / WP

QE3 – A Brief Analysis PragCap

QE3 arrivesFelix Salmon / Reuters

The Fed Announces Additional Easing Economist’s View

FOMC Projections and Bernanke Press ConferenceCalculated Risk

Longer-term inflation expectations spike in reaction to the FedSober Look

QE3: Fed to buy bonds until the economy recoversNordea

Fed launches aggressive easingDanske Bank (pdf)

When a central banker almost says that bubble is goodASA

The Fed will buy over half of all new agency MBSSober Look

A Quick Note on the FedKrugman / NYT

Further Qeedingalphaville / FT

The day after: lingering thoughts and questions about QE3alphaville / FT

The Fed’s QE3: No Exitnaked capitalism

Everything you need to know about the Fed’s big moveWonkblog / WP

(audio 17min) BizDaily: US Quantitative EasingBBC (mp3)
The Fed is feeding again - 40 billion freshly minted dollars every month, for as long as it takes to get Americans back to work. But will Ben Bernanke's big bazooka really do the trick?

QE market reactionThomson Reuters
table of historical asset class price changes after QE

Fed's selling volatility into the market will force mispricing of riskSober Look
Buying mortgages results in a direct sale of volatility (prepayment risk) to the public. Extending the rate guidance to “mid 2015” represents an implicit sale of volatility – the Fed is giving up the option to hike

On Bernanke's Voyage To The End Of The Monetary Policy WorldZH
Morgan Stanley: If the Fed has not acted consistently over the past few meetings, how will market participants infer future action? Has it adapted a hierarchal mandate in which it will work first to reduce unemployment until it reaches some barrier of distaste on inflation? Or was the phrase “in the context of price stability” snuck in to trump policy activism?

BofA Sees Fed Assets Surpassing $5 Trillion By End Of 2014... Leading To $3350 Gold And $190 CrudeZH

QE3: How long before the Fed’s stimulus helps the real economy? About six months.Wonkblog / WP

More Fedding Krugman / NYT

The Fed asserts its independenceFree exchange / The Economist

Rosenberg: "If The US Is Truly Japan, The Fed Will End Up Owning The Entire Market"ZH

A Psychological Profile of Ben BernankeEconoMonitor


The Fed May Be Pumped UpMark Grant / ZH

Agency MBS spreads collapse, durations shorten, swap spreads follow, and fundamental valuations go out the windowSober Look

Michael Woodford: ‘I personally would have gone further but what [the Fed] did is definitely a step in the right direction.’ Wonkblog / WP

How Could QE Work?Krugman / NYT

we actually can hope that the Fed’s new policy will boost housing as well as operating through other channels, and therefore that it can act more like conventional monetary policy in fostering recovery.

Where the Fed Stands on Monetary PolicyAtlantic

Now We WaitTim Duy’s Fed Watch

I would like to say that the Fed acted in time to prevent a broader slowdown, but the manufacturing data gives me pause. While I certainly see nothing that convinces me that further slowing is inevitable, the ongoing global weakness and the fiscal cliff provide me with plenty of uncertainty heading into the final months of 2012.

How much will lower mortgage rates help the US economy?Sober Look

It is quite clear that even though lower mortgage rates are helpful to economic growth, another 50bp (or even larger) reduction in rates will have only a marginal impact on hiring and growth.

Draining duration from the marketsSober Look

Who cares if the market's overall duration is shortened? The answer is that ultimately it is the institutional investors such as corporate and state pensions who will get hurt the most by this process. These investors have long-term liabilities and will now be increasingly struggling with the so-called "duration mismatch". They also have a return hurdle.

Q&A – The AnswersPragCap

Hating on Ben BernankeKrugman / NYT

As the Fed announces a third round of quantitative easing, this column argues that it is unlikely to work. Investment and hiring are held back by huge uncertainty over the long-term outlook and the stimulus provides a monetary bridge over the election gap but little more.

The Fed Has Failed, Failed, Failedof two minds
Bernanke knows QE3 will fail, but he doesn't really care. His job is to protect the Fed's political power and the banking sector's wealth. He is doing an excellent job at his "real" job while failing catastrophically at his PR job of reviving the real economy and employment.

Kotok on QE: The Bible says…Kotok / The Big Picture
Let me be very clear. I disagree with this Fed policy move. It was not my first choice. I think the Fed is now playing with fire. But our job is to manage portfolios and not to make policy. If the Fed is now in QE infinity and if the Fed is now buying duration from the market at a rate faster than the market is creating it, then we want to be on the bullish side of that trade.

Does the August Inflation Spike Mean QE3 was a Mistake?EconoMonitor

Can The Fed Kill Two Birds With One Stone?EconoMonitor

The Weekly T Report: Heart, Head, GutTF Market Advisors
The QE3 Announcement * Will Stocks Respond the Same Way as they did to QE2? * Treasuries? * Commodities? * Volatility? * Final Answer

QE to Infinity does its work on our market stress indicators Saxo Bank
This week's installment of Stress Indicators shows the lowest stress levels seen in its history and probably since the debt crisis started…inflation expectations are back on the rise.

Effects of QE3 Econbrowser

The One Chart To Explain The Real Effect Of QE3ZH

Barclays: bad economic news may not seem so horrible, if it is perceived to raise the probability of a market-friendly monetary policy response…But now that the monetary policy responses to economic weakness are in place, markets have had the good news.

Is QE3 Yet Another Stealth Bank Bailout?naked capitalism

So the Fed looks to be completely on board with this sort of rent-seeking. Perhaps the central bank believes its charges need more in the way of earnings to strengthen their balance sheets, even though history shows they prioritize executive bonuses over building their equity levels. Or maybe Bernanke was being completely truthful when he said QE3 was targeting employment. After all, fatter bank margins will preserve their staffing levels.

Getting Off the Zero BoundTim Duy’s Fed Watch

I am thinking it would be very bad to be still at the zero bound when that recession hits.

A few more QE3 thoughtsFree exchange / The Economist

QE Extreme - When the Fed really put its neck on the lineSaxo Bank

What are the limitations of the Fed’s power? Fabius Maximus
They are independent only so long as they retain the confidence of a majority in Congress. The Fed’s leadership has to worry about institutional legitimacy of the Fed should they adopt radical new policies that earn the enmity of one of the two major parties.  That’s the ultimate limitation on their actions.

Diminishing market reactions to unconventional monetary policyASA

What's More Important - Growth Or Policy?ZH
Morgan Stanley: while monetary policy can provide a temporary boost to valuations, in fact over medium-term horizons, it is in fact growth that dominates the drivers of equity performance.

Central bank nostalgia and an equilibriumalphaville / FT
JP Morgan: It is excess rather than gross money supply that generates upward pressure on asset prices or prices of goods and services in the economy.
It's Just Getting Stupid!ZH

Barclays: Investors seem to misremember history; monetary policy was not the only driver of the rallies following QE2 and Operation Twist. (good charts)

Winners and Losers from Monetary PolicyFED / The Big Picture
The Fed seeks to support the economy as a whole, but some redistributional effects are unavoidable.

QE3 and OMT: No panacea but window of opportunity!Saxo Bank
Three big open issues: Fiscal cliff, US financial regulation, Eurozone

When Money DiesZH
Bob Janjuah / RBS: The Fed and the ECB are directing and attempting to orchestrate the grossest misallocation and mispricing of capital in the history of mankind.

A Flaw in the QE Expectational Transmission Mechanism?PragCap

The Three Costs of QE3The Reformed Broker

The QE Aftermath: What it Means and How it’s (not) Different CFA Institute
Do the benefits of an open-ended QE program, which looks like it could be massively mispricing risky assets, justify such a dramatic action by the Fed? I am personally not convinced either way, but I am sure it will be a case study in many ways going forward. For now, I am optimistic that positive news in the housing market, modest job improvement, and strong corporate balance sheets will continue to build momentum with the aid of QE.

Seasons of the BernankeEconoMonitor
This is the third summer in a row that we have watched commodity specific sectors make a mid-summer bet that a Central Bank somewhere would intervene to attempt a “jump start” to the world economy.

Could QE3 Cause the Fed to Go Broke?EconoMonitor

Don’t call it a target: Fed buys wiggle room with qualitative goalsMacroScope / Reuters

No PretenseThe Big Picture
Since 2007 our analysis has suggested the likelihood of economic outcomes that most have considered unlikely: significant and ongoing monetary inflation, policy-administered currency devaluation, substantial global price inflation, and an eventual change in how the forty year old global monetary system is structured. Most observers have viewed such outlooks as tail events – highly unlikely, unworthy of serious consideration or a long way off. We remain resolute, and believe last week’s movements in Frankfurt and Washington towards perpetual quantitative easing confirmed and accelerated the validity of our outlook.

The Fed’s Best Rationale for QE3BB

Hawks Are MarginalizedTim Duy’s Fed Watch
Fed hawks are largely marginalized.  Their views have not and will not have a significant impact on policy making.  They will only appear to have an impact on policy if the data signals that a policy shift is needed.  Given the current set of policymakers on the Fed, the hawks will only have a voice if Bernanke is replaced with one of their own.  And that is when it would get interesting, as I am not sure that the moderates would follow a hawkish Chairman.