Wednesday, December 18, 2013

Takeaway from Bernanke Press Conference: Fed May Stop Remittances to Treasury for Years

Bob English  emails:
Today's press conference was the usual sycophantic ho-hum, except towards the end.  Bernanke volunteered (not even responding to a specific question on the matter) that if interest rates quickly rise, the Fed could stop remittances to Treasury for a few years (emphasis on "years," plural).  That's the first I've heard anyone at the Fed give any kind of time estimate on this phenomenon.  Clearly, the matter is in the Fed consciousness.  
This, of course, will only mean that the Treasury will have to raise more money via Treasury debtsecutity sales (which the Fed will end up buying in roundabout manner), but it is indicative of how unstable and unpredictable Fed operations are right now.

4 comments:

  1. When thinking about a replacement monetary system, many problems will be avoided by remembering that nature has provided a fundamental currency unit for copper, silver, and gold. That fundamental unit is called the atom.

    It's by the way that atoms have measurable mass, which should never be confused with weight. When discussing the monetary metals, I think it would be beneficial to abandon the use of English units in favor of the metric system. Probably it would be prudent also to abandon the word "dollar", too, since this word is contaminated by the status quo.

    Get to know your way around a periodic table of the elements. Notice, for example, that in the most popular layout, Cu, Ag, and Au are found in adjacent periods and in a single group, the 11th.

    http://en.wikipedia.org/wiki/Group_11_element

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  2. I can't understand why the Fed would do this - especially since it can hold bonds until maturity. Can someone please enlighten to me as to what the reasoning might be?

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  3. @danger pioneer. The fed has bought tons of low interest debt over the last few years. If rates rise quickly, the Fed's portfolio will be losing lots of money, and it won't have the cash to remit to the Treasury dept.

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    1. Bernanke is telling the market to expect higher rates and that Fed remittances might then drop as low as zero. I think the question is how could it get to a hard zero as long as they're collecting coupon? Does Fed "retain earnings" for investment? I thought cash in = cash out.

      If rates rise, then the NAV of Fed portfolio will decrease, essentially shrinking their balance sheet in dollar terms. Fed remits interest earned on whatever they have to Treasury.

      If Treasury needs more cash remittances from Fed, Fed can buy the new higher-yielding debt to load up their balance sheet and then pass back more money to Treasury.

      While Treasury is limited by the debt ceiling as to what they can issue, there is no limit to the Fed balance sheet.in buying it up. At a trillion dollars a year, it'll be less than five years before the Fed is the biggest creditor of the U.S. government, and they'll hold the majority of the long-term debt.

      Forget about Fed remittances. The only thing significant is expectation for tightening.

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