ALERT 2: Bernanke Calls Expedited Meeting

Okay, first Giethner cancels a visit to the Bronx, now Bernanke is calling an expedited meeting for Monday. They have my attention. Here's the Federal Reserve's full announcement:

Advance Notice of a Meeting under Expedited Procedures

It is anticipated that a closed meeting of the Board of Governors of the Federal Reserve System at 11:30 a.m. on Monday, April 5, 2010, will be held under expedited procedures, as set forth in section 26lb.7 of the Board's Rules Regarding Public Observation of Meetings, at the Board's offices at 20th Street and C Streets, N.W., Washington, D.C. The following items of official Board business are tentatively scheduled to be considered at that meeting.

Meeting date: April 5, 2010

Matters to be Considered:

1. Review and determination by the Board of Governors of the advance and discount rates to be charged by Federal Reserve Banks.

A final announcement of matters considered under expedited procedures will be available in the Board's Freedom of Information and Public Affairs Offices and on the Board's Web site following the closed meeting.

For more information please contact: Michelle Smith, Director, or Dave Skidmore, Assistant to the Board, Office of Board Members at 202-452-2955 202-452-2955 .

Supplementary Information: You may call 202-452-3206 202-452-3206 beginning at approximately 5 p.m. two business days before this meeting for a recorded announcement of any bank and bank holding company applications scheduled for the meeting; or you may contact the Board's Web site at http://www.federalreserve.gov for an electronic announcement about applications and other expedited items, as well as procedural and other information about the meeting.

Dated: April 1, 2010

This is pretty much the exact wording the Fed used the last time they raised the discount rate. Which is what this meeting is likely all about, an unimportant discount rake hike.

Bernanke may be just training the markets to expect rate moves at times other than during regularly scheduled FOMC meetings. On the other hand, it could be an event that it is going to be co-ordinated with banks globally, with some international moves. I am still leaning to it being an unimportant discount rate hike, but my antenna is up. And, of course, a hike in the Interest Rate on Excess Reserves would be extremely significant.

Rumor of Discount Rate Hike

ZeroHedge is reporting that a  rumor is circulating that the Fed is about to hike the discount rate, again. They just hiked it last month. The discount rate is not particularly relevant, given there is very little that goes on at the discount window, but a second hike would send a signal that the Fed wishes it actually had the balls to raise the rate  that matters, i.e. the IOER.

Here's FT on  the rumor:

Traders say the Euro’s move lower was linked to speculation the Federal Reserve is about to raise the discount rate again.

This would be slightly surprising coming so soon after the FOMC meeting, but US 3-month Libor did fix at 0.27 per cent today – the highest level since November.

And remember, some people reckoned the previous increase leaked.

The Federal Reserve, meanwhile, is saying nothing.

FEDERAL RESERVE SPOKESPERSON SAYS FED DOES NOT COMMENT ON RUMORS

Goldman Man Top Contender for NY Fed Spot

Imagine my surprise.

Fed Governor Kevin Warsh, once a leading contender to succeed Timothy Geithner as president of the New York Fed, will remain Chairman Bennanke's chief liaison with the Treasury Depart ment and other regulators, Nypo is reporting. Warsh's withdrawal leaves William Dudley, the New York Fed's top markets official and a former Goldman Sachs economist, as the leading candidate.

The Fed Doesn't Understand the Powerful Impact of Their Own Money Printing

The Fed is much more pessimistic in their recent FOMC minutes, than they need to be. The Fed projects GDP to decline in 2009 "as a whole", and unemployment to "rise significantly into 2010". The Fed also expects disinflationary pressures to continue into 2010.

From the just released FOMC minutes:

In the forecast prepared for the meeting, the staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010. Real GDP appeared likely to decline substantially in the fourth quarter of 2008 as conditions in the labor market deteriorated more steeply than previously anticipated; the decline in industrial production intensified; consumer and business spending appeared to weaken; and financial conditions, on balance, continued to tighten. Rising unemployment, the declines in stock market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to continue to hinder household spending over the near term. Home building was expected to contract further. Business expenditures were also likely to be held back by a weaker sales outlook and tighter credit conditions. Oil prices, which dropped significantly during the intermeeting period, were assumed to rise over the next two years in line with the path indicated by futures market prices, but to remain below the levels of October 2008. All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting. The disinflationary effects of increased slack in resource utilization, diminished pressures from energy and materials prices, declines in import prices, and further moderate reductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010.

What's really going to happen:

Because the Fed fears a deep, deep recession, they will print and print more money. This means that the recession will be over much earlier than they foresee, sometime before the end of 2Q 2009. Inflation, not deflation, will be a major problem in 2010.

Money Supply Watch and the Real Story for 2009

M1 nsa continues to grow at remarkable rates.

According to the Fed's latest numbers, three month annualized M1 nsa is growing at 52%. This indicates there is still tremendous fear in the system.

Three month annualized M2 nsa is growing at 20.8%. Growth in M2 is indicative of Fed money printing. 20.8% M2 growth is also remarkable. The readjustment period in the economy is going to end much sooner than most expect, given these money injections by Bernanke. Inflation and a collapsing dollar is going to be the real story in 2009, if Bernanke keeps this up.

Obama Announces Tarullo to Fill Empty Fed Slot

President-elect Barack Obama will name Daniel Tarullo, a Georgetown University law professor, to take an open seat on the Federal Reserve Board.

Tarullo has no special understanding, if any, of the business cycle, monetary theory or inflation. Do not expect him to have much impact on the Fed Board. He's filler, who won't make waves and will back the inflation regime.

The ultimate insider, Tarullo held several senior positions in the Clinton administration, ultimately as Assistant to the President for International Economic Policy.

Prior to his appointment to that position, he had been Deputy Assistant to the President for Economic Policy, with special responsibility for regulatory and international issues. He was also a principal on both the National Economic Council and the National Security Council.

Before joining the administration,Tarullo practiced law in Washington. He spent a year as a senior fellow at the Council on Foreign Relations. He is currently a non-resident senior fellow at American Progress.Healso was Chief Counsel for Employment Policy on the staff of Senator Edward M. Kennedy.

Jim Grant on the Credit Markets, Zero Yield Treasury Securities, the SEC, and Much More

on Bloomberg TV, here.

(Via LRC)

Alert: Fed Meets

The FOMC has a regularly scheduled meeting today and tomorrow.

Policy decisions will be announced tommorow at 2:15 ET.

UCLA Anderson The Magnificent Says It's Going to be a Nasty Recession

Given that the economy over the next twelve months will be largely determined by activities of Ben Bernanke and the Federal Reserve over the next twelve months, and that it doesn't appear that even Bernanke knows to what degree he will boost the money supply over that period, UCLA Anderson has to be labeled UCLA Anderson the Magnificent, and nothing less than courageous, for making a forecast out to 2010. But they have done just that.

UCLA Anderson Forecast predicts that the current recession will be "nasty" inflicting the national economy with four quarters of negative growth (followed by very tepid growth rates) and rising unemployment rates that last through 2010, according to a press release they issued today.

The UCLA Anderson Forecast now expects that real Growth Domestic Product (GDP) will decline 4.1% in the current quarter, followed by respective declines of 3.4% and 0.8% in the first two quarters of 2009. In addition, the unemployment rate is forecast to rise from October 2008's 6.5% to 8.5% by late 2009/early 2010. Associated with the rising unemployment rate will be the loss of two million jobs over the next 12 months.

For California they forecast negative growth through the middle of next year and unemployment as high as 8.7% until 2010.

UCLA Anderson Senior Economist Jerry Nickelsburg writes that the "Inland Empire, Orange County, the East Bay and Central Valley will be hit hardest as the recession provides a double whammy with a generalized downturn in demand and a postponement of a recovery in residential construction." Coastal regions will be impacted by declining imports coming through California ports, while the global recession weakens demand for manufactured California exports.

The outlook for California calls for a very weak first three quarters of 2009, with the glimmer of a recovery in the fourth quarter. A key to look for will be a recovery in the rest of the country and in Asia, which will create demand for California goods and services. Unemployment is expected to contract by -0.7% in 2008 and -1.4% in 2009, before growing at a more-than-modest 0.3% in 2010. The unemployment rate is forecast to rise as high as 8.7% next year and remain at that level through 2010.

Bernanke's Madman's Toolbox

Yesterday, I commented:

Bernanke better watch out with all these new financial "tools" he is creating. It's possible one of them won't be completely thought out and will result in all sorts of unintended consequences.

Today, my inbox contains two emails containing links to stories detailing how haywire events could develop from Bernanke's toolbox.

Nick sent along this link from NYT's Dealbook which warns about the Bernanke proposal for the Fed to issue their own debt:

The prospect of the Federal Reserve issuing its own bonds now that the United States Treasury has stopped borrowing on its behalf could paradoxically make the world a riskier place, according to Breakingviews. It threatens to reduce the effectiveness of Fed policy moves or, worse, influence them, the publication argues.

The tactic is only at the trial-balloon phase, and Congress may well reject it as an end run around its right to determine government borrowing. But lawmakers have blessed questionable strategies before, it notes.

If the Fed did issue traded debt, the market prices would act as a barometer of how investors viewed its policies, Breakingviews says.

Even if the debt were explicitly backed by the government, prices would probably still reflect market sentiment, it argues. After all, the publication says, bank-issued bonds insured by the Federal Deposit Insurance Corporation and the quasi-guaranteed debt of Fannie Mae and Freddie Mac trade with effective interest yields that exceed Treasury securities by notable, and in some cases volatile, margins.

It’s likely that rates on any Fed-issued bonds would diverge from Treasury bonds too, especially since the central bank lacks the power to raise tax revenue to pay interest, says Breakingviews. The market would probably look to the Fed’s own balance sheet, which has more than doubled in the last year, and weigh that against its ability to raise money by increasing reserves, when determining the risk of the bonds.

If the Fed pursues policies that could result in a loss — like its plan to lend to entities that buy packages of consumer loans — the risk premiums on its bonds should increase, it says.

Such snap judgments on policy moves could undermine the Fed’s effectiveness, Breakingviews says. If the bond market gave a thumbs-down to even a sensible policy, it would throw doubt on the Fed’s willingness to follow through, especially because the higher risk premium would increase the Fed’s future borrowing costs, the publication argues. Since monetary policy has a large psychological element, that could be a big problem.

Of course, there are already indicators of market sentiment about Fed policy, the publication notes. And the devil of any Fed debt would be in its details, it says. But with the Fed’s resources stretched and its mandate expanding, giving the markets another red flag to wave seems foolhardy, Breakingviews concludes.

Also this morning, Jeffrey Rogers Hummel emailed a link to his extensive analysis of the Bernanke decision by the Fed to pay interest on bank reserves. The JRH conclusion:

I predict that future economic historians will look back on this change as a major blunder during the current credit tightening, making traditional monetary policy less effective...Moreover, the paying of interest on reserves was motivated by the misguided focus on interest rates, rather than money supply measures, as an indicator and target of monetary policy...The irony is that the Fed is now less able to hit its interest rate target than ever before. It first adopted the corridor or channel system of the ECB, setting the interest rate on reserves below its Federal funds target, as a lower bound, with the discount rate above the target as an upper bound. But as the effective Federal funds rate fell not only below target but below the interest rate on reserves, the Fed on November 5 moved to the New Zealand system, where the interest rate on both required and excess reserves is set right at the target Federal funds rate. So far, this hasn't worked either.

Toolmaker Bernanke Is At It Again: Fed Wants to Issue Direct Debt

The very strange Ben Bernanke is apparently circulating a very strange proposal that calls for the Fed to directly issue debt.

WSJ reports:

The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets...Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter.

Since the Treasury can borrow money and deposit it at the Fed, and, further, the Fed can print any amount of money it desires, it is not clear exactly what this Bernanke initiative will accomplish other than create some kind of financial masturbation tool for Bernanke.

Bernanke better watch out with all these new financial "tools" he is creating. It's possible one of them won't be completely thought out and will result in all sorts of unintended consequences.

Treasury Now Partly Owns The Fed

Interesting observation from Lila Rajiva:

Member banks within each of the 12 districts of the Fed elect 6 of the 9 regional board members and the president for that district. Since the Treasury now intends to take minority equity stakes in some banks that it claims are struggling, (ostensibly for the purpose of preventing investors from pulling out), it will have partial control over the Fed. That means the Fed is now even less independent.

Paul Volcker and the October 1979 Saturday Night Massacre

Interactive video, graphics and front pages from NYT on the historic financial moment when then Fed chairman Paul Volcker announced the Fed would target money supply instead of interest rates.

Fed Sees Recession Lasting Through First Half of 2009

You have to take this news out of the Fed with a ton of salt, since they didn't see the recession or the housing crisis coming, despite the fact that they caused it by their money supply manipulations.

That said, according to minutes of the closed-door meeting of the Federal Open Market Committee on Oct. 28 and 29. The Fed governors and Fed bank presidents "generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009, and agreed that the downside risks to growth had increased."

For a group that hasn't done too well on the forecast front, they do get into some detailed forecasts. The minutes, for example, also report that "Participants agreed that inflation was likely to diminish materially in coming quarters."

Given that the Fed is now printing money again, and that it will only take a lessening of the desire to hold cash balances that will re-ignite inflation, the Fed's expectations that inflation is likely to diminish materially is a very bold statement, and has a good chance of proving very wrong by mid-2009.

Fed Hiding Data On What It Is Accepting as Collateral on Bailout Loans It Is Making

Bloomberg News on May 21 asked the Fed to provide data on the collateral posted between April 4 and May 20. The Fed said on June 19 that it needed until July 3 to search out the documents and determine whether it would make them public. Bloomberg never received a formal response that would enable it to file an appeal. On Oct. 25, Bloomberg filed another request and has yet to receive a reply.

Thus, on Friday, Bloomberg asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks, based on the Freedom of Information Act.

According to Bloomberg, the Fed staff planned to recommend that Bloomberg's request be denied under an exemption protecting ``confidential commercial information,'' according to Alison Thro, the Fed's FOIA Service Center senior counsel. The Fed in Washington has about 30 pages pertaining to the request, Thro said today before the filing of the suit. The bulk of the documents Bloomberg sought are at the Federal Reserve Bank of New York, which she said isn't subject to the freedom of information law.

``This type of information is considered highly sensitive, and it would remain so for some time in the future,'' Thro said.


The Fed has lent $1.5 trillion to banks, including Citigroup Inc. and Goldman Sachs Group Inc., through programs such as its discount window, the Primary Dealer Credit Facility and the Term Securities Lending Facility. Which is above and beyond the $700billion approved by Congress in a bailout package.

More Fear Factors

As I have pointed out, M1 continues to show exceptional growth. I have taken this growth as a signal that sgnificant fear remains within the financial system.

Brad Setser looks at Treasuries versus Agencies, and sees the same situation:

The general flight out of risk by central banks is one reason why the Treasury’s bailout of the Agencies has failed to halt the central bank run on Agencies. The flight out of Agencies — and flight into Treasuries — over the past two months has been stunning. Last week continued the trend: central banks added close to $20b to their Treasury portfolio at the New York Fed while cutting their Agency holdings by $7 billion. That helps support the Treasury market amid all the new supply, but hasn’t done wonders for the market for Agencies.

Setser then takes a look at the Fed's balance sheet:

The changes in the Fed’s own balance sheet this week were driven by the growth in its new commercial paper facility — and rising bank deposits at the Fed. Right now the Fed has raised over a trillion dollars from the new supplementary financing facility and the rise bank deposits at the Fed. Those new funding sources — rather than the sale of the Fed’s holdings of Treasuries — have financed its huge lending to the US financial system and its large swap lines with the world’s central banks...

I increasingly suspect that one indicator that the financial crisis has truly turned a corner will come when the Fed’s balance sheet starts to shrink …

Federal Reserve Announces It Will Alter Formulas Used to Determine Interest Rates Paid on Required Reserves and Excess Reserves

As I previously indicated, the Fed Funds rate is not as important a factor in money supply growth as it was in the past, now that the Fed is paying interest on bank reserves. But, Bernanke does like to monkey with his "new tools". So we have a bit of Fed monkeying with the new tools, today.

The Fed announced today that it will alter the formulas used to determine the interest rates paid to depository institutions on required reserve balances and excess reserve balances.

Previously, the rate on required reserve balances had been set at the average target federal funds rate established by the Federal Open Market Committee (FOMC) over a reserves maintenance period minus 10 basis points. The rate on excess balances had been set as the lowest federal funds rate target in effect during a reserve maintenance period minus 35 basis points. Under the new formulas, the rate on required reserve balances will be set equal to the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest FOMC target rate in effect during the reserve maintenance period. These changes will become effective for the maintenance periods beginning Thursday, November 6.

The Board judged that these changes would help foster trading in the funds market at rates closer to the FOMC's target federal funds rate.

Fed: 'Bailout' Loans Are For Insiders, Not Consumers

The Federal Reserve Board today alerted the public to instances of questionable solicitations directed at consumers. These solicitations promise consumers access to personal loans through a nonexistent Federal Reserve lending program.

Under this fraudulent scheme, targeted individuals are told that that they can work through a broker to access a Federal Reserve program that extends sizable secured loans to consumers. Consumers are encouraged to deposit large sums of money into a bank account, under the guise of a security deposit, in order to receive the purported loan.

The Federal Reserve is advising consumers that it has no involvement in these solicitations and does not directly sponsor consumer lending programs. The matter has been referred to the appropriate authorities for action.

On the other hand, if you are Goldman Sachs, the $10 billion should be in your account shortly.

Wall Street Knows A Gift Horse When It Sees One

Today's climb of 889.35 points, or 10.9%, in the Dow Jones Industrial Average to 9065.12, included gains in all 30 of its components.

The catalyst for the move: News that sales of longer-term commercial paper soared 10-fold after the Federal Reserve began buying the corporate paper.

Companies yesterday sold 1,511 issues totaling a record $67.1 billion of the debt due in more than 80 days, compared with a daily average of 340 issues valued at $6.7 billion last week, according to Fed data. The Fed began buying commercial paper from companies yesterday.The central bank probably absorbed about $60 billion of the total, said Adolfo Laurenti, a senior economist at Mesirow Financial Inc, according to Bloomberg.

It's possible the Fed sterilized this buying, but if they didn't money supply is gong to rocket.

The Coming Collapse Of Treasury Security Prices

FT has a solid article this morning on the huge Treasury offerings that will be required because of the "bailouts".

Among the points made:

Before the recent upheavals, the US budget deficit for the fiscal 2009 financial year starting this month was estimated between $400bn and $450bn. Some economists now expect that figure to reach $1,000bn, which would be a record. That will push Treasury debt sales sharply higher...

“It is pretty conservative to say that the cost of the bail-out will be $1,000bn and by the time all the programmes have been tallied, it could be $2,500bn,” says Jamie Jackson, portfolio manager at RiverSource Investments...

This is all going to mean greater frequency of issuance and a return of previously discontinued issues such as the three-year note and possibly the seven. At a minimum, dealers expect the return of the three-year note, which was suspended in May 2007. The sale of 10-year notes is expected to move to a monthly schedule from being sold twice every quarter at present. New sales of 30-year bonds are seen occurring every three months...

From a logistical standpoint, the quarterly sale of debt in November and this week’s sales are a major test for the thinning ranks of primary dealers. These are the banks and securities broker-dealers that participate in Treasury auctions.

From 20 primary dealers at the end of 2007, Bear Stearns, Lehman Brothers and Countrywide have fallen by the wayside this year. The list will shrink to 16 once Merrill Lynch is absorbed by Bank of America.

Fewer dealers at a time when banks are preserving their balance sheets before the end of the year has contributed to an erosion in liquidity for buying and selling current and older Treasury securities. That backdrop could lead to poorly received auction sales, with yields for new notes being awarded at much higher levels, driving up the cost for the Treasury and taxpayers...

Tom di Galoma, head of trading at Jefferies & Co says: “No one has any balance sheet room and supply is a concern for the rest of the quarter.”..

Treasury in recent weeks has been selling securities in a buyers market as the flight to quality has caused enormous demand of Treasury securities. This will all change when the market stabilizes. Not only will there be less demand for Treasury securities, but there is likely to be major liquidation of currently held Treasury positions. A flight from Treasury securities is a very real possibility. This will also have negative ramifications for the dollar.

The only way to stem the collapse of the Treasury market would be for the Fed to step in and become an aggressive buyer of Treasury securities. This would be an exceptionally inflationary move. Bernanke has been running an erratic money supply operation since he has taken over, so it is impossible to guess how inflationary he is willing to get to protect Treasury rates. It is likely to result in a combination of some Fed buying coupled with a climb in rates.

The noose on government money operations is tightening again. For savvy traders, it will be a huge money making opportunity. For the average Joe, plumber or not, it will be a lower standard of living as rates climb, inflation climbs and Treasury borrowing crowds out private sector borrowing.