It will be interesting to see how the bond markets react to the Fed's FOMC meeting this week. The committee meets Tuesday and Wednesday.
The Fed is losing credibility. It is clear that the money-printing policy is not working as well as the Fed would like. So now the bankers will will try to talk their way out of the mess they've created.
Today from Bloomberg:
Chairman Ben S. Bernanke has to convince investors the Federal Reserve can take back more than $1 trillion it pumped into the U.S. banking system to pull the economy out of the longest decline in more than six decades.
Bernanke and his colleagues, who meet June 23 and 24 to map monetary strategy, have said they need to continue buying assets and keep interest rates low for a long time to help revive growth. Rising Treasury bond yields show Wall Street is concerned their policy may lead to an inflationary bubble: Ten- year notes reached an eight-month high of 3.95 percent June 10.
In the U.S., concern is growing that consumer-price inflation will accelerate, based on trading in Treasury Inflation Protected Securities. Expectations for 2015 to 2019 -- the so-called five-year, five-year-forward rate calculated by the Fed -- increased June 2 to 3.18 percent, the highest since November, before sliding to 2.68 percent on June 16. The average since 2005 is 2.66 percent.
Behind investor unease is a $1.2 trillion jump to $2.07 trillion during the past year in the portfolio of mortgage, Treasury and other securities the Fed owns, as it flooded the banking system with reserves. The balance sheet rose to a record $2.31 trillion in December and has fallen since as the financial crisis eased and banks’ demand for short-term credit ebbed.
Meanwhile, the Fed is adding to its holdings of long-term securities, pledging to buy this year as much as $1.25 trillion of mortgage securities, $200 billion of agency debt and $300 billion of long-term Treasuries.
Anxiety over the Fed’s pump-priming program is twofold, according to Robert Eisenbeis, chief monetary economist at Cumberland Advisors in Vineland, New Jersey. The first worry is the central bank lacks the tools to unwind its monetary stimulus quickly enough. The second is that even if it can act in time, it won’t because of political opposition to tightening credit when unemployment is 9.4 percent, a 25-year peak.Bernanke is also scheduled to testify this week before the House Committee.on Oversight and Government Reform.
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At the time of publication Mr. Cale held long positions in TBT.
Source:
Rich Miller and Michael McKee. Bernanke Must Reassure ‘Confused’ Market About Rate Strategy.
Bloomberg. June 22, 2009.
http://www.bloomberg.com/apps/news?pid=20601109&sid=a3icASndPQHE
Graphic courtesy of Bloomberg.
© 2009 Michael Cale
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