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Politics : The Obama - Clinton Disaster
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From: DuckTapeSunroof9/29/2009 5:41:07 PM
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Fed steps up its hints that the exit strategy is coming

The FOMC at its meeting earlier this week kept its federal funds rate target unchanged at zero to 0.25% and said that the funds rate is likely to remain “exceptionally low” for “an extended period.” However, the FOMC’s post-meeting statement contained a more upbeat economic assessment by saying that the economy has “picked up” since the last FOMC meeting in August. That added to Fed Chairman Ben Bernanke’s recent comment that the recession “is very likely over.”

The big news out of the FOMC meeting was that the Fed slowed its $1.45 trillion mortgage security purchase program so that it would now end at the end of Q1-2010 rather than at the end of this year. That should delay and soften the upward movement in mortgage rates that is likely to accompany the end of the Fed’s program. The Fed last month did the same thing with its $300 billion government security purchase program by extending the program until the end of October. The important thing is that the Fed is signaling that the end of these programs is definitely coming. The bond market is particularly happy to see the government securities program end because that program represents the blatant printing of money and monetization of the Treasury’s debt.

For the bond market, though, the biggest news surrounding the FOMC meeting was actually the press report on Tuesday that the Fed has started discussing with bond dealers how it can execute large-scale reserve repo agreements when the time comes to drain reserves. Those talks provided the bond market with more confidence that the Fed is developing serious plans for an exit strategy from its extraordinary liquidity measures. The Fed has yet to remove any of its $1.2 trillion in extra liquidity, however in coming weeks and months it is likely to slowly ratchet up its talk about exit strategies and will probably start to withdraw its liquidity in Q1. The Fed is likely to start withdrawing liquidity even before it raises interest rates, something that the ECB has already indicated it plans to do. That would allow the Fed to get a jump on curbing monetary expansion and keeping the bond market happy, without drawing negative attention from the public and politicians with a highly-publicized rate hike.

Futures Magazine "Market Pulse" 9-29-09
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