Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Well it looks like even a 1% correction now brings out Fed intervention conversation. Very difficult to do any traditional technical analysis this way that is for sure. As I wrote in the past week the Fed’s mouthpiece (or one of them) in the media, Jon Hilsenrath said no QE. Markets didnt like that. Today we have reports surfacing from the same source that they are contemplating a different type of easing… and the market spikes. I don’t even think this would have much effect on monetary supply (sounds like a lot of card shuffling) but any mention of the Fed contemplating anything causes the Pavlovian response…
Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.
Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed’s previous efforts to aid the recovery.
From what Hilsenrath is writing (I.e. what the Fed wants conveyed) it sounds like they realize each monetary easing is leading to a spike in oil (even though Ben said no this idea last year) so by doing this type of program they can get easing and psychological impact but by sterilizing that shouldn’t impact commodities. Who knows..
- The Fed’s approach to a bond buying program matters a lot to many investors. More money printing could push commodities and stock prices higher, or send the dollar lower, if it sparks a perception among investors that inflation is moving higher, said Michael Feroli, an economist with J.P Morgan Chase. However, if the Fed chooses a course aimed at restraining inflation expectations, the impact on those markets might be more muted.
- Many Fed officials believe strongly the bank reserves it has created as part of this money creation aren’t an inflation threat. But they are acutely aware of a popular perception, also held by a few inside the Fed itself, that the money the Fed has created could cause an inflation problem down the road. An approach that limits the amount of new money flowing into the system—through another Operation Twist or a sterilized operation—could help them manage that perception.
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