Forward Tweaking


With the end of QE3 in sight, this is from the FT today:

Some believe the end of QE will reveal which of those asset classes have been lifted by their own fundamental strength, and which of them have merely been floating on the tide of US dollar liquidity.

Figuring out which is which sounds like fun. To give a bit of background, from Bloomberg:

The yield spread on the Fannie Mae securities is 0.43 percentage point less than the average during the past 15 years, according to data compiled by Bloomberg. It’s also 0.05 percentage point tighter than when the Fed started its third round of quantitative easing, known as QE3, in September 2012.

The U.S. central bank has also been buying Treasuries under the program, which has swelled its balance sheet by $1.66 trillion to a record $4.48 trillion. The Fed said last month it will keep buying enough mortgage bonds to maintain the size of its holdings, which total $1.71 trillion excluding some unsettled purchases, until after policy makers start raising their benchmark interest rate.

Many in the market are expecting that this will not happen until the end of next year. According to Millan Mulraine, a strategist at TD,

With domestic economic growth momentum beginning to leak lower, and the medium term outlook for the recovery and inflation becoming less certain, we expect the statement to be tweaked sufficiently to reflect a more dovish bias towards the near term monetary policy stance.

In addition, Michael Carey from Crédit Agricole said in another article from FT,

In the wake of recent market volatility, cautious policy makers may not want to risk significant changes to the forward guidance text that could be misinterpreted as a signal of a fundamental shift in the stance of policy and result in an unintended tightening of financial conditions.

If you change the “cautious” to “nervous”, I think Mr Carey has it just about right. So, any linguists out there, expert in the language of FED and specialising in dove speech want to come work for me?


In other news, “Kim Jong Un Executes 10 Officials for Watching Soaps”:


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