Tuesday, October 26, 2010

(Semi-) Official Words from WSJ's Jon Hilsenrath

and Jon Hilsenrath doesn't need to quote many people (unlike the Bloomberg article I commented in my previous post), and shows he's THE Fed insider.

In the article titled "Fed Gears Up for Stimulus" on October 26, 2010, Hilsenrath writes:

The Fed's aim is to drive up the prices of long-term bonds, which in turn would push down long-term interest rates. It hopes that would spur more investment and spending and liven up the recovery. But officials want to avoid the "shock and awe" style used during the crisis in favor of an approach that allows them to adjust their policy, and possibly add to their purchases, over time as the recovery unfolds.

Uh oh...

Later in the article,
A Wall Street Journal survey of private sector economists in early October found that the Fed is expected to purchase about $250 billion of Treasury bonds per quarter and continue until mid-2011, amounting to about $750 billion in all.

Not $2 trillion, not even $1 trillion. Not $100 billion per month.

So who is going to be right? Hilsenrath with $750 billion? Hatzius with $2 trillion? If it's Hilsenrath, the stock market may sell off hard after the announcement, US dollar may shoot up, Treasuries may be dumped, along with gold and silver.

Maybe that's what Bernanke wants - for the markets to tank - so that he can push for QE3 (that's Marc Faber, isn't it?). Besides, three regional Fed presidents who have been vocal in their criticism of Bernanke's policy, Narayana Kocherlakota of Minneapolis, Richard Fisher of Dallas and Charles Plosser of Philadelphia, will become voting members of FOMC in January 2011. The most effective way to counter their opposition to further quantitative easing may be for the markets to tank after announcing a light-weight QE2, and give Bernanke a chance to tell them "I told you so."

Yesterday the US Treasury auctioned 4-year 6-month TIPS (Treasury Inflation-Protected Securities), and for the first time ever, it resulted in the negative yield of minus 0.55%. The investors were paying the Treasury for the privilege of holding TIPS, because they expected the future inflation to be much higher partly thanks to the Fed's QE2 to come.


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