Yes, we know that Bernanke was right out of central casting with the FOMC minutes being the mainstay of the prepared text. The market was supposedly surprised by the chairman’s words about the FED preparing ways to remove all the previous stimulus. We don’t know why Bernanke paid homage to that as it was in direct contradiction to the everything else he said. (He believes that the FED will have to leave interest rates at these low levels for an “extended period.”) Again, we stress that there was nothing new in the testimony, but as always we respect the market’s wisdom and its ability to inflict pain. We have long thought that as the long end of the DEBT markets rallied, the FED ought to be selling some of the MBS debt that it has bought as they would need to relieve their balance sheet to make room for future possible purchases. As long rates have fallen due to demand for BONDS and other debt instruments, we wonder who is buying all that paper now that the FED has stopped? If it is pension funds, shouldn’t the FED be selling it them so as to insure that they don’t bid the market to ridiculous levels?
Thus, the FED would be doing the market and pension funds a favor while potentially helping themselves. We want to raise a serious question at this point and it stems from what the BOJ under Hayami proposed about seven years ago. The BOJ was worried that they had bought so many JGB’s and if its anti-deflationary tact was successful then they would be left holding the bag as inflation soared and they owned all the bonds (the BOJ is a privately held institution–yes there are stockholders). Hayami said the BOJ would hence forth buy equities to pump liquidity into the system, and, at the time, it put the low in the Nikkei, which was around 7200 at the time. Our question: wouldn’t the FED get more bang by buying stocks and pushing up equity prices to ease the terrible situation of the pension funds, as well as pumping liquidity into the system? Just food for thought and certainly a question we would ask Chairman Bernanke.