Notes From Underground: Waiting for the 12 gnomes of the FED

Overnight, the Bank of Japan announced that it was holding rates at zero. The recovery was proceeding but the BOJ was watching the impact of the YEN on growth going forward. But at this point BOJ Governor Shirakawa was content to leave the YEN price to market forces. According to a Bloomberg article, Shirakaw did say that the PRESENT VALUE OF THE YEN did dominate the meeting because of possible risks to the economy. Most of the time, members from the Ministry of Finance  (MOF) are invited to sit in the meetings with no vocal presence unless specifically asked. Finance Minister Yoshi Noda has been very vociferous about the YEN appreciation and it effects on Japanese exporters.

Also, we received the data on the Chinese trade number and it was reported that exports increased 38 percent while imports rose 22 percent, an 18-month high for the trade balance. The fall in imports led to a decline in coomodities across the board as this was seen as proof of a Chinese slowdown. We will say it again: To trade off of Chinese data is a mug’s game for we have no faith in the transparency that hog tied GOOGLE in an effort to control the information and news that enters the public domain. We will use technicals and our own fundamental analysis rather than rely on “all the news that fit to read” as released by a controlling government.

The market is all a twitter about the coming news from the twelve gnomes of the FOMC. Will they, or won’t they go to a full or partial reintroduction of quantitative ease? Will they stay the course and wait for further unemployment data? We don’t pretend to know but as of now the market looks to be disappointed if the FED was to sit tight and do nothing. Last week’s piece from St.Louis Fed Chief Bullard certainly got the animal spirits of aggressive ease flowing. If the FED does nothing will it matter? Probably not after this morning’s selloff because some analysts will see it as the FED is not ready to panic … yet.

The problem is that the political voices are very worried for they are going to have to face an electorate that is experiencing a sputtering economy. We think that the FED may well remove the 25 basis points it pays on reserves as an effort to appear as if they are doing something, but not too much. Remember that the interest on reserves is a recent phenomenon so taking the rate to zero is really not a major event. Also, the FED was hoping to use the IOR as the mechanism to remove funds from the banking system and now that they overestimated the impact from all the stimulus, it would make perfect sense to remove the incentive to place funds at the FED and see if banks may then start putting them to work. Yes, we know that it is still profitable to surf the curve and with rates this low the cost is minimal, but it may be far better then staying put. In an hour all the mystery will be removed.

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7 Responses to “Notes From Underground: Waiting for the 12 gnomes of the FED”

  1. Cheryl Galante Says:

    I heard that if they cut the IOR to zero, the fed funds mkt could completely shut down and trading volumes would collapse- there are inhibiting technical factor to not paying banks interest

    • Joe Says:

      The banks might plow some cash into loans to “qualified” customers, but I wonder if they’ll just buy more treasuries if the IOR rate goes to nil.

  2. yra Says:

    may well be and that is why they didn’t and took the next route–amazing how the market had a no change in its gut

  3. yra Says:

    cheryl –it is hard to grasp the fed funds market collapsing becaus ethe fed never paid on reserves until recently

  4. Paul Says:

    Non-borrowed reserves of depository institutions are in excess of 1 trillion. And that’s just one side of the ledger. It appears now this issue won’t be touched until after November, right? What will happen then, come November? QE I had little traction, will be all the clearer by then. The Fed will be in a much more difficult situtation than now. Do they care?

  5. yra Says:

    Paul I think they care and as today’s post stresses they care as they are worried that their Models are just so badly flawed

  6. Peter Says:


    I read your interview in Drobny’s “Inside the House of Money” (I also read Drobny’s “The Invisible Hands”) and, out of all the interviews in both books, I enjoyed your interview the most. I am drawn to the way you approach the markets and have been reading this blog religously and listening to any interviews with you available on the internet.

    Based on your recommendations, I just finished reading “The Bank of Bundesbank” (great book by the way) and I am currently reading Robert Aliber’s “The International Money Game”. Do you have any other book recommendations for the aspring macro trader?

    Thank you and thanks again for this great site!

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