The following is an excerpt from today’s Professional Edition Fed Report, Market Liquidity Shortage Will End on March 1.
The FOMC minutes are propaganda which the Fed tailors to manipulate the markets in the direction it wants at the time of the release. In early January, it raised the specter of an early end of QE in the minutes of the December meeting. The Fed released its minutes of the January FOMC meeting last week. It played the same game in this release, highlighting a split among FOMC members on the issue of how and when to end QE. That’s a far cry from the QE that the market thought was open ended and would remain in force until employment came down to 6.5% or inflation rose above 2.5%. The Fed wanted to put the fear of god into speculators to keep them from buying commodities, particularly crude oil and the monetary metals. The tactic worked in spades last week as commodities got crushed (charts below).
The release was fortuitously timed to coincide with huge Treasury issuance and the ECB’s LTRO repayment, both of which were going to require that dealers and banks liquidate some things anyway to raise the cash to buy the Treasuries and to repay the LTRO loans. It all came together in a mini-meltdown in most commodities.
Bernanke and Co. must have been patting themselves on the back for their manipulative powers. The Chairman even bragged at today’s Senate hearing that he had the best record on inflation of any Fed Chairman ever (the lucky bastard- woe to his successor). This drop in commodities gave the Fed more breathing room to continue and even add to QE. Adding to QE is not a crazy thought that I just had. The Treasury Borrowing Advisory Committee (TBAC) had suggested that the Fed might increase QE in its February Report to the Secretary of the Treasury, due to the low inflation readings in conventional measures.
Meanwhile the Fed is pretending that it might end QE perhaps as early as later this year. It can only proclaim this so many times before “the boy who cried wolf” syndrome creeps in to speculators’ minds and they begin to ignore the warnings and buy anyway. But even when that happens, it will take a significant move up in commodity prices to put the Fed in a position where it would need to begin to tap the brakes. I think these threats to end QE are hollow for now. The pressure will really need to build to force the Fed to cut back.
Charts below show price trend, and COT net positions reported by the CFTC.
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