Wednesday, January 28, 2009
Will they or won't they? That's the question du jour, at least with respect to today's FOMC announcement. There's obviously nothing they can do on rates, so the big issue is whether the Fed takes the leap and announces a program to buy longer-dated Treasuries.
Such an outcome would hardly be unprecedented; the BOJ, for example, has purchased JGBs in the secondary market for more than a decade via its rinban program. For the Fed, it would seem to be more a matter of "when", rather than "if", they pursue such a policy; after all, buying government duration is part of the "Bernanke QE playbook" that he's been following to a tee so far.
Regardless, the Fed will probably not be best pleased to see 30 year Treasury yields some 50 bps higher than at the time of their last meeting. More to the point, the uptick in 30 year mortgage rates is an unwelcome development for BB and co., given the perceived target of 4.5% and the recent signs that refinancing demand was responding to lower rates.Regardless, equities are once again threatening a more interesting bounce, helped on by the mooted meeting between Obama and the bank CEOs. Good bank/bad bank is swiftly materializing as the preferred next attempt at a solution, thus validating Macro Man's long-held view that a "turd-buying repository" would be created before all is said and done.
Of course, an exact replica of RTC is not on the cards; that agency took assets off of bankrupt institutions, whereas today the object is to stop everyone from going bankrupt. How the bad bank would work is currently uncertain; what price would they pay, what incentive would banks have to offload their turds, etc. Simply having the FDIC standing on a street corner, Salvation Army-style, with a big bucket marked "turds" wouldn't appear to be an ideal solution.
Whatever the solution, it seems likely to originate from someone with connections to Goldman Sachs. Yesterday's scuttlebutt was that yet another GS alum, Bill Dudley, is the front-runner to replace Geithner at the New York Fed. This provides further fodder for the chattering classes to mutter about GS in the same terms as the Rosicrucians et, al.
It would be refreshing if the Adminsitration appointed someone to a position of economic responsibility who has demonstrated an ability to anticipate economic developments and to accurately forecast the market impact. Someone like Mr. Paulson. (That's John, not Hank.)
Somehow, however, Macro Man thinks this one probably won't happen.