The process of tapering is a gradual one that has been discussed by Fed officials continuously, and it is clear that, in the absence of some extreme reaction, they are going to sustain this path. What does that mean? By autumn, we will see issuance of US government securities at a rate of somewhere close to $400 billion annualized, whereas Fed absorption will be at zero. The Fed will continue to replace its maturities, but that practice will not add duration or supply any stimulus. In July, August, September, and October, for the first time, the change in rate between what the Fed absorbs and what the Treasury issues will result in a shift. That shift is a tightening.
What is Dave going to do? He is holding cash in reserve so as to have liquidity available when the Fed exits the market. But Uncle Milt just said that when capital managers have liquidity to use when the Fed exits the market, then that is loosening!
Is this nutty? No, just everyone is confused by definitions.
What happens when the Fed is done with taper? Money will flow and reveal the true cost of government, and that means a fight in Congress and every nutcase economist will pull out their 'I told you so" model. This process will likely start in election season, about now.
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