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Will We See More Accommodation from the Fed?

POSTED ON BY

Update 6/20/12: FOMC decides to continue Twist through end of year. From the FOMC statement:

The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities.

As described by this CNN article, "the move was designed to boost lending and lower longer-term interest rates."

Based on Chairman Bernanke's press conference and the FOMC projections, Calculated Risk blog thinks Chairman Bernanke is paving the way for QE3 on August 1st.


The Fed's 2-day FOMC meeting will be finishing up on Wednesday. The FOMC should be releasing its statement early Wednesday afternoon followed by its summary of economic projections and a press conference by Chairman Bernanke. I won't be able to post on the results until late Wednesday (I'll update this post). In the mean time, you can use this post and the comments to stay up-to-date on the outcome. The FOMC statement and economic projections will be available at this Federal Reserve FOMC page, and I'm sure the Calculated Risk blog will be posting on this news.

I think the best we can hope for is that the committee decides not to act with any new accommodation. Unfortunately for savers, analysts are predicting more stimulus. This post at FT Alphaville provides an interesting decision tree that Credit Suisse published in its attempt to predict the Fed. It's giving the probability of more easing at 80%, and it lists 3 types of easing:

  1. Operation Twist Extension is given the highest probability at 60%.
  2. QE3 is only given a 15% probability
  3. Other is given only a 5% probability. This includes extending the commitment language. That's the language in the statement that reads "the Committee ... anticipates that economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014".

I'm glad to see they're giving this commitment language extension such a small probability. However, after seeing how easily the FOMC decided to extend the language from mid 2013 to late 2014 in January, I'm worried that this may be a higher probability.

I've seen rumors of some new type of stimulus such as purchasing from the muni market by buying short-term state or local government debt. This is described in this post Should the Federal Reserve Go into the Muni Market? from the Next New Deal blog. Based on what I've seen from analysts, I don't think this is likely. This could help local governments reduce their budget cuts, but it would punish everyone who invests in muni bonds.

Not everyone thinks there's a good chance that there will be new policy decisions announced tomorrow. As this Business Insider post describes:

QE3 or more twist will have little impact in the current situation, and the Fed can pass the ball to the politicians’ court, especially as the “fiscal cliff” is getting closer. In this case, the dollar will strengthen across the board. Doing nothing at this meeting still leaves the door open for coordinated action or QE3 in the next meeting.

So if savers do get "lucky" with no action by the Fed on Wednesday, the luck may not last long. The next FOMC meeting is scheduled for July 31st to August 1st.



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Comments
33 Comments.
Comment #1 by Shorebreak posted on
Shorebreak
I will be really surprised if the Fed takes no action. The markets are addicted to periodic easing and so far Bernanke has been accommodative in that regard. Why should anything be different this time?

9
Comment #3 by Anonymous posted on
Anonymous
The Fed and the Government are a bunch of Crooks!! The system is corrupt!!

The only reason there keeping interest rates down is because they cannot afford to pay the interest on the enormous debt they have!

Good luck to anyone on fixed income, If they can get away with it they will leave rates at these levels forever!

Oh I'm sorry, Mr. Bernanke said we should invest our hard earned money in the Crooked stock market and spend whatever we have left on the economy and keep paying high prices for everything!

Remember... there's no inflation accoring to these Basterds!

 

16
Comment #5 by Anonymous posted on
Anonymous
I have some positives and minuses with intrest rates.  My CD's are paying very low rates.  I am in the process of refinancing my mortgage.  The rate is 3.5% fixed  and have 1 free "buy down on that rate over the next 60 days (It will take 60 - 90 days to close because of the refi crunch) and the 3.5 is the max. .  I did buy some muni bonds that are paying 3.5% and are of course tax free.  I bought my hose 5 years ago and the rate was 6 1/8%.  The new loan is a 20 year and I pay a little more but it will be paid off sooner.

3
Comment #6 by Anonymous posted on
Anonymous
The people who do not find the information helpful should use common sense - don't read the blog!  The rest of us appreciate the useful tips and hard work.  My thanks to Ken.

 

18
Comment #7 by 51hh posted on
51hh
Action or no action, the economy is doomed for the next few years.

13
Comment #8 by Anonymous posted on
Anonymous
Read and draw your own conclusions:

http://www.forbes.com/sites/steveforbes/2012/02/08/ben-bernanke-supreme-socialist/

1
Comment #9 by Shorebreak posted on
Shorebreak
"The national debt is growing at $1.5 trillion per year.  Ultra-low interest rates MUST be maintained to prevent the debt from overwhelming the government budget.  Near-zero rates also need to be maintained because even a moderate rise would cause multi-trillion dollar derivative losses for the banks, and would remove the banks’ chief income stream, the arbitrage afforded by borrowing at 0% and investing at higher rates."

http://webofdebt.wordpress.com...

11
Comment #10 by Anonymous posted on
Anonymous
And your point is?  You like receiving zero interest on investments.

6
Comment #11 by Anonymous posted on
Anonymous
I find this an excellent report on the "Downside of Zero Interest Rates" :

http://www.usnews.com/opinion/blogs/economic-intelligence/2012/04/30/the-downside-of-the-feds-zero-interest-rate-policy?msg=1

Needless to say, I agree with the writer. 

1
Comment #12 by Anonymous posted on
Anonymous
If the FEDs could have fixed the economy they would not have to do all those follow ups with new twists and turns.

Conclusion: STOP PRINTING MONEY, stop regulating, stop stimulating, stop giving false hopes, stop interfering...........stop doing anything,

25
Comment #13 by Anonymous posted on
Anonymous
To Anonymous #9

Isn't that nice --- so the banks will be fine ---- what about the people who saved for 20, 30, 40 or even 50 years and want to have some income in retirement?   Why should they be forced to bear the brunt of all of this?  They are the ones who did the right things --- prepare for retirement --- and perhaps being burned often enough have had their fill of the "casino stock market".   You are simply repeating what the pundits are advertising hoping if we hear it enough, we will agree with it.  

Let the chips fall where they may!!!   Those who got us into trouble should be paying the price, not the ones who kep us out of trouble!!!!!!!!!!!!!!!!

19
Comment #14 by Anonymous posted on
Anonymous
Looks like the Fed is extending Operation Twist until the end of 2012.

2
Comment #15 by Anonymous posted on
Anonymous
#14  Yes it's all over the news and internet.  I just don't think this nightmare for savers will end in in the near future.  This is going to be a long bleak road for us for many more years, imo.  This is unless Romney gets elected and works some "miracle" with the economy.

8
Comment #16 by Kaight posted on
Kaight
I did not forecast this outcome correctly.  I foresaw higher interest rates because the USA is, after all, bankrupt.  I did not anticipate this level of Fed intervention.  OpTwist is bringing down even long interest rates, which the Fed does not control directly.  The short stuff, which they do directly control, they are holding at between 0% and 0.25% through at least late 2014.  The ongoing flight to quality by Europeans also is lowering our rates.  It's a sad day for the world when they think our paper is decent quality, but I guess when you're sitting in Europe it is, relatively speaking.

I'm listening to Bernanke's presser as I write this.  He is one calm and cool character as he goes about his disgusting business, systematically picking our pockets and stealing our dreams . . all legally, of course!  What a tub of crap.

19
Comment #17 by Anonymous posted on
Anonymous
"The Creature from Jekyll Island" by G Edward Griffin

'nuff said.

2
Comment #18 by Shorebreak posted on
Shorebreak
Re: Anonymous - #10, Wednesday, June 20, 2012 - 9:48 AM and Anonymous - #13, Wednesday, June 20, 2012 - 11:07 AM

Both of you neglected to notice the quotation marks around the comment of my post @ #9, Wednesday, June 20, 2012 - 9:34 AM and/or probably didn't even click on the article I referenced. The author of the article is merely pointing out why the Federal Reserve will maintain their zero interest rate policy (ZIRP) for the forseeable future, and will most probably extend their Operation Twist time and time again. I'm not defending the reasoning or the policy.

3
Comment #21 by Anonymous posted on
Anonymous
BERNANKE hates savors and loves losers, that is because he himself is a LOSER.Since 2008 he continues to destroy ihe income needed by seniors to live.all he dors is reward the out of control spenders and the stocket mkt players at the expense of the savors who counted on this income in their retirement.the entire fiscal problem caused by our runaway youth has been placed on the backs of savors, how does he sleep at nite.i for one senior no longer say i am proud i fought for this country which now destroys me

12
Comment #22 by Anonymous posted on
Anonymous
"This could help local governments reduce their budget cuts, but it would punish everyone who invests in muni bonds."

Since when has the fed started worrying aout punishing the investors?  This may be a tactic to drive the muni rates down even lower so that the tax equivalent rate of munis are lower than taxable investments.  The end result would be that the muni investors would switch to taxable investments.  The government then gets what it is looking for.  Keeping interest rates low and getting more tax money.

2
Comment #23 by Bozo posted on
Bozo
Remember back in the early 80's when the Government was issuing 30-year bonds at 18% or thereabouts? Folks who bought them made out. Now, the reverse is true. Folks can buy a 30-year mortgage at a fixed rate of 3.6%. Thanks to the Garn-StGermain Act of 1986, this debt can be passed to heirs. Due on sale clauses aren't triggered by death of the homeowner. Imagine a cadre of current 40-somethings who inherit property from their boomer parents with 3.6% mortgages. Weird times are these.

5
Comment #24 by mak1118 posted on
mak1118
I believe rates would have gotten low on their own, the part I have a problem with is the manipulation of the rates.

Lets face it, if the market determines rates to be low then there is nothing we can do about it but to print money to buy our own bonds and then to cause everyday needs to go up in price is where I have the problem.

2
Comment #27 by Anonymous posted on
Anonymous
Glad to. Take a look at the following symbols. There are many more good payers but most are too costly right now. 

AZSEY, GFZ, ARR-A, KMI, MHR-D, MHND, MFO, TWO, FUR-D, ZIX, AMLP, PBA, PRY, PSB-T

These are not recommendations to buy. Everyone has their own risk tolerance and I am simply giving what I consider to be current buys if not already owned.   Ken

1
Comment #28 by Anonymous posted on
Anonymous
#27- Thanks for the info....always nice to have some fresh ideas to ponder.

1
Comment #29 by Anonymous posted on
Anonymous
Even with rates low mortgage rates are high compared to the spread between the 10 year treasury and mortgage rates.  I'm afraid the finacial system is rigged to favor the banks and a tool for the fed. Savers are really getting the shaft

3
Comment #31 by Anonymous posted on
Anonymous
One thing Bernanke seems to be forgetting, imo.  Many of the savers are seniors who may be too old to take on a 30 or 20 year mortgage even if the rates are at the bottom.  There are also many other costs involved in home ownership which one must take on.  This is why, I think, many seniors like myself are opting for living in an apartment even tho we could probably get a house for the same payment.  Sooo I guess the only ones who are really going to be snatching up the houses are the young if they still have jobs and can save enough for a down payment with these tanked savers rates.

1
Comment #32 by Anonymous posted on
Anonymous
#31:  Beranake has this worked out for the 1st time home buyers.  It's called "zero down payment" and no employment required.

1
Comment #33 by Anonymous posted on
Anonymous
#32   Most seniors I am referring to would not be first time home buyers.  They could have lost their homes to circumstances etc.  It seems like Bernanke has thought out how to get everyone to buy more homes.  However, I still don't think aged seniors would fit into his category or even want to take over the responsibilities and additional problems of home ownership.

1
Comment #36 by Hoody (anonymous) posted on
Hoody
I'm waiting for the day banks start to charge savers to just keep money in CD.s or Money markets, at that point I will do my own  "silent" bank run thing.

But I'm sure the powers that are will have an answer for that too, like changing all the currency to make your cash worthless.

For now its at least a place to hold the funds in a safe (or sort of safe) place.

 

2
Comment #37 by Rob R. (anonymous) posted on
Rob R.
Yes, He bernanke, is going to keep the rates down no question. He has already made that mistake by giving so much to keep the big banks up.  I my estimation he acted in FEAR of the moment without considering the possibility of a prolonged down-turn of the economy. But I wonder where his head was because the signs were all there of the future weakness. Also he has studied the last great depression. He having formed an opinion that the government didn't do enough stimulation. 

I think we all have gotten an education about this mess.  If he wanted to stimulate the economy he has to get money moving in the economy.  Giving the stimulus to the very banks that caused the crash to me doesn't sound very bright!!  They just said thankyou very much and invested the money to make more money, thus the stock market was pushed higher, every part stocks, bonds, commodities, oil , gold, silver etc.

So it seems the saver is indeed paying for all this.  BUT we may have one consulation, if you hold your money in savings soon DEFLATION will set in because of DEBT DELEVERAGING causing the dollar to get much stronger for the next 10 years or so. At that point around 2014 we should see higher interest rates.  So in effect our dollars should act like stock in increasing in value maybe doubling.  Well good luck and hang in savers. :)

1
Comment #38 by Hoody (anonymous) posted on
Hoody
?? what was your reasoning for deleting my post #34?

1
Comment #39 by Anonymous posted on
Anonymous
#38  I think we need a new Petition. One which states the deleters can't delete someone unless they post the reason for the deletion.  How are we going to learn what NOT to post if we don't know what we did wrong?  I think  there is a need for certain posts to be deleted but when we get entire chunks of a thread destroyed and we don't know why, something is wrong.  How about it Deleters?  Can we get a bit of info here so we will know what we do wrong?  Thanks!

1
Comment #44 by Anonymous posted on
Anonymous
Wouldn't it be great if the IRS allowed IRA/401K withdraws tax free?  That would help the economy.

2
Comment #45 by Anonymous posted on
Anonymous
#44 That would be great!  Then the retiree's would be treated more fairly than they have been for the last 4-5 years.  We don't need to be penalized for being savers any longer.

1