Bloomberg: Bernanke May Sustain Stimulus to Avoid ‘Cold Turkey’ End to QE

[Winehole23]

Federal Reserve Chairman Ben S. Bernanke (http://topics.bloomberg.com/ben-s.-bernanke/) may keep reinvesting maturing debt into Treasuries to maintain record stimulus even after making good on a pledge to complete $600 billion in bond purchases by the end of June.



The Fed chief’s top two lieutenants said this month the economy and inflation are too weak to warrant the start of a monetary-policy reversal. Investors and economists including David Kelly (http://topics.bloomberg.com/david-kelly/) at JPMorgan Funds see that as a signal the Fed will keep its balance sheet at current levels by replacing about $17 billion a month in maturing mortgage debt with Treasuries.
http://www.bloomberg.com/news/2011-04-19/bernanke-may-reinvest-maturing-debt-to-avoid-cold-turkey-end-to-stimulus.html

[CosmicCowboy]

Gee, what a surprise.

[Winehole23]

while the Fed really is undergoing a massive and, in certain respects unprecedented (due largely to the size and scope of Fed asset purchases), the percentage of Fed holdings is actually appears to be within certain norms due to historic under-investment by the public and institutions. In other words, the Fed is first in line to monetize Treasuries before the public and institutions get a chance, the inevitable outcome of that being the 'natural' coppering of the public once they finish piling into Treasuries at precisely the wrong time. http://www.minyanville.com/businessmarkets/articles/brain-possibilianism-the-disciplined-investor-podcast/4/19/2011/id/34044

[Winehole23]

While someday we may have to worry about whether or not the United States has the willingness and ability to honor that obligation, I suspect that there other commitments that the United States has made which are much more likely to undergo some kind of hair-cutting process first.

While not suggesting a right or wrong, sovereign notes tend to be the last commitment dishonored by a struggling nation.

If it were me, I’d be spending much more of my time looking very closely at all of the indirect, unfunded, off-balance sheet (http://www.minyanville.com/businessmarkets/articles/us-treasuries-us-treasury-market-sovereign/4/19/2011/id/34047#), strategically less significant “commitments” that the United States has made and how a reduction/elimination of those obligations would affect others.

For example, as someone who watches the financial services (http://www.minyanville.com/businessmarkets/articles/us-treasuries-us-treasury-market-sovereign/4/19/2011/id/34047#) space closely, I am looking at how increased rating agency pressure on the United States’ “willingness and ability” might affect “moral hazard” and the government’s commitment to Fannie Mae and Freddie Mac.

While someday we may have to worry about whether or not the United States has the willingness and ability to honor that obligation, I suspect that there other commitments that the United States has made which are much more likely to undergo some kind of hair-cutting process first.

Others with an interest in defense-related industries (http://www.minyanville.com/businessmarkets/articles/us-treasuries-us-treasury-market-sovereign/4/19/2011/id/34047#) might want to consider how a financially limited US might deal with funding for NATO or even the United Nations, for example.http://www.minyanville.com/businessmarkets/articles/us-treasuries-us-treasury-market-sovereign/4/19/2011/id/34047