April 11, 2013
Plosser pitches his plan for a post-crisis Fed.
A top Federal Reserve official took an
early stab at how the central bank should reduce its swelled balance
sheet to a more normal size in the years ahead, arguing the current plan
may need some adjusting. In a detailed speech to a Hong Kong audience,
Philadelphia Fed President Charles Plosser urged a return to pre-crisis
monetary policy as soon as possible and warned of a possibly
quicker-than-previously-envisioned selloff of assets. The Fed’s
unprecedented bond-buying stimulus has boosted its balance sheet to some
$3.2 trillion in longer-term securities, raising concerns over how it
will return to a more normal level of about $1 trillion without
disrupting markets or racking up losses later this decade. Plosser, an
outspoken policy hawk and longtime critic of the bond-buying, said the
Fed would be wise to begin swapping maturing longer-term assets with
shorter-term ones, aiming to hold only Treasury bonds and not the
mortgage bonds it is now buying.
The ultimate goal, he said, should be to
reduce the balance sheet so that the key “federal funds” interest rate
again becomes the central bank’s main policy instrument. The federal
funds rate has been near zero since late 2008 to help drag the U.S.
economy out of recession. “The complexity of shrinking the balance sheet
is nuanced,” Plosser, who is often in the minority of Fed opinion and
does not have a vote this year on monetary policy, told the Market News
International Seminar. “We are in uncharted territory in this regard and
should be appropriately cautious in specifying too detailed a path that
we may not be able to follow,” he said, according to prepared remarks.
The Fed published its so-called “exit strategy” from the extraordinary
policies back in mid-2011; Fed Chairman Ben Bernanke recently said it
needs a rethink. The balance sheet could rise to $4 trillion by year end
if the Fed continues buying $85 billion in monthly Treasuries and
mortgage-backed securities. While the central bank is transferring large
profits to the U.S. Treasury now, it may run into the red if it sells
these assets when longer-term rates eventually rise.
At its March policy meeting, Fed
policymakers began discussing whether it would be best not to sell the
assets and simply let them mature, a decision that could stabilize
markets and curb any politically-sensitive losses. Shedding further
light on where this debate may head, Plosser warned that excess bank
reserves now total $1.8 trillion and could grow to $2.25 trillion if the
ultra easy policies continue apace. “That may require the Fed to sell
assets at a somewhat faster pace than contemplated in the principles
adopted in 2011,” he said. “This action would heighten the risk that the
Fed would be selling longer-term assets at a loss, which would affect
the Fed’s remittances to the Treasury,” he added. “There might even be
negative remittances (losses).” Getting down into the weeds of monetary
policy, Plosser said he didn’t want the outsized balance sheet to
dissuade the Fed from its traditional “corridor” system in which the
federal funds rate floats between a lower rate paid on the bank
reserves, and a higher discount rate at which banks can get emergency
funds. He also urged the Fed to increase the discount rate from the
current 0.75 percent to “more normal, or non-crisis, levels.”
U.S. revives probe of media’s handling of economic data.
U.S. law enforcement officials have
reversed a decision to wind down an investigation into how news agencies
handle the release of economic data to investors, concerned some
sensitive information may have leaked into financial markets, a person
familiar with the probe said today. The Wall Street Journal reported
earlier on Wednesday that Thomson Reuters Corp, the parent of Reuters
News, Bloomberg LP and Dow Jones & Co., a unit of News Corp, were
among the media companies under investigation. The source who spoke to
Reuters declined to provide details. Reuters and the Wall Street Journal
reported in January that law enforcement authorities had conducted an
investigation into whether media companies facilitated insider trading
by prematurely releasing market-sensitive data, but decided not to bring
charges. Media organizations are provided sensitive economic data
during “lockups” in which they are not supposed to transmit any
information until a set embargo time has lifted. The Wall Street Journal
reported on Wednesday that the FBI had been frustrated the Commodity
Futures Trading Commission had not provided data sought by
investigators. Citing officials familiar with the probe, it said the
CFTC had since agreed to provide trading data and analysis to help the
investigation. “We are not aware of a current investigation nor any
embargo violations,” said Ty Trippet, a spokesman for Bloomberg LP. A
spokeswoman for Dow Jones, Paul Keve, said the government had not
contacted Dow Jones about any criminal investigation. Thomson Reuters
spokesman David Girardin declined to comment. The FBI and CFTC did not
immediately respond to requests for comment, while the SEC declined to
comment.
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http://sweetfutures.com/2013/market-update-from-mike-kuta-the-squawk-trader-4/
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