Saw this transcript of the FOMC 2012 Oct 23 - 24.
This is just a short transcript from a couple of pages, the whole thing is mind blowing.
Some very interesting admissions made in this document by the FED including how big their short position on Volatility is. Yes that is correct they have been shorting volatility since 2011 or there abouts and perhaps earlier.
They have also admitted to a 4 trillion usd balance sheet which has only grown. They said then that there will be big losses on the markets when they start to raise rates. Thee are other intersting points and this is just a couple of pages of the nearly 300 page doc from the Fed.
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October 23–24, 2012 192 of 279 deliver that so as to not disappoint the market. But, of course, the market also expects—and I think it is an expectation that is a reasonable one, given what we have said—this program to go on until early 2014, which implies a balance sheet somewhere north of $4 trillion. So if there are broadly felt misgivings about that prospect, I do think it is important that we confront them in December as opposed to kind of just going with the flow and dealing with that problem later. And this is very inherently a dynamic problem. If there are constraints of this sort, I think they have to be factored into the whole path of the policy rather than pushed off into the future. Thank you, Mr. Chairman. CHAIRMAN BERNANKE. Thank you. Governor Powell. MR. POWELL. Thank you, Mr. Chairman. So we have had Gary Cooper, the Most Interesting Man in the World, Bill Belichick, Woody Allen, and now Hamlet. [Laughter] I support alternative B, to relieve the suspense. And as far as what is to be decided at the next meeting, it seems to me we should let it be decided at the next meeting. But I will say that if we have another good run of data, I think there would be a strong case to defer action. And I don’t see us as committed to act unless conditions warrant. I have concerns about more purchases. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction than I anticipated, and I am uncomfortable with it for a couple of reasons. First, the question, why stop at $4 trillion? The market in most cases will cheer us for doing more. It will never be enough for the market. Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated. And we will be able to tell ourselves that market function is not impaired and that inflation October 23–24, 2012 193 of 279 expectations are under control. What is to stop us, other than much faster economic growth, which it is probably not in our power to produce? Second, I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy. My third concern—and others have touched on it as well—is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think. Take selling—we are talking about selling all of these mortgage-backed securities. Right now, we are buying the market, effectively, and private capital will begin to leave that activity and find something else to do. So when it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response. So there are a couple of ways to look at it. It is about $1.2 trillion in sales; you take 60 months, you get about $20 billion a month. That is a very doable thing, it sounds like, in a market where the norm by the middle of next year is $80 billion a month. Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position. When you turn and say to the market, “I’ve got $1.2 trillion of these things,” it’s not just $20 billion a month— it’s the sight of the whole thing coming. And I think there is a pretty good chance that you could October 23–24, 2012 194 of 279 have quite a dynamic response in the market. And I would just say I want to understand that a lot better in the intermeeting period and leave it at that. Thank you very much, Mr. Chairman. CHAIRMAN BERNANKE. Thank you. Vice Chairman. VICE CHAIRMAN DUDLEY. I think I will just be myself. [Laughter] I support alternative B as written. I think what we did at the last meeting was successful in a number of respects, but, obviously, things are still very tentative. First, we showed a high-level commitment to persist with an accommodative monetary policy regime. I think this did have a beneficial impact on confidence. The fact is that if households and businesses anticipate that there will be a sustained economic recovery, then that makes the recovery more likely. So I think how we present ourselves, in terms of our determination to achieve that outcome, is important. Second, the mortgage-backed securities purchases did have a large effect on the spread between agency MBS yields and Treasuries. In fact, the impact was somewhat larger than I would have anticipated. Third, it was well understood by market participants and the press why the additional QE took place in the agency MBS market. Providing support for housing is viewed as a credible means of supporting economic activity more generally. Fourth, the effect on inflation expectations was relatively muted and mostly short-lived. It is true that five-year, five-year forward rates are slightly higher now than before the last meeting, but the increase does not appear to be outsized. Some increase was to be expected, given that we are essentially removing some of the downside tail risk through our actions. Importantly, we still remain firmly within the range of recent years. Moreover, there is no evidence that our actions caused inflation expectations elsewhere to become unmoored. If you
