The Fed’s Stealth Tightening
As expected, the Fed tapered its purchases of mortgage-backed securities on Wednesday to $15 billion per month and its purchases of longer-term Treasury securities to $20 billion per month.
That means total monthly purchases, which were $85 billion last year, are now down to $35 billion. That’s a significant cut.
The Fed also cut the range of its full-year 2014 real GDP growth forecast, from 2.8%-3.0% down to 2.1-2.3%. That was no surprise, considering that GDP in Q1 was negative 1%, and it may have been a bit of a warning.
If you’re familiar with my work, you know my no-confidence stance on Fed prognostication. But just to make my opinion clear: I think the Fed is in the business of obscuring the truth. Official inflation numbers vastly understate actual price rises:
- Housing in California is back to its pre-crisis peak;
- Stocks are at record levels;
- Food prices jumped 0.7% in May alone; and
- Anyone who drives knows that a tank of gas is far more expensive than it was a year ago.
The Fed’s claim that inflation is contained and that there is no need to raise interest rates is just a show put on for people who believe the government. If we applied a more accurate inflation rate to GDP calculations, real GDP would not be growing at all.
My point is that the Fed and the media tell us things are better than they actually are. Meanwhile, the Fed is taking secret actions that reveal where Yellen and friends really think the economy might be headed.
The Fed’s New Tool: Reverse Repo
Traders have used Repurchase Agreements (“repos”) for decades. A repo is essentially a collateralized loan. A borrower sells government securities to a lender and buys them back later at an agreed-upon date and slightly higher price. The lender takes on very little risk, to earn a small amount of compensation while it holds the government securities as collateral.
