THE BASIS POINT

BUILD YOUR OWN FED STATEMENT! (and QE timeline)

The Fed concludes a two-day FOMC policy meeting Thursday and many think the Fed’s statement will include terms of a third round of quantitative easing aka QE3.

QE is when the Fed prints money to buy bonds. The goal is to drive bond prices up and rates down. And while weak U.S. and non-U.S. economic fundamentals have caused rates to trend down since QE1 was announced November 25, 2008, rates actually rose short-term after QE1 (mostly mortgage bond buying) and QE2 (all Treasury buying) were implemented, as shown in this chart.

One thing that did actually cause rates to fall short-term was on September 21, 2011 when the Fed announced that they’d buy more mortgage bonds using proceeds from principal payments received from mortgage bonds they already hold (they bought $1.25 trillion in mortgage bonds during QE1).

Which the Fed is still doing as of their last policy statement on August 1.

Which brings us to their next statement tomorrow. Since Fed statement interpretation is everyone’s favorite game, my friend and industry colleague Ted Rood invites you all to play Build Your Own Fed Statement. Just choose your favorite answers from the statement* below.

Stay tuned for rate market reaction to tomorrow’s actual statement. Also see links below.

BUILD YOUR OWN FED STATEMENT!

It’s easy to win: just choose the most appropriate phrases.

Information received since the Federal Open Market Committee met in August indicates that economic growth so far this year has (slowed considerably; surprisingly slackened; sickeningly slumped) more than the Committee expected. Indicators suggest a deterioration in (housing markets; employment growth; Wall Street morale) in recent months, and (the unemployment rate; public debt; Clint Eastwood’s dementia) has moved up. (Household income; investor confidence; the Euro) has flattened out, investment in non residential structures is still (nonexistent; scarce at best; all but extinct), and (business sentiment; European politicians; our investment advisers) remain depressed. However, business investment in equipment and software continues to (outperform the rest of the sluggish economy; expand if you squint hard; hinge solely on iPhone 5). Temporary factors, including (higher food and gas prices; looming fiscal cliff; end of the Summer Olympics) appear to account for only some of the recent economic weakness. Inflation (rose slightly; remained muted; signaled it will explode soon) earlier in the year, mainly reflecting (soaring Town Car fares; higher costs for Madonna tickets; raises for Fed Committee members). More recently, inflation has (slowed somewhat; permanently moderated; signaled deflation is imminent) as prices of (European airfare; Kobe beef; Kona coffee) have declined from their earlier peaks. Longer term inflation expectations (could be stable; will not be an issue unless prices rise; will explode you just watch).

Consistent with its statutory mandate, the Committee seeks to (foster economic stability; provide incentives for business growth; stabilize the hemorrhaging labor market). The Committee now expects a (somewhat slower; rapidly plummeting; painfully painful) pace of recovery over the coming quarters than it did at the (previous meeting; last Committee Happy Hour; White House hoops tourney) and anticipates the unemployment rate will (decline gradually over the next decade; improve dramatically if more unemployed people get jobs; never approach prior levels again). Moreover, (downside risk; the Chicago Cubs’ record for futility; the potential for a looming economic meltdown) has increased. The Committee also anticipates that (inflation; Jim Cramer’s coffee consumption; public interest in November’s election) will decline. However, the Committee will continue to pay close attention to (economic factors; capital gains taxes; Scarlett Johansson).

To promote the ongoing (economic recovery if you could call it that; facade of fiscal responsibility; faint glimmer of hope) and to help ensure that (inflation; public confidence; our income) remains at levels consistent with its mandate, the Committee decided today to (keep the federal funds rate laughably low; concentrate on college football until after the election; spend more time with friends and family). The Committee currently anticipates that economic conditions–including (low resource utilization; rampant buyers’ remorse among Facebook stock holders; depressed housing values in 43 states) are likely to warrant exceptionally low levels for the federal funds rates at least (through mid 2013; for the rest of our terms or natural lives, whichever comes first; until the Treasury Department’s funds are depleted). The Committee will regularly review the size and composition of its (securities portfolio; weapons stockpile; Greek bank IOU’s) and is prepared to adjust those holdings as appropriate.

The Committee discussed the wide range of policy tools available including (bake sales; car washes; garage sales) to promote a stronger economic recovery in a context of (price stability; public relations; shorting the Euro). It will continue to assess the (economic outlook; Giants’ Super Bowl chances; odds on November’s election) in light of incoming information and is prepared to employ these tools (as conditions warrant; whenever bored; on slow news days).
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*Ted said he’ll do future versions of this multiple choice Fed statement, but only if it’s referred to as a Ted Statement. Can do. Thanks Fed, I mean Ted.
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Reference:
Quantitative Easing Timeline Through 9/2012

3 Reasons The Fed Shouldn’t Do QE3

CHART: Rate Impacts of QE1 and QE2

Why Rates Could Rise If QE3 Is Announced

$MBB, $TLT