JFG - Just Friggn Great [not]

Andy Hamilton

Are you really suggesting so much inflationary pressure that rates are going to be forced up? Obviously not. What are you suggesting then? Ah yes house prices are going to collapse. Okedoke

What is the point slashing the OCR when the banks dont follow and instead put their rates up? Give us a break - the OCR is at 3%, lets see some good offerings on the longer term rates!

hey elves
wanna see what the big picture driver is?

No Offset
To avoid expanding the money supply, the Fed simply has to sell short-term bills for an equivalent amount to its purchases of other securities. The one offsets the other. That is what the Fed were doing until mid-2008, but a gap appeared in the third quarter. And, by the end of October, sales of short-term bills had ceased while security purchases continued. (Market Oracle) The gap widened to $600 billion in November "” and is likely to expand dramatically over the next year.

The Multiplier Effect
Purchases of $1.75 trillion of securities have the potential to massively expand the money supply. The Fed does not pay for its purchases with gold or other tangible medium of exchange, but merely issues an IOU in the form of a deposit account with itself. Banks are then able to use the IOU as part of their reserves, expanding their loan assets by up to $17.5 trillion (10 times the reserve amount). This is referred to as the "multiplier effect".

Deflationary Spiral
Banks, however, are trapped in the present deflationary climate. Not only by their overvalued assets, but by their inability to find sound customers who want to borrow. The private sector are shrinking their balance sheets to reduce risk, selling off assets and reducing debt. The Fed is hoping that by expanding the money supply, asset prices will stabilize and restore business and consumer confidence. But the money supply will not expand if the private sector refuses to borrow. Banks would be forced to deposit the new money back with the Fed or buy Treasuries (driving yields even lower) for want of better opportunities. The Fed has to find some way to prime the pump "” and break the deflationary spiral.

Expect some "window-dressing" in the months ahead. Like announcements that Citi and other major banks are in the black for the first two months of the year "” write-downs are only likely to be made at the end of the quarter. And pressure to relax mark-to-market accounting rules. (WSJ)

Treasury Markets
The Fed move will suppress long bond yields, and drive down the dollar as investors look for richer pastures. China has already expressed concern. Expansion of the money supply is inflationary and likely to give them a "haircut".

rock on elves !!....it ain't over till it's over and it ain't over yet !!