90 seconds at 9 am: US Fed ends QE

US Fed ends money printing, still holding US$3.6 tln; China to support six industries; stocks and gold fall; oil and UST 10yr yields rise; NZ$1 = US$0.786, TWI = 76.5

30th Oct 14, 7:25am by David Chaston

Here's my summary of the key news over night in 90 seconds at 9 am, including news of a falling New Zealand currency.

First up this morning, the US Federal Reserve has ended its money printing program. It has stopped buying bonds and its balance sheet will no longer get pumped up in this way.

At one stage it was buying US$85 bln per month. All up it has bought more than US$3.6 tln of bonds with money 'printed' into its coffers since 2009. That stimulus is still there however; it is just not being added to. The next stage - is to wind back this level, but no-one is talking about that now. It is only the end of the beginning.

The US dollar took off on the news, and the NZ dollar fell sharply as a consequence.

The New Zealand Reserve Bank will release its latest decision on our OCR at 9am today

The Chinese government will support consumption in six industries including real estate development as growth in the world’s second-biggest economy slows, their cabinet said after a meeting yesterday. The six 'industries' are the mobile internet, 'green consumption', housing, tourism, education, and aspects of financial security for seniors.

In New York, UST 10yr bond yields rose following the Fed announcement today and are now at 2.32%.

The oil price rose today and is now just below US$83/barrel with the Brent price just under US$88/barrel. American output data released earlier today shows strong gains in their domestic production.

Stocks are falling in New York.

The gold price also fell sharply on the Fed decision and is now at US$1,216/oz.

We started today with our currency a higher again. But following the Fed announcement there has been a sharp retracement, especially for the New Zealand dollar. It is now at 78.6 USc, at 89.2 AUc, and the TWI is at 76.5.

If you want to catch up with all the changes yesterday we have an update here.

The easiest place to stay up with today's event risk is by following our Economic Calendar here »

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12 Comments

by MortgageBelt | 30th Oct 14, 7:59am 1414609174

Will today be a repeat of March 2011, when the RBNZ realised it had made a major economic environment misjudgment (in raising the OCR in the middle of a global crisis) and were forced to cut the OCR? That cut was needed despite the earthquake.

CPI is 1% and tracking downwards, consumers are cautious, new NZ lending is flat.

As long as we have unfettered global buying of NZ property, the OCR will have minimal impact on Auckland.

by steven | 30th Oct 14, 8:57am 1414612620

Totally agree, however.....

<grin>

2 things on the RB,

I think ppl expect it to be trustworthy/consistant and slow. Back peddling now "so early" would be seen as not such. So I think we'll see a hold until such time as we are actually seeing the CPI hit 0.6% or less.

However they have over-cooked the LVR so we may well see it ease, though persoanlly I think that would be stupid if its done away with, but,

Dogma/ideology/education. The RB is trained in the way of the Central banker and free markets and cant see there has been a paradigm shift. Im not sure they ever will and hence will always be behind the curve on this.

regards

by Stephen Hulme | 30th Oct 14, 10:00am 1414616419

First up this morning, the US Federal Reserve has ended its money printing program. It has stopped buying bonds and its balance sheet will no longer get pumped up in this way.

Yes, and let the acrimony begin.

Former Federal Reserve Chairman Alan Greenspan said Wednesday that the Fed’s bond-buying program, which aimed to lower unemployment and spur stronger economic growth, fell short of its goals.

Mr. Greenspan’s comments to the Council on Foreign Relations came as Fed officials were meeting in Washington, D.C., and expected to announce within hours an end to the bond purchases.

He said the bond-buying program was ultimately a mixed bag. He said that the purchases of Treasury and mortgage-backed securities did help lift asset prices and lower borrowing costs. But it didn’t do much for the real economy.

“Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” s aid Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.” Read more

by Stephen L | 30th Oct 14, 10:11am 1414617096

Indeed. Greenspan seems pretty obviously correct. It remains a mystery to me why Bernanke did not use the printing process he had advocated in his books on the depression. Namely print money and give it out through the treasury as tax cuts at the low end, (so some cuts for all) or perhaps to fund government infrastructure directly. The way the real economy works he would have had to print probably only a tenth the money he printed to force into the world's bond markets and pump asset prices, with then at best a slow trickle down effect into the real economy.

I assume he was captured by the banking/finance industry who needed their balance sheets fixed, and who still wanted to control the apparent money printing into the economy.

by Roger Witherspoon | 30th Oct 14, 10:36am 1414618585

I think you would like this chap:

http://moslereconomics.com/

He basically says that govt bonds are like term deposits and serve as a sort of tax rebate to set an appropriate interest rate. So the Federal reserve buying government bonds effectively decreases the money flowing to the non government sector as bank reserves are effectively moved from the equivalent of a term deposit paying say 4% to a call account paying 0.5%.

I've started working my way through his stuff and so far it is brilliant. His theories are well thought out and have been tested in the markets.

by Stephen Hulme | 30th Oct 14, 11:00am 1414620021

He is not wrong - the largest banks in the US have soaked a $trillion plus from the US economy by purchasing US government related debt purely for speculative QE related delivery purposes - view graphical evidence. The persitence of purchases make one wonder if these banks percieve the start of QE4 in the not too distance future.

by steven | 30th Oct 14, 10:59am 1414619950

Hmm, reading other things. Except that the money going to the private non-Govn sector is only crowded out/decreased if the money is wanted.

this is him?

http://en.wikipedia.org/wiki/Warren_Mosler

interesting in that it looks a bit Keynesian,

"Mosler's law states there “…is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it."

Actually Im not so sure on that, or maybe in practical terms Govns simply wont do this. The US for instance didnt, in Obama's first term and got a lackluster result.

very socialist of him,

"He states health cannot be viewed as a production cost, therefore the government should fund for at least 90% of the cost paid by the firms."

Also there is a lot of private money stiing in Govn bonds at just about neg rates of return, they are not forced to be there.

regards

by Roger Witherspoon | 30th Oct 14, 11:30am 1414621829

I'm enjoying reading his work as he looks at the engineering of the money system. Basically he is saying that the ideas currently in vogue are largely based on how a commodity (ie gold) based money works; whereas a government issued fiat currency works in different ways. Money works differently if you are the issuer. Lots of fascinating insights.

by steven | 30th Oct 14, 11:39am 1414622341

I might read a bit more this evening when I get time, put his theories to the test, against others work. Initially he certianly does not strike me as dogmaticilly wedded to the free market as most fund/money ppl seem to be.

For me our entire global economy only works on a fiat currency because in effect it has to grow I think. Gold on the other hand is finite and hence isnt compatible with our present economy. The only other option would be to have the value of gold grow expotentially, in effect handing big un-earned profits to those holding it and guaranteeing it.

"issuer" yet the private banks in effect create money when a loan comes into existance, its almost like QEing, in fact from my simplistic viewpoint I cant see the difference.

regards

by Roger Witherspoon | 30th Oct 14, 1:13pm 1414628025

Yes, as I see it present day money is created in three ways. The private banking sector creates money when it creates new loans. The trade sector can create money when it creates new trade credit. The government (if it is a currency issuer such as NZ) also creates money when it spends more than it taxes. These interact in all sorts of complex and interesting ways.

So by my reckoning (ok, my current working hypothesis) is that it seems the banks in NZ aren't spewing the stuff out like they were and neither is the gubmint. No wonder inflation is "surprisingly" low...

http://www.rbnz.govt.nz/images/key-graphs/Fig6_large.jpg [serves as a proxy for private credit creation]

http://www.rbnz.govt.nz/images/key-graphs/Fig1b_large.jpg

http://www.treasury.govt.nz/economy/mei/archive/pdfs/nzecp-charts-sep14…

I'm trying to gather the data to support this thesis but my forte is speculation (and pontification) rather than research. If I am right then we could see asset price declines in NZ pdq.

by Gummy Bear Hero | 30th Oct 14, 11:41am 1414622493

...regarding the Federal Reverse , is this really only the " end of the beginning " , David ... or actually the " beginning of the end " as the Gloomsterisers would have it ...

It may very well be the " end of the end " ... .. or the .... ummmm ... what was the question again ?

by Roger Witherspoon | 30th Oct 14, 1:11pm 1414627890

The end of the third part and the beginning of the first part?