The Credit Crisis Financial Stocks Short Journal

By itself, means nothing...

Just another signal that, some time in the future, the Fed is hoping to harness the interest on reserves mechanism to be able to withdraw liquidity. That would imply, as the article suggests, that the FF Tgt might lose some significance. It's not clear, however, whether in practice the Fed's theory will actually work.

This means that the impact of these specific changes on LIBOR are not clear yet. However, the general message is that the Fed can tighten when the right time comes and they have various instruments at their disposal to do it.

As to the high in the front Eurodollar contract, it's simple. It's just 3m OIS (i.e. expectation of where FF Effective will avg over the next 3m) plus the LIBOR/OIS spread. Given that FF effective is fixing arnd 11bps and LIBOR/OIS is at 10.6 (before the crisis, it was trading at arnd 8bps), how much lower can LIBOR go, in your view? The story in yen is different in only one respect, namely that Mutan was actually at 0 for years.
 
I'd say the front eurodollar is likely to expire lower rather than higher if it does change. the EFF could go higher towards the deposit rate(and some in the Fed claim it will happen before the first hike, a sign of stabilization) and libor could blowout(surprisingly it didnt change much during this panic, that is encouraging)
 
ECB's Weber says rate changes will be mainly a function of the inflation outlook which he doesnt see risks high now thus believes rates are at 'appropriate' levels, he says one needs to separate rates from other easing measures taken by the ECB, they plan to decrease those more in the H1. Perhaps the same is true for the Fed which suggests the balance sheet will be shrunk first before the FFR is raised

I dont believe they let 'extended period' go today, I do believe they will discuss expanding or extending the MBS puchase program, whether they will or not its hard to tell. Hoenig is probably causing some confusion in the meeting by his hawkish arguments, this might get them to delay that decision to the next meeting(March 16), but that would be too close to the actual ending of purchases, so the market might think they are done buying, which makes today the day of the decision(if they are following this logic at all).
I believe there is a decent chance they extend the time period but not the amount of purchases but frankly its hard to tell what will happen, they might just stop buying too(I dont think thats a big deal). All I know is that I dont expect any hawkish surprises(except Hoenig voting against the statement)
 
"Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted."

The guy didnt mentioned hiking rates for some reason
 
I'm happy with the fed statement, I dont believe Hoenig is taken very seriously by the other voters, so it appears to me he will dissent all statements this year and not much will happen. But its very interesting how when these guys are not in a fomc meeting, giving speeches or in the fed rotation(not voting) they will put out ridiculous hawkish statements but when it comes time to vote all the sudden they are more sane.

Lacker did the same thing last year, said Fed might not buy everything they promised then he goes with every statement. Hoenig cries about jacking rates to 4% for a while then all he does is disagree with 'extended' language while implying he thinks 0% is appropriate right now
 
We'll see. 2 year note has jumped 15 basis points higher since the statement, so somebody didn't like it.

The Fed will be led by events. It appears that the equity markets have looked through the abyss of big changes coming out of DC, and could be poised to move higher. My take on DC is that for all the talk since the election last week, it looks like more of the same - which is gridlock. The tax hike on banks looks to be DOA. The Volcker bank regulation - minor stuff to begin with - will probably be watered down to even less. Geithner has survived. The Beard has survived.

For now, no hikes. If stocks bust through 11k and we get a few more ISMs in the 60s, and some positive prints on the UE, a rate hike will be in play this summer.
 
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