Fed May `Ease,’ Though Form Debatable, Nomura Says

Nomura Holdings Inc., one of the 18 primary dealers that trade with the Federal Reserve, said policy makers will “ease” at their Aug. 10 meeting, though what form it takes is debatable.

Central bankers may change the language of their policy statement to signal that the Fed’s balance sheet will remain expanded and change policy on the mortgage program to start reinvesting paydowns, the firm said in a note to clients today. There is also a chance of other actions, such as a cut in the rate on excess reserves, Nomura’s global economics team said.

“Easing is going to be very seriously considered given several months of disappointing data and the very dovish tone of public commentary across the spectrum,” said Zach Pandl, an economist at Nomura Securities International in New York. “If the Fed is averse to buying more assets, then cutting the rates of interest on reserves could be the next option.”


Given the increase in chatter about the Fed easing, it would appear they are getting us ready for it so that it isn’t such a shock when it begins. Whether it be easing via monetary base expansion by purchasing treasuries and agency debt (mortgage-backed) or easing by reducing the rate that the Fed pays on excess reserves (the idea of which is to try and get banks to lend to businesses and consumers at much higher rates than the tiny amount the Fed pays, but of course this carries more risk), no one knows. My guess is that we will see base expansion by purchasing securities as the Fed can directly control the amount of expansion and make it happen whereas with reducing the interest rate paid on excess reserves, it is still up to the banks whether they want to extend credit or not. Given that one of the main reasons for ‘easing’ is because the economy is still weak, it is not likely that banks will lend anyway. To circumvent the ‘pushing on a string’ concept of trying to get banks to lend, the Fed can simply lend directly by purchasing treasuries… in effect, no different than a direct loan to the government… the Fed holds the treasury and the government gets the cash. Of course the Fed doesn’t really buy directly from the government, but rather from the 18 primary dealers, but the 18 dealers only buy the government debt at the auctions because they know they can flip it right to the Fed for a quick profit… and because of this, for all intents and purposes, the Fed IS lending directly to the government… plus the banks know that even if they don’t immediately flip the treasury to the Fed, the treasury can be used in a repo transaction which just goes back to the same concept of the Fed lending to the government. In a repo, the the Fed ‘buys’ the security from the bank and then the bank must ‘repurchase’ (repo) the security at a later date at an agreed upon price.


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