Fed takes on some TIPS

With the marginally dismal employment numbers and rumors flying around that housing is entering a second dip in which JPMorgan analysts revised their forecast for a housing bottom to occur sometime near mid 2011 at a peak trough decline of 34%. So with these somewhat uncertainties the Federal Reserve Bank of New York bought $1.44 billion in inflation-indexed Treasury debt today Tuesday June 7^th 2011 accounting for 19% of the dealer offered $7.77 billion in 2013-2041 Treasury Inflation Protected Securities. A significant headwind circulating the headlines around world are that energy and food prices are rising across the board due to inflation creeping in and staying around for the summer of 2011. So with this recent purchase does it mean that the Fed will continue to purchase more TIPS and continue quantitative easing measures? Here’s a simple Tip for our Fed stop spending money we don’t have. Here’s a look at the TIPS (an ETF tracked by Barclays) and the 10-year since 5/31/11’s announcement of the 9.1% unemployment rate:

What would QE3 mean for the markets?

With QE2 ending next month there is an expectation that the Fed’s balance sheet will come to a standstill at approximately $2.75 Trillion. Given the rise in the money supply and banks increasing their lending throughout QE2 the rapid expansion experienced during those months could place pressure on continue lending by banks and generate expansionary economic activity because of the decrease in the money supply. Some economists are torn between a continued QE program on the face of inflationary pressure or unemployment prospectus. The first argument has the CPI (Consumer Price Index) heading towards the lower levels of 5%, while the second item of unemployment is expected to remain 8.7% for 2011 according to the latest (May 13^th) Bloomberg survey. Whichever item provides the strongest pressure if QE3 were to be implemented (And I personally think it will) the unveiling would occur before the January 2012 presidential election kickoff season. The pressure on the Treasury market after June could fold either way but there is enough buyers both institutional and foreigners to drive the market up and keep yields low. But many factors could come into play such as China’s growth, the IMF’s (International Monetary Fund) leadership change, and the Eurozone debt crisis plus that the number 3 has been notoriously famous in government such as the 3 branches of powers (Legislative, Executive, and Judicial).

Charts from: http://mises.org/daily/5299/The-Effects-of-Freezing-the-Balance-Sheet

When the US has reached its debt limit

As the national debt continues to increase by an average of $4.05 billion per day since September 28, 2007 even in 2009 the Obama administration noted that the deficit for fiscal year 2009 came in at a record of $1.42 trillion with a capital “T”. This was in 2009 but now the story has turned more severe as Timmy Geithner stated that the legal limit of $14.3 trillion would be reached within a few weeks from now (as of the end of April).

Although the political cards begin to play into whether to lift the debt limit, the Treasury secretary has a few options available such as borrowing money from the federal workers pension plan or paying investors their interest payments ahead of their obligations. Regardless, if the limit gets a raise the ramifications would mean higher interest rates for consumers since the bond yields will rise as investors lose more confidence in US treasuries. This stressful situation has occurred many times in the history of the US as the debt ceiling was raised six times between 1995 and 2007 but never has it been such a wide spread media publication. As the political big wigs debate on whether constricting further spending or cutting outlays while raising taxes the ones feeling the strain would be the US consumers as the cost of borrowing will eventually rise and perhaps at a frightful pace. As a final and last attempt by the US Treasury they have setup a site where the general public can donate:

https://www.pay.gov/paygov/forms/formInstance.html?nc=1271991815942&agencyFormId=23779454

Article: http://www.garp.org/news-and-publications/overview/story.aspx?newsId=27689