STOCK MARKET WATCH -- Friday, 8 January 2016

[Proserpina]

11. Fed leans on big balance sheet to soften rate hike impact

http://www.reuters.com/article/us-usa-fed-portfolio-idUSKBN0UM02420160108

Federal Reserve policymakers appear to have succeeded in their push last month to convince investors the central bank will hold on to its $4.5-trillion portfolio at least until next year, a Fed survey showed on Thursday. Recent interviews with officials showed they were counting on the Fed's massive bond holdings to blunt some of the impact of interest-rate hikes this year. But they were also concerned that markets did not fully appreciate that the central bank was willing to hang on to the bonds for longer than thought only three or six months ago.

They said that apparent perception gap could explain in part why they are expecting a brisker series of rate hikes in 2016 than investors do. It was also a reason why, as it raised rates last month for the first time in nearly a decade, the U.S. central bank used new language saying it will keep its portfolio at its record size until rate hikes are "well under way." The nudge, designed to push back expectations when the Fed would start shrinking its giant portfolio, seems to have worked.

The New York Fed's survey published on Thursday showed that before last month's rate hike most Wall Street dealers had expected the balance sheet to start shrinking around December. But canvassed again on Dec. 18 most forecast the Fed would keep its $2.5 trillion Treasuries portfolio intact until March of next year, and its nearly $2 trillion mortgage-backed securities until January of 2017.

San Francisco Fed President John Williams told Reuters that by holding long-term borrowing costs down, the Fed's giant portfolio should give it some more headroom to raise rates without accidentally triggering an economic slowdown. Williams said that tightening at a brisker pace allows more leeway to cut rates should the recovery go sour, rather than relying on the "cumbersome" tool of quantitative easing if rates were still near zero.

"If we get that negative shock, we get a little bit of a cushion ... and of course we can adjust (rates) as needed," he said in an interview on Dec. 18.

The Fed is currently reinvesting proceeds from maturing assets, under a long-held plan. Doing so for even a few months longer than markets expect could depress longer-term borrowing costs and offset the planned tightening in short-term rates. This faith in the ongoing stimulative effect of the giant portfolio, built up from $900 billion to boost the U.S. recovery from recession, could be tested if world financial markets continue to tumble as China's economy slows.

so, that's the plan...jerk it up until we scream, then sell off the bonds...what a country!