Hawaii Six O - Gary Wagner
Fed Speak And Intent Weigh Heavily On Gold Pricing
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
There’s a new Sheriff in town, spreading hawkish sentiment wherever she goes. Chairwoman Janet Yellen is not actually a new Sheriff, but statements she made at yesterday’s news conference, coupled with the press release issued by the Federal Reserve, reveal a much more aggressive stance by the Fed.
The highly anticipated rate hike announced yesterday was already largely factored into the market. This marks the second rate hike this year and the third time that the Fed has raised interest rates since it began the quantitative easing program initiated in 2008. Additionally, the Federal Reserve’s revealed its intention to implement an additional rate hike this year.
However, the wildcard of yesterday statements were comments made in regards to plans to liquidate part of their balance sheet of assets, which now totals 4 ½ trillion dollars. This asset liquidation is commonly referred to as a stealth hike in that it has the same net effect of an interest rate hike. Simply put, massive liquidation will change the basic supply and demand variables intrinsic to pricing. A massive increase in supply with demand remaining steady will have a dramatic impact on pricing.
As reported in an addendum to yesterday’s press release, the Fed stated, “The Committee intends to gradually reduce the Federal Reserve's securities holdings by decreasing its reinvestment of the principal payments it receives from securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps.”
Furthermore, the asset liquidation will begin as soon as this year, and once initiated become a regular monthly occurrence. “For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.”
Occurring concurrently, the Fed will also liquidate mortgage-backed securities. “For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.”
This is the first time the Federal Reserve has revealed its timetable and the extent of asset liquidation. Simple math shows that they plan to cap the liquidation of assets to $50 billion monthly once the program is in full swing.
The net effect of this technique is uncertain. What is certain is that the asset liquidation of $50 billion monthly could have a profound impact on the financial markets as a whole.
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Wishing you as always, good trading,