Liquidity indications have remained neutral over the two weeks since I last updated this report. Panic outflows from Europe boosting theUSsystem seem to have taken a breather, or been covered up, in the wake of the massive ECB liquidity operation just before Christmas. However, other indicators which had been bearish such as bank purchases of Treasuries, and an uptick in bank non-Treasury trading accounts have turned mildly bullish. FCB purchases remain bearish but could be coming into a cyclical low. In the Treasury report, there were indications of a moderation in supply. Supply may also be restricted because the debt ceiling has yet to be raised and the government may be forced to go back to raiding civil service retirement funds. All of which seems to support higher financial asset prices over the near term.
Strangely, the Fed’s pumping of cash into Primary Dealer accounts via the MBS purchase program, has been offset in recent weeks by the Fed quietly, and inexplicably, selling Treasuries. The Fed has liquidated a net of $21 billion in Treasuries over the past 2 weeks. This is separate from Operation Twist, whose operations are offsetting and designed to have no impact on the Fed’s balance sheet.
This shrinkage runs counter to the Fed’s policy of maintaining the System Open Market account at a stated target level of $2.654 trillion, and it runs counter to the Fed’s newly expanded policy of more transparent manipulation, wherein it will publish individual FOMC member rate forecasts to help push the market in the “right” direction. The Fed only wants to be transparent to push the markets up. When there’s something going on that Bernanke andCo.don’t want you to notice, they shut up. That leaves us with two questions. Why is the Fed selling assets, counter to its policy, and why aren’t they explaining it?
So far, no news outlets or other bloggers seem to have noticed this balance sheet shrinkage, or if they have, they aren’t talking about it. See no evil, hear no evil, speak no evil.
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