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Tuesday, September 29, 2009



what fed governor fisher means by 'alacrity' is a bit uncertain -- after all, it would be hard to hold to the promise of tightening liquidity with a vigor "equal in speed and intensity to that with which we pursued monetary accommodation".

and yet, with particular improvement in house prices (however illusory it may prove), the fed might be on the warpath to withdraw easing more rapidly now -- and certainly it seems unlikely that they will extend nearly completed programs to purchase mortgage-backed securities and treasuries under the rubric of quantitative easing.

thinking forward the consequences of a suspension of QE, one has to first understand that up to 50% of recent treasury issuance at the long end of the curve has been soaked up by the central bank. much of the financing of the deficit and debt is being taken up at the shorter maturities, where there is less rate risk, shortening up the funding profile of the government and increasing its roll risk. dealers are highly unlikely to warehouse the kind of issuance in treasury bonds now making its way to market from the treasury, so it is not unreasonable to expect that the treasury curve may steepen. this would be contra the recent trend of lower yields in the long bond, which john jansen attributes to the hedging of more exotic bets in credit, as well as security in the belief that the open markets desk of the fed will not allow rates to rise. there's also been a move out of money market funds into the belly of the curve. but i imagine that a tick up in long rates to quash liquidity and multiplier expansion is exactly what inflation hawks would like to see, provided it doesn't run out of control.

if it does run out of control, we'll see a quick reprise of quantitative easing -- and then the debate over whether the united states is stuck on a hyperinflationary vortex, navigating between the scylla of deflationary collapse of keynesian demand management and charybdis of permanent quantitative easing, would really begin in earnest.

UPDATE: more from edward harrison.

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