Atlanta Fed President’s Dilemma

’tis the week to hear from the various Fed governors once again.

Today it is Atlanta Fed president Dennis Lockhart.

I am finding his comments rather unsettling after reading one part of them.

Here is what has me scratching my head in bewilderment, courtesy of Dow Jones:

“I was more prepared at the beginning to assume it would be a small factor for the economy ( the rising Dollar). But as it has continued to go up, evidence has mounted that it is pulling in capital from overseas that is pushing borrowing costs down at a time when the Fed is getting ready to have them go the other way. Actions by other major central banks that are providing stimulus are helping drive that process”.

I wrote an article about this very thing a couple of weeks ago which you can reference here:

http://traderdan.com/?p=3290

I noted the same conundrum that Mr. Lockhart is now referencing. What I find astonishing however is that Mr. Lockhart never raised the possibility of the Fed actually using this GIFT to reduce the size of the Fed’s balance sheet. Seriously, one could not ask for a better possible scenario into which the Fed could scale down its balance sheet with as little disruption to the financial markets as possible. AT a time when Treasury demand is red hot, and with the Fed sitting with over $2 trillion worth of the things, and a captive market BEGGING for more of them, why not use this opportunity to start selling some of their holdings?

Look, they cannot sit on these Treasuries forever nor should they want to. Use these things to add supply to the market and that will help to bring the longer end of the yield curve higher which is exactly what Mr. Lockhart says the Fed wants to do.

We know that the ECB at this point has no plans to cease its QE purchases of EUR60 billion each month. We also know that many Eurozone nations have negative interest rates. While US rates have fallen recently as the FOMC statement talked them lower, the fact remains that the yield on the 10 Year Treasury Note is still nearly 10 times greater than the yield on its equivalent German bund. Money is still going to come to the US in search of yield in that environment.

Mr. Lockhart – there is an answer to your problem sir. Just open your eyes and see it!

Editor’s Note :

This is a Public Post please all feel free to send it to Mr. Lockhart at the Atlanta Fed or any other member of the Federal Reserve Board .

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Courtesy of Trader Dan http://traderdan.com/