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Fed Readies Reverse Repo Hoping To Soak Up QE Cash

Bill Frezza, Forbes, 12/17/13

Everyone, it seems, loves asset inflation. What could be more satisfying than watching the value of your home, your stocks, and your 401(k) soar, especially after the economic beating from the mortgage meltdown? Monetary illusions that pass for prosperity buy Washington time to tackle other Big Problems, like providing affordable health care to everybody, eliminating income inequality, bringing peace to the Middle East, and saving the planet from global warming.

But woe to the powers that be if the asset bubble pops and rampant inflation follows. Paying more for gas, groceries, and rent as wages stagnate, housing prices collapse, and retirement savings erode makes voters grumpy. This is a threat to incumbent politicians—especially if they have not meanwhile solved the aforementioned big problems. They can try to shift blame to mysterious forces beyond their control, but this is becoming increasingly difficult as mainstream media loses its ability to enforce Washington orthodoxy.

And so, the world’s greatest mysterious force—the Federal Reserve—has to figure out how to wean the global economy off of Quantitative Easing before it unleashes a tsunami of liquidity as trillions in excess reserves flee too-big-to-fail bank balance sheets seeking better returns than the few measly basis points earned parked at the Fed.

The Fed, of course, could begin selling off its massive hoard of securities, expunging the money that buyers surrender in return. The problem is that this would tank the sovereign debt and mortgage securities markets, potentially generate huge losses for the Fed, compromise Uncle Sam’s ability to borrow, and make life miserable for Fannie Mae and Freddie Mac. So, we can expect the Fed to hold those assets to maturity.

What’s a central planner to do?

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