Market Update 3 18 09: Fed Day

The nicest thing about being the Chairman of the Federal Reserve now-a-days is that you’ve got a Treasury Secretary that is drawing all the fire. I hear that Geithner can’t even watch Wheel of Fortune after work because he knows he’ll have to see “A”, “I”, and “G” some time during the program. I can hear him yelling at his TV “don’t buy a vowel…do NOT buy a vowel…” On to the news of the day.

Today is Fed day. The FOMC began its meeting yesterday and we get to hear their thoughts at 2:15 Eastern time. Most of the talk ahead of this meeting has revolved around the probability of the Fed announcing a new program to buy assets. Two lines of thought have been put forth on this topic. The first is that the Fed may have to double the amount of MBS purchases they’ve committed to buy if they hope to have much of an effect on MBS spreads. The other thought is that the Fed may announce plans to begin purchasing Treasury bonds. Either option is going to cause a further expansion of the Feds balance sheet…and what an expansion it has been so far.

I’ve attached a graph showing the growth of the Feds balance sheet as this business cycle has evolved. The first hiccup we saw was the implosion of two Bear Stearns hedge funds in the summer of 2007. Looking back it’s a bit amusing that I’m calling $20 billion worth of hedge fund losses a “hiccup” but we all know the rest of the story. On the graph below I’ve highlighted the time period when the Bear Stearns hedge funds blew up. You can see that this is the bump in the Feds balance sheet this cycle. The rest of the graph speaks for itself.

CPI data was released this morning. It shows a slight uptick in Core CPI on a year over year basis. The Fed will be viewing this as good news as it points away from deflation and it gets inflation figures back more in line with their comfort zone.

I’ve attached a longer term view of Core CPI going back to 1978 for reference. Look for an update from us after the FOMC release this afternoon. If you have any questions or if there is anything I can do for you just let me know.