FOMC Minutes: Interpretation needed

[Intrinsic_Value]

Link:
http://www.cnbc.com/id/36196300

Specific part:
Fed Considering Policy Shift on Treasurys

The Federal Reserve is considering allowing maturing Treasury bonds to roll off its portfolio as an alternative way to drain reserves from the banking system, according to minutes from its March meeting.

The move would mark a shift from the current policy of reinvesting the proceeds from government debt into new Treasury bonds as the old ones come due.

This would serve as an additional tool for removing the extraordinary stimulus the Fed injected into the banking system in response to the worst financial crisis since the Great Depression.

"Redeeming all of its maturing Treasury holdings would significantly reduce the size of the Federal Reserve's balance sheet over coming years and hence could be helpful in limiting the need to use other reserve draining tool such as reverse repurchase agreements," the minutes said.

For those economic techno boffins on this forum what does this mean????

If the allow the bonds to be 'rolled' off, does that mean using cash to pay for it? If so how does this reduce reserves from the banking system?
Its just creating cash to pay for debt isnt it?
In order words, by different means, the Fed is still acting in an expansionary manner. And the article doesnt make sense, because its not removing any stimulus from the economy, its just replacing bonds with cash.

What am i failing to understand.
Help please.

 

[boz]

Link:
http://www.cnbc.com/id/36196300

Specific part:
Fed Considering Policy Shift on Treasurys



For those economic techno boffins on this forum what does this mean????

If the allow the bonds to be 'rolled' off, does that mean using cash to pay for it? If so how does this reduce reserves from the banking system?
Its just creating cash to pay for debt isnt it?
In order words, by different means, the Fed is still acting in an expansionary manner. And the article doesnt make sense, because its not removing any stimulus from the economy, its just replacing bonds with cash.

What am i failing to understand.
Help please.

At present the fed buy again the treasury bonds when they expire using the same money. When they roll off mean that the FED will get the money back when bond expire and will not buy again bonds with that money. THat mean they destroy the money (with a couple of click on a mouse)They'll probably keep destroing those money till the money around is less then 1 tril$. I did post something about it this morning in the Simple forum,
here are the main extract from bloomberg

“They want to see the whites of the eyes of everything -- from strong growth to many months of employment,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “They want to see inflation accelerate so they are sure we are not going to get deflation, and they probably want to see banks start to lend again.”
...
The minutes also showed that policy makers were surprised by the rate at which inflation was slowing.

“Participants saw recent inflation readings as suggesting a slightly greater deceleration in consumer prices than had been expected,” the minutes said. “A number of participants observed that the moderation in price changes was widespread across many categories of spending.”

...
U.S. central bankers last month completed their program to purchase $1.25 trillion of mortgage-backed securities, expanding the Fed’s balance sheet to $2.31 trillion on March 31, near the record $2.32 trillion the previous week.

Chairman Ben S. Bernanke told the House Financial Services Committee March 25 that he anticipates “at some point we will in fact have a gradual sales process so that we can begin to move our balance sheet back to its pre-crisis condition” which he described as “under” $1 trillion.

...
“Members noted the importance of continued close monitoring of financial markets and institutions” in order to see “significant financial imbalances at an early stage,” the Fed said. “At the time of the meeting the information collected in this process, including that by supervisory staff, had not revealed emerging misalignments in financial markets or widespread instances of excessive risk-taking.”

 

[Intrinsic_Value]

At present the fed buy again the treasury bonds when they expire using the same money. When they roll off mean that the FED will get the money back when bond expire and will not buy again bonds with that money. THat mean they destroy the money (with a couple of click on a mouse)They'll probably keep destroing those money till the money around is less then 1 tril$. I did post something about it this morning in the Simple forum,
here are the main extract from bloomberg

Thanks boz, i read that article in bloomberg in the morning.

But sorry you are going to need to walk me through your comments above (in simple terms). Firstly i presume it refers to the Fed buying the treasury bonds to hold down interest rates (as opposed to the government issuing bonds to finance the deficit).
So now when these treasury bonds come to expiry they will not be rolled, which i presume means they receive the 'cash' (ie payment of bond face value at maturity).
So where does this cash come from? I understand the relationship between private sector/government sector transfer, but what about government sector to government sector?

The cash comes from the US treasury. So the Fed receives the cash, then gives it back to the US treasury to remove the cash from circulation?
So no bond and no cash?
Isnt this like magic????

i dont understand, what am i missing.

 

[boz]

Thanks boz, i read that article in bloomberg in the morning.

But sorry you are going to need to walk me through your comments above (in simple terms). Firstly i presume it refers to the Fed buying the treasury bonds to hold down interest rates (as opposed to the government issuing bonds to finance the deficit).
So now when these treasury bonds come to expiry they will not be rolled, which i presume means they receive the 'cash' (ie payment of bond face value at maturity).
So where does this cash come from? I understand the relationship between private sector/government sector transfer, but what about government sector to government sector?

The cash comes from the US treasury. So the Fed receives the cash, then gives it back to the US treasury to remove the cash from circulation?
So no bond and no cash?
Isnt this like magic????

i dont understand, what am i missing.

well, when the fed buys treasury they create cash, when they decide not to roll over bonds the treausry is giving them the cash, but in practical term somebody else will buy new bonds and the money through the treasury will go back to the fed that just destroy them (they can pretty much create and destroy money with a mouse click), probably to get someone else to buy the bond the yield is likely to rise a little. In any case i am pretty sure that if the fed want to reduce the amount of money to below 1 tril$ they would destroy the money and not giving it back to anyone.