The Federal Reserve could possibly disclose record accommodation today by announcing $45 billion in monthly treasury buying that will push its balance sheet almost to $4 trillion, according to a Bloomberg survey of economists.
Per Bloomberg, forty-eight of forty-nine economists predict the Federal Open Market Committee will purchase treasuries to bolster an existing program to buy $40 billion in mortgage bonds each month. The panel pledged in October to continue that plan until the labor market improves, in their words, “substantially.” The committee plans to release a statement on policy today at around 11:30 A.M. That announcement will be followed by forecasts for growth, unemployment and inflation. Bernanke is scheduled to hold a press conference at 1:15 P.M., after release of the forecasts.
THE DETAILS
The Central Bank this month is scheduled to end Operation Twist, in which it swaps $45 billion of short-term treasuries each month for longer-term government debt. That program kept the total size of the balance sheet unchanged, while new treasury purchases could expand it.
The Fed’s latest round of quantitative easing will total $1.1 trillion, with about $620 billion in mortgage-backed securities, and $500 billion in treasuries, according to the median estimate per Bloomberg.
By adding treasury purchases, policy makers “would continue to lower mortgage rates and create conditions that would be favorable for a continued recovery in the housing market”. The FOMC will probably wait until its March 19-20 meeting before adopting thresholds on unemployment and inflation to indicate when it will consider raising short term interest rates, according to the median estimate of surveyed economists per Bloomberg.
Forty-eight of forty-nine economists say the Fed won’t set the thresholds tomorrow according to Bloomberg. The Fed currently says it will keep its main interest rate near zero at least through mid-2015. In the first round of quantitative easing starting in 2008, the Central Bank bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of treasuries.
HISTORY LESSON AND THE TRADE
The question which one may ask is: when did Gold prices and Commodities end up going as a result of continued stimulus by the Fed? When President Obama took office in January 2009, Gold settled at $887.50. After three quantitative easing measures by the Fed and countless interest rate cuts from Central Banks around the world, Gold sits at just above 1700 an ounce.
What has changed?
If you are looking for a conservative directional trade to the upside for Gold I would look at buying the April Gold 1850 call and selling the 1900 April gold call for 4.5 points for a $450.00 risk plus commissions and fees to possibly collect a max profit of $5,000.00 minus all commissions and fees. I’m not saying Gold is going back up to 2011 highs, but I am looking to catch a move to the upside, using options spreads with defined risk versus buying outright dips in the futures. The exercise is designed to sell them higher than what you paid for them.
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