Fed out of Focus

The 2Q earnings reports have shown explicitly- that the large (and many small) public companies are sitting on huge piles of cash. Case in point - Apple ended the quarter with $32 billion in Cash equivalents/readily available cash including Net receivables. All the big banks reported gigantic earnings and are sitting on piles of cash.

If these Cash machines are not buying debt or are not investing, and if the "markets are right" then the federal /Fannie Mae/Freddie Mac/state and local debt are bad investing options. That could be one reason why the Fed, which loaded up on debt in excess of a trillion dollars, wants to continue loading up. It is clear where the Fed money is ending up- in the coffers of the big corporations which are all too happy with the scenario. Yes, liquidity helps the market- makes the money flow to the market participants. Unfortunately the Fed Debt is socializing the pain, but capitalizing the gain.

The shell game is too obvious- Fed "effectively" prints and gives the government money by buying debt, and gives an easy way for banks to make money by banking with the Fed. With huge long-term debt on its balance sheet, will the Fed raise rates and risk taking a hit on its assets? One more sign that the rates will be low for a long, long, time.

Saying Recovery Has Slowed, Fed to Buy U.S. Debt - NYTimes.com: "Federal Reserve officials, acknowledging that their confidence in the recovery had dimmed, moved again on Tuesday to keep interest rates low and encourage economic growth. They also signaled that more aggressive measures could follow if the job market and other indicators continued to weaken.

...

From January 2009 to March 2010, the Fed bought $1.25 trillion in mortgage-backed securities and about $175 billion in debt owed by government agencies, primarily the housing finance entities Fannie Mae and Freddie Mac. The Fed had planned to allow the size of that portfolio to shrink gradually as the securities matured or the debts were prepaid.

Instead, the Fed will now reinvest those principal payments in longer-term Treasury securities. (The central bank said it would continue to roll over its holdings of other Treasury securities as they mature.)

The money involved is unclear. In March, the Federal Reserve Bank of New York estimated that at least $200 billion of the mortgage-related securities and debt would mature or be prepaid by the end of 2011...."