January 24, 2025 | In the strange world of Washington, speaking truth in public is a capital crime. Truth is often revealed accidentally. Sometimes truth emerges in a response to a question that somehow is asked, but the reply goes unnoticed. In other cases, cowed and confused media are held spellbound by Washington pharisees, never daring to ask an obvious yet impertinent question of some high official. Yet whether asked or ducked, the questions remain.
Our favorite example of questions not asked is the relationship between the Big Media and the Federal Reserve Board. Despite the fact that some of the most senior members of the media in Washington “cover the Fed,” they never ask any meaningful questions about the most important aspect of monetary policy, namely the changes in the balance sheet of the central bank and related “open market operations.”
So completely vacuous has the media discourse with the Fed become that several fellow scribes have privately confessed befuddlement and frustration with their colleagues, people who seemingly cannot report on the obvious. For example, since the Fed is supposedly reducing its balance sheet, why has the Board basically maintained the level of reserves? And just where is the “floor” of total reserves in terms of dollar amount and the average rate?
If someone in the Big Media was actually prepared to ask such questions, the response might surprise the questioner and also the public at large, which is why we don’t ask the question. In order to cover the Fed and actually be allowed to ask questions during the FOMC press conference, you cannot ask Chairman Powell any embarrassing questions that he is not briefed on in advance. And virtually every question the media asks Powell is couched in the happy talk of “monetary policy” so as not to roil the equity markets.
In days past, members of the media who “covered the Fed” actually had to read the statistical releases prepared by the staff and thereby discern the direction of Fed policy. In the world of post-2008, however, the Board has become much more overt in trying to steer public "expectations" (and related media) with verbal direction that often times is at odds with the policy suggested by the data. Under "quantitative tightening," the balance sheet is shrinking yet reserves are not falling. Does this suggest a divergence between guidance and data? You won't read any critical analysis of Fed policy in The Wall Street Journal.
What sort of questions should the media ask the Fed? They might start by reviewing the questions published before each FOMC meeting by Bill Nelson at Bank Policy Institute. But even more important, stalwart reporters (h/t Alex Harris) might take a look at the questions that the US Treasury asks of primary dealers about the Fed’s balance sheet. These questions are sent to primary dealers for the quarterly refunding discussions. For example:
Please provide your views regarding potential changes to the size and composition of the Federal Reserve’s SOMA portfolio.
When do you expect the Federal Reserve to cease redemptions of Treasury securities from the SOMA portfolio?
Do you expect the Federal Reserve to begin purchasing Treasury securities with proceeds from principal payments received on its MBS holdings? If so, when would such purchases begin?
When do you expect the Federal Reserve to begin open market operations to grow the size of its balance sheet in order to maintain ample reserve balances?
What Treasury security tenors do you expect the Federal Reserve to purchase and why? What if any concerns do you have about money market functioning during such changes to the Federal Reserve balance sheet?
That last question is a doozy. And yet, for some reason, none of the anointed members of the financial media seem to be willing or even able to ask Fed Chairman Jerome Powell the most obvious questions about Fed monetary policy. To make things easier, perhaps the Fed covering media could simply ask the questions posed by the Treasury to primary dealers? This final query is especially of note:
Please discuss how foreign demand for Treasury securities has evolved over the last year. What have been the recent drivers of demand for Treasury securities by foreign official sector and foreign private sector entities? How is demand likely to evolve over the next year? Please elaborate.
The Treasury questionnaire for primary dealers certainly seems to merit attention. How do members of the media get a copy of the bank responses to these questions? Hmm? Now that is a good question.
Meanwhile on Capitol Hill, the written responses by Treasury Secretary nominee Scott Bessant provide some insights on where single-family housing and the possible release of Fannie Mae and Freddie Mac stand in the priorities of the Trump Administration. Basically, Bessent seems to be distancing the Trump Administration from the idea of release from conservatorship “as is” and is leaving all options open. Sound like Trump I? Yeah. Ponder these questions and responses:
Question 69: If you decide to end the conservatorships of Fannie and Freddie, will you seek to do so through administrative action or through legislation by Congress? In your view, what conditions must be met before ending the conservatorships? Are there any congressional actions that must take place to end the conservatorships?
Answer: If confirmed, I look forward to exploring all options available and being briefed by Treasury staff and all interested parties on the status of Fannie Mae and Freddie Mac, and if confirmed I will commit to acting in a manner that is thorough and thoughtful, and consistent with the law. If any legislative changes are warranted, I commit to working collaboratively with Congress in this process.
Question 70: In your estimation, how long would it take to meet any required preconditions and complete the process of releasing Fannie and Freddie from conservatorship?
Answer: I look forward to being briefed by Treasury staff and all interested parties on the current status of Fannie Mae and Freddie Mac, and if confirmed, I will commit to carefully assessing and instituting a process if it is deemed appropriate.
Question 71: Should the Trump Administration bar any individuals or entities who would financially profit from the end of Fannie and Freddie’s conservatorships from discussions and decision-making about potential release?
Answer: If confirmed, I look forward to hearing from a wide and diverse range of interested parties in seeking the best path for Fannie Mae and Freddie Mac in compliance with applicable law as set by Congress.
Question 79: During the 2008 crisis, the federal government bailed out Fannie and Freddie, vindicating widespread investor views that the GSEs were backed by an implied government guarantee despite their lack of an explicit government guarantee.
A. If the conservatorships are ended, would you support extending a full faith and credit guarantee to Fannie and Freddie, their securities, or their debt? In your view, would doing so require congressional action or could FHFA or the Treasury extend such a guarantee through administrative action?
B. Should Fannie and Freddie be charged a fee for any government guarantee, whether explicit or implied? If so, how much should that fee be and how would such a fee affect mortgage costs?
Answer: It is my understanding that legislation from Congress would be required for an explicit, paid-for guarantee backed by the full faith and credit of the government. If confirmed, I look forward to being briefed on options regarding a government guarantee.
Question 82: If Fannie and Freddie were released from conservatorship, do you anticipate that credit ratings for their products would be downgraded? If so, how much do you estimate that their ratings would be downgraded by and how would that rating downgrade affect investors’ willingness to purchase their securities? How would these changes affect mortgage rates for homebuyers?
Answer: If confirmed, I look forward to working with all interested parties, including the Director of the FHFA to understand the potential implications of a release from conservatorship of the GSEs, including potential impacts on their credit ratings and the downstream effects.
Reading these questions from the Senate Finance Committee, the false narrative about releasing the GSEs from conservatorship "as is" seems to be unravelling. Is the blatant "pump & dump" operation in the securities of the GSEs that has been ongoing for months about to end? Notice that Fannie Mae seems to have peaked near-term and volumes are falling. Will you hear anything about the deliberate manipulation of GSE stocks in the Big Media? Not a chance.
Source: Google Finance (01/23/25)
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