Fed announced it will buy another $10 billion per month in securities. That means monthly purchases down to $65 billion from $85 billion. That means $240 billion of securities remain in the economy, earning interest each year.
At an average of 3% coupon, that means the economy GAINS about $7.5 billion in income. Gaining income is NOT tightening or removal of stimulus.
If the Fed does a $10 billion reduction every month now, that will start to add up quick. For every $10 billion of reduced purchases that equates to about $3.6 billion of new income to the economy. Do the math.
It's stimulus, not removal of stimulus.
The market's got it all wrong.
11 comments:
A stimulus for Wall Street perhaps, not so much for Main Street.
The 2013 economy was largely driven by housing and by auto sales. Both seem to have weakened lately (which may or may not have anything to do with interest rates).
Meanwhile the budget deficit continues to shrink. :~/
As Mosler has pointed out in his recent blogs, it's hard to see where any growth is going to come from?
"The market's got it all wrong.
Mike - I agree with you, but as far as QE goes perception is reality. In every instance, without exception, ever since the Fed started doing QE, every time it comes to an end bonds rally.
Dan,
Mosler's been saying this for a year and he has been wrong. It's not about the deficit. The deficit represents what's left over after paying taxes, i.e. non-government savings. It's about top line spending and last year it was higher than in 2012. This year it's starting soft, but it's still early.
85 billion per month?
When $22 billion would get everyone a free college education... per year?
QE was fed buying fed like a farm subsidy pays farmers not to farm.
Now the farmers are pulling back on food against food stamps but
Still getting subsidies!!!!
Sub variable X for farmers and fed or wall street
QE amounts to replacing government debt with base money. That’s actually a move in the direction of a system advocated by both Warren Mosler and Milton Friedman: a system where the government / central bank machine issues no interest yielding liabilities at all. It just issues base money on which it pays no interest.
So we could just continue with QE for the next five years and monetise the entire debt. Any inflationary effect of that would need to be countered by extra tax of course, but it would be doable. There is a nice chart showing the greatly expanded proportion of the total money supply now made up of base money (about 20%) – see:
http://soberlook.com/2014/01/how-bank-reserves-make-gap-between.html
"For every $10 billion of reduced purchases that equates to about $3.6 billion of new income to the economy. "
And about $3.6 billion less remitted to the Treasury - widening the government deficit.
Agree as long as Treasury doesn't reduce its spending because of some debt ceiling limit or artificial concern for the 'widening deficit'.
Ralph - Thanx for that link. Very helpful. The trillions of dollars created by the Fed via QE is money the market place has not demanded, so it just pools on account at the Fed as excess reserves. The question in my mind is.... What would lead to a surge in demand for those reserves?
When the Treasury issues debt only to have the Fed buy it back in the secondary market shortly thereafter, it's as if the Treasury never issued that debt in the first place.
If the Fed simply allows the Treasury securities held on its balance sheet to mature and run off, over time it will redeem the principal for cash and instead of having a balance sheet bloated with Treasury securities and MBS, its balance sheet will be bloated with cash. At that point, the only way the the Fed could conduct monetary policy -- i. e. target interest rates -- would be by changing the over night and/or term interest rate on excess reserves.
Meanwhile, corporate balance sheets are also bloated with about $2 trillion of corporate cash. But as private sector lending expands over time, the 10% of reserves required to sustain loan origination could be drawn down from the $2.4 trillion in corporate excess reserves currently held on account at the Fed. To be clear, banks don't lend out those excess reserves, but they do need to hold 10% of loan value as "Required Reserves" with the Fed.
So, the widely held fear among fixed income traders that the fed will one day have to sell off its hoard of Treasury and MBS holdings and sharply drive up interest rates may not ever come to pass. So, what does the Fed do with all those cash reserves? Should the Fed stand ready to lend those reserves to banks as a way to gauge loan demand? Not likely with so much in excess reserves plus existing cash on corporate balance sheets. Maybe the cash left over after Treasury holdings at the Fed have been redeemed should be used for infrastructure development?
Ed, The bonds that the Fed purchased will run off over time and mature if the Fed stops buying. The reserve balances will slowly come down as treasury makes redemptions. In operation, the treasury will simply roll over most of the debt too, so that means the private sector effectively takes the bonds back over time as new issues replace the old. And the reserve balances are extinguished when the treasury pays the Fed. They are just destroyed and evaporate into nothing.
"For every $10 billion of reduced purchases that equates to about $3.6 billion of new income to the economy. "
And about $3.6 billion less remitted to the Treasury - widening the government deficit.
Showing that QE is functionally a tax, as Warren says. Although I would say that it is the canceling of a subsidy in that the interest payments are not necessary operationally.
This QE is BAD period imo... reduces interest payments from govt to non-govt... and as long as it exists it continues to erode xfers as long as the Fed is buying any amount of USTs or MBS....
They need to stop this and let the portfolio run off thru regular redemptions and let households/savers get access to the higher yielding risk free bonds again imo... rsp,
This is one of those tricky short run-long run arguments for us...In the short run, we know that QE removes interest income and acts as a unnecessary tax, but we dont want to make it seem like we are supporting the federal subsidy to bond holders.
I think we always need to emphasize that there is no particular reason for the US government to be issuing long term, interest bearing debt at all. As WM says, the ag demand affect removal of interest income should easily be offset with a tax cut.
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