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Thursday, September 13, 2012

QE3 announced, ho-hum


Much ado about nothing. More asset swapping, nothing that might boost effective demand directly, and low probability it will have much of an effect indirectly either — or to increase NGDP by increasing inflation rate.

Board of Governors of the Federal Reseve System
For Immediate Release
September 13, 2012

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18 comments:

  1. Ryan HarrisSeptember 13, 2012 at 2:57 PM

    All the recent fed research says the message is more powerful than the actual intervention so I'm sort of confused why they insist on targeting a quantity of bonds to purchase instead of setting a target benchmark rate and publicizing the target.

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  2. Matt FrankoSeptember 13, 2012 at 3:08 PM

    "ho-hum"

    Sums it up in 2 words Tom.

    Although that will not stop the MSM from talking about it non-stop...

    rsp

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  3. GeoffSeptember 13, 2012 at 3:15 PM

    "might not boost demand"

    It could actually be doing the opposite. It may be lowering demand as it drains interest income out of the economy.

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  4. AndyCFCSeptember 13, 2012 at 3:34 PM

    Thought they are buying MBS not Bonds... taking out the the trash?

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  5. mike normanSeptember 13, 2012 at 4:09 PM

    And for whatever reason, it is raising commodity prices, which will mean higher inflation and lower real growth.

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  6. beowulfSeptember 13, 2012 at 4:15 PM

    "Thought they are buying MBS not Bonds... taking out the the trash?"

    The Fed needs to buy up ALL the mortgages and then unilaterally refinance each to 30 year, 2%fixed (promising to finance new mortgages at the same terms). Lower interest rates means a higher sales price can be capitalized . If that doesn't restart the real estate market, nothing will.

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  7. EdmundSeptember 13, 2012 at 4:43 PM

    All the recent fed research says the message is more powerful than the actual intervention so I'm sort of confused why they insist on targeting a quantity of bonds to purchase instead of setting a target benchmark rate and publicizing the target.

    All intelligent people have been asking themselves this for years. I'm starting to suspect they're insane.

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  8. AndyCFCSeptember 13, 2012 at 4:45 PM

    "And for whatever reason, it is raising commodity prices, which will mean higher inflation and lower real growth"

    Inflation hedging ironically causing the inflation itself Mike

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  9. AndyCFCSeptember 13, 2012 at 4:46 PM

    Beowulf sounds like a type of debt jubilee?

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  10. Tom HickeySeptember 13, 2012 at 5:54 PM

    And for whatever reason, it is raising commodity prices, which will mean higher inflation and lower real growth.

    Expectation of higher inflation "down the road" is driving up inflation hedge like gold, commodities and equities. Should put pressure on strong currencies like the CHF and Yen, while lowering the USD relatively.

    But interest rates-yields won't rise on govts because the Fed doesn't want them to, whatever the market thinks about it. Rates-yields will likely rise on more speculative debt tho.

    The Fed's buying MBS will also carry over into lower mortgage rates, which the Fed also wants as it desperately tries to inflate housing prices to wage the dog's tail and create the illusion of recovery in housing.

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  11. Tom HickeySeptember 13, 2012 at 5:58 PM

    beowulf If that doesn't restart the real estate market, nothing will.

    As Dr. Housing Market has been saying for a long time, the housing market is sensitive to income growth and debt. Income is flat, deleveraging is still in force, and student debt is building to unprecedented levels. Young people are postponing marriage and families, and this is more the driver of the housing market than mortgage rates.

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  12. Tom HickeySeptember 13, 2012 at 6:01 PM

    All the recent fed research says the message is more powerful than the actual intervention so I'm sort of confused why they insist on targeting a quantity of bonds to purchase instead of setting a target benchmark rate and publicizing the target.

    All intelligent people have been asking themselves this for years. I'm starting to suspect they're insane.

    No, not insane. The Fed fears that if it uses price instead of quantity to influence the yield curve, there will be a backlash against intervention in the market setting rate. Of course, anyone who knows anythings knows is an illusion, but the Fed is not going to act against widely held belief and misperception.

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  13. ggmSeptember 13, 2012 at 6:04 PM

    Agree with Ryan and Edmund. It seems like the Fed is taking a real risk for no real gain by politicizing Fed operations this way. Now we have the Red Team cheerleaders calling for Bernanke's head and the Blue Team cheerleaders trying to canonize him.

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  14. JoeSeptember 13, 2012 at 7:32 PM

    I understand the asset swapping aspect, but since this time it's MBS that the fed is buying.

    Are these all held by banks?

    And now since the banks will now hold reserves instead of MBS, won't they try to buy interest earning assets with those?

    So overall, is this just a way to get shitty mortgages off the books of the banks?

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  15. JoeSeptember 13, 2012 at 8:01 PM

    follow up to my earlier questions. When the mbs's were originally made, they started as a loan, ie money created on the spot by the banks. It's not an nfa for the private sector. So then the loan gets bundled up with a bunch of other loans and you get the MBS. So when the fed is swapping the MBS for reserves, aren't these reserves nfa's? With QEII it was easy to see that one form of govt liability was swapped for another, but since this is MBS, it seems different.

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  16. widmerpoolSeptember 13, 2012 at 8:07 PM

    By what mechanism does buying mortgage securities actually lower mortgage rates?

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  17. Tom HickeySeptember 14, 2012 at 1:24 AM

    By what mechanism does buying mortgage securities actually lower mortgage rates?

    Same as the GSE's taking on the mortgages from the banks. Takes it off the bank's books so they can then (theoretically) extend more mortgages. Supports demand, but doesn't create demand. Only credit worthy customers wishing to buy properties can do that, and QE doesn't.

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  18. Matt FrankoSeptember 14, 2012 at 3:06 PM

    "By what mechanism does buying mortgage securities actually lower mortgage rates?"

    The FRBNY keeps lowering their bid for the MBS and the prices for the bonds keep going down... then next month they can buy even more at the ever decreasing prices as they are buying a fixed $ amount of bonds per month... (scale down buying).... this way they can "get a good deal for the taxpayers" see the NYT story here:

    http://www.nytimes.com/2011/01/11/business/economy/11fed.html?pagewanted=all&_moc.semityn.www

    This has the unintended effect of actually raising interest rates but that is besides the point for morons....

    The Fed can make even more money if these trades are profitable and they can return even more balances to the Treasury for deficit reduction...

    I think we've seen the lows on Mortgage rates for a while...

    rsp,

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