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Spot on with one minor wrinkle. When the Fed "buys" a bond in QE at some nominal value, it is economic-value neutral if and only if the bond is actually worth what the Fed pays. If the Fed pays more than the bond is actually worth on a public and transparent market (for whatever reason), then it is "printing money". Since we don't have any insight into the prices being paid or the nature of assets actually being acquired it is reasonable to speculate that QE is not, in fact, economic-value neutral (IMHO).
As far as 'printing money' it looks like the do a reserve adjustment in the process and list the bonds on the H41 Factors at 'face value' so everything balances out...
"Since we don't have any insight into the prices being paid or the nature of assets actually being acquired...."
"As far as 'printing money' it looks like the do a reserve adjustment in the process and list the bonds on the H41 Factors at 'face value' so everything balances out..."
Unknown & Matt - I haven't been following in granular detail Fed POMO purchases for QE3, but I did track every single Treasury note and bond purchased by the Fed in QE2. As I recall, the prices the Fed paid for each security were subsequently published on the Fed website on a monthly basis for each tranche of purchases during that month.
raising interest rates to high levels seems to crash the economy, causing recessions and high unemployment, whilst cutting interest rates seems to increase borrowing and speculation on rising asset prices.
If interest rates remained at their historical levels subsequent to the meltdown of 08, what would the economic effect have been? Much worse, much better, or no different than it is today? How would the employment picture have shaken out? I also wonder if a less aggressive Fed would have forced more aggressive fiscal policy, and would that have had a more sustaining and thus positive economic effect than Fed tweaking?
Also, do rates follow the economy or lead it, especially relative to the period when Greenspan started his incremental quarter point moves up in November of 2004 to where we are today? In other words did the rate hikes cool economic output too much too soon, thus in part leading to the meltdown? Could we have a similar outcome once the Fed stops easing and thus starts raising rates again?
"Also, do rates follow the economy or lead it, especially relative to the period when Greenspan started his incremental quarter point moves up in November of 2004 to where we are today? In other words did the rate hikes cool economic output too much too soon, thus in part leading to the meltdown? Could we have a similar outcome once the Fed stops easing and thus starts raising rates again?"
The overwhelming number of sub-prime and Alt-A mortgages minted subsequent to the 2001 recession were adjustable rate mortgages (ARMs) and many of these were 2/28, i.e. fixed at a very low teaser rate for 2 years and then adjustable starting in the 3rd year. The objective of the homeowner was to be able to refinance out of the loan into a fixed rate mortgage within the 2 year teaser period. The onset of the floating rate resets intersected with the Greenspan Fed raising rates starting in 2004 which did not appear to have much effect at first. However, publicly traded homebuilder shares hit their high water mark by summer of 2005 and charts show they subsequently careened downhill like a sled without a rider. The homebuilders were the canary in the mine shaft.
8 comments:
Spot on with one minor wrinkle. When the Fed "buys" a bond in QE at some nominal value, it is economic-value neutral if and only if the bond is actually worth what the Fed pays. If the Fed pays more than the bond is actually worth on a public and transparent market (for whatever reason), then it is "printing money". Since we don't have any insight into the prices being paid or the nature of assets actually being acquired it is reasonable to speculate that QE is not, in fact, economic-value neutral (IMHO).
Unk,
As far as the nature I believe under current QE they are buying 85b/mo total, 45b USTs and 40b USG Agency...
The FRBNY lists the actual bonds here (USTs):
http://www.newyorkfed.org/markets/pomo/display/index.cfm?showmore=1&opertype=orig
Agency:
http://www.newyorkfed.org/markets/ambs/
As far as 'printing money' it looks like the do a reserve adjustment in the process and list the bonds on the H41 Factors at 'face value' so everything balances out...
rsp,
Bravo Mike! Terrific video!
"Since we don't have any insight into the prices being paid or the nature of assets actually being acquired...."
"As far as 'printing money' it looks like the do a reserve adjustment in the process and list the bonds on the H41 Factors at 'face value' so everything balances out..."
Unknown & Matt - I haven't been following in granular detail Fed POMO purchases for QE3, but I did track every single Treasury note and bond purchased by the Fed in QE2. As I recall, the prices the Fed paid for each security were subsequently published on the Fed website on a monthly basis for each tranche of purchases during that month.
raising interest rates to high levels seems to crash the economy, causing recessions and high unemployment, whilst cutting interest rates seems to increase borrowing and speculation on rising asset prices.
We do have some insight into the value of the assets the Fed purchases. We can look to see how much money the SOMA portfolio is earning.
If interest rates remained at their historical levels subsequent to the meltdown of 08, what would the economic effect have been? Much worse, much better, or no different than it is today? How would the employment picture have shaken out? I also wonder if a less aggressive Fed would have forced more aggressive fiscal policy, and would that have had a more sustaining and thus positive economic effect than Fed tweaking?
Also, do rates follow the economy or lead it, especially relative to the period when Greenspan started his incremental quarter point moves up in November of 2004 to where we are today? In other words did the rate hikes cool economic output too much too soon, thus in part leading to the meltdown? Could we have a similar outcome once the Fed stops easing and thus starts raising rates again?
"Also, do rates follow the economy or lead it, especially relative to the period when Greenspan started his incremental quarter point moves up in November of 2004 to where we are today? In other words did the rate hikes cool economic output too much too soon, thus in part leading to the meltdown? Could we have a similar outcome once the Fed stops easing and thus starts raising rates again?"
The overwhelming number of sub-prime and Alt-A mortgages minted subsequent to the 2001 recession were adjustable rate mortgages (ARMs) and many of these were 2/28, i.e. fixed at a very low teaser rate for 2 years and then adjustable starting in the 3rd year. The objective of the homeowner was to be able to refinance out of the loan into a fixed rate mortgage within the 2 year teaser period. The onset of the floating rate resets intersected with the Greenspan Fed raising rates starting in 2004 which did not appear to have much effect at first. However, publicly traded homebuilder shares hit their high water mark by summer of 2005 and charts show they subsequently careened downhill like a sled without a rider. The homebuilders were the canary in the mine shaft.
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