Wednesday, July 8, 2009

QE to date...

From the FT (via a poster on Delong's Semi-Daily Journal):


The US Federal Reserve is roughly halfway through completing its planned purchases of mortgage and Treasury debt, which constitutes its quantitative easing programme, writes Michael Mackenzie in New York.

So far, the Fed has bought $197.7bn of government securities of a planned $300bn. Purchases of US agency mortgage backed-securities run at $621.6bn, against a target of $1,250bn by the end of the year. The central bank has purchased $96.8bn out of a planned $200bn in agency debt.

The Fed’s buying has not prevented either Treasury yields or mortgage rates from rising, complicating efforts to provide relief for homeowners and other long-term borrowers.

Following the path of higher long-term Treasury yields, the coupon for 30-year mortgages rose above 5 per cent last month, up from under 4 per cent in April.

The recent rise in rates, which accelerated in early June, sparked expectations among some bond traders that the Fed would increase its planned purchases of US Treasuries.

In March the Fed announced its target of buying $300bn in Treasuries and also raised its planned purchases of mortgages from $500bn to $1,250bn and doubled its planned agency buying to $200bn.

The scope of the Fed’s QE programme has aroused concerns it will nurture higher inflation and debase the currency. At its June policy meeting, the Fed stuck to its QE targets and said it would “continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets”.

With long-term rates having eased back and recent Treasury auctions attracting strong foreign buying, the central bank has some breathing room for now, say analysts. Should credit conditions deteriorate later this year or the economy’s recovery falter, the Fed may step up its purchases of Treasury debt.

(end quote)

This would seem to contradict Sumner..."raising its planned purchases of mortgages from $500bn to $1,250bn" is not nothing. He's a U of Chicago grad, so I should have known better.

Still, the question remains -- Why has the Fed only bought back $200 billion in treasuries? We're in the 18th month of recession. The economy still coughed up half a million jobs last month. If buying $200 billion in Treasuries has not ignited inflation or created jobs, why doesn't the Fed buy another $400 billion. (Or $2 trillion?) And why didn't they start doing this last November, rather than wait until this March? And buying only $200 billion over the past four months doesn't strike me as being all that fast. They should pull back the moment inflation hits 5% and employment starts jumping by half a million/month, not while we've had actual deflation in the total CPI over the past 12 months, when the 5 year TIPS spread suggests inflation at 1.3%/year over the next five years, and while the dollar is still stronger vs. most other currencies than it was last summer. Makes no sense to me whatsoever. It still smacks of a Fed that has been waaay too tepid, almost glacial...

And I just don't know what to make of comments like this: "The scope of the Fed’s QE programme has aroused concerns it will nurture higher inflation and debase the currency." But as you can see in the post below, if anything, the dollar is strong at the moment, and this clearly poses a risk as well. Plus, other countries who do not have the US's exorbitant privilege are worried about their falling currency values, with the only difference being that most every other currency has fallen against the dollar since the start of the crisis, lending them some justification.

What do others think?

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