October 24, 2012
It was just over a month ago that the Chairsatan formalized the incorrect named QE 3, aka the open-ended QEternity, whose purpose, for now, was to increase the Fed’s balance sheet by $40 billion/month in new MBS purchases. Well, according to MarketWatch, whose previously unheard of Greg Robb is seemingly vying for the role of Jon Hilsenrath, Ben Shalom is preparing to unveil a number bigger than eternity: ” After historic changes last month, Federal Reserve officials this week will discuss a possible expansion of the size of its third round of bond buying and better ways to guide markets about future policy actions.” Just because $40 billion per month in new flow is apparently not enough, and because the market is now well below the level it was when “QE 3″ was announced.
Of course, reading the fine-print indicates nothing new, and merely confirms what we said the same day QE3 was announced: “… the central bank will consider whether to expand its bond-buying at the end of the year to take account of Treasury purchases under its Operation Twist plan that finishes at year-end.” In other words, instead of ending Twist, which it can’t as this is an incremental $45 billion in long-end “flow” added to the market each month, the Fed will merely roll it into an unsterilized program, that will expand the Fed’s balance sheet not by $40 but by $85 billion per month. Of course, those who look at the Balance sheet in terms of ten year equivalents, know this all too well already, and know that there is no way that the Fed will halt Twist in just two months without replacing it with an unsterilized program, for the simple reason that the Fed’s holdings of sub 3 year debt are on the verge of running out.
There are no pressures on the Fed for immediate action on these two fronts, economists said.In other words, nothing new as this is precisely what we explained would happen on September 13. However, it is good to know that with each passing day the Fed is boxing itself ever more into a corner, as there is no way on this earth that Bernanke will be able to unwind a $5 trillion balance sheet (which is what it will be in 2 years), without destroying every last trace of the equity (and likely) other capital markets, unless there is a concurrent bout of hyperinflation.
“I think they are reasonably comfortable with the market reaction [to QE3] and the way the economy has turned out,” said Michael Hanson, an economist with Bank of America Merrill Lynch.
Robert DiClemente, chief U.S. economist at Citigroup, noted that, in the wake of QE3, Citi’s financial-conditions index has reached its most accommodative reading since the Fed began easing more than five years ago. “At its current reading, the financial-conditions index is consistent with above-trend growth in final demand, an important prerequisite for stronger hiring and meeting policy goals,” DiClemente wrote in a note.
At the moment, the Fed is buying $45 billion of long-term Treasurys each month under its Operation Twist program, with the purchases offset by sales of shorter-term securities. Many economists think the Fed will decide to expand QE3 by that amount, and with Treasurys instead of MBS. But the announcement is not expected to come until its December meeting.