quantitative easing question?

Am I right in thinking theat the mechanism works thus: by buying trasuries, the fed injects funds to the treasury, which controls the flow of money in the money markets. when the t4easury has more money, it has more to inject to the money markets, bringing down effective rates.

However, is the treasury obliged to inject this new fed money into the money markets ? ie will the fed's actions have the desired effect? or do the treasury act on the fed's orders ?

Further to this, wouldn;t someone have just bought the treasuries anyway, so that the treasury just end up with the same amount of money? or are the fed buying up treasuries that will no omnger be on the market.

sorry for long message, I did engineering at college I'll answer question on fluid dynamics in return

brut said:

Am I right in thinking theat the mechanism works thus: by buying trasuries, the fed injects funds to the treasury, which controls the flow of money in the money markets. when the t4easury has more money, it has more to inject to the money markets, bringing down effective rates.

However, is the treasury obliged to inject this new fed money into the money markets ? ie will the fed's actions have the desired effect? or do the treasury act on the fed's orders ?

Further to this, wouldn;t someone have just bought the treasuries anyway, so that the treasury just end up with the same amount of money? or are the fed buying up treasuries that will no omnger be on the market.

sorry for long message, I did engineering at college I'll answer question on fluid dynamics in return

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I thought that "Quantitative Easing" was a technical term for "printing money".

Presumably we'll get free wheelbarrows to use like the German people did in the 1930s

quantitative easing a puzzle for traders.

At least someone on t2w has got the topic.

Let me tell my life’s first against the fundamentals trade. On last FOMC when US 10 yr (futures) rallied for 5 handles within few seconds, I tried to short German bund (Futures) after every green candle and ultimately ended with losing 100 ticks with 2 lots.(although few days before I had a view that bund will break 126 level and may reach to make life high!!!!!!!!!)

So the crux of the matter is if you do not give importance to the news u can be in trouble.
Let me put my certain observations about quantitative easing.
First of all difference between conventional and non conventional QA tools.
Conventional tools are Open market operation by buying treasuries, providing loans through discount window operations. The simplest way of conventional QA is reducing interest rates. The last resort is printing money. Unconventional ways are the ones which are adopted in special situations like current financial crisis. TALF,TAF, Asset backed commercial paper money market mutual fund liquidity facility ,money market investor facility, commercial paper funding facility etc. To know about this unconventional ways just go on FRB: Monetary Policy. Just go through policy tools.


Adding something more to the topic. Actually Fed is not doing quantitative easing but it is actually doing credit easing. In USA lenders have lost faith in debtors so what Fed is doing is that it is buying all that risky assets and getting risk on its balance sheets. What fed found out was that market was not ready to lower rates for the end consumer. So to make the markets CORRECT Fed decided to go for buying treasuries because there are certain long term rates which are derived by taking treasury yield as its base.

My response to brut’s question. I believe (If I am wrong then correct me) that Fed is going to buy treasuries from open market just like UK central bank. So treasury department does not come into the picture. The idea is to force the market participants to reduce the yields of 10 year note. Answering brut’s question of buying of treasuries by some one else, the matter is once Fed came up with the idea that it may buy treasuries, then 10 year note rallied like anything and infact many participants were bullish on 10 year note in december2008. But then after that they did not find any strong desire of fed to buy treasuries. So 10year note started going down. It was as if market was challenging the fed to make real steps rather than making talk. So finally fed also retaliated on market by taking action.

:idea:Now here comes the BIG question. IF fed decided to buy treasuries in mid march then why there is small rally in Dow Jones? Is it because market participants are happy not to listen any major bad news? And if equity markets are thinking that economy is recovering then why fed has started its major QA step now. My fear is, probably fed might have very weak 2009 economic projections and fed is taking preventive steps. Are current l equity markets rallying like a dead cat’s bounce???????

The market always calls the bluffs (of the Central Banks).

If the CBs want to buy up all of the supply of treasuries like the Bunker Hunts did with Silver in 1980, they're welcome to them.

QE will not work since the problem is one of excessive debt in the system due to a persistent asset price bubble since the 1980s.

In the unlikely event that QE works, you will have a readily available supply of toilet paper.

brut said:

Am I right in thinking theat the mechanism works thus: by buying trasuries, the fed injects funds to the treasury, which controls the flow of money in the money markets. when the t4easury has more money, it has more to inject to the money markets, bringing down effective rates.

However, is the treasury obliged to inject this new fed money into the money markets ? ie will the fed's actions have the desired effect? or do the treasury act on the fed's orders ?

Further to this, wouldn;t someone have just bought the treasuries anyway, so that the treasury just end up with the same amount of money? or are the fed buying up treasuries that will no omnger be on the market.

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The Fed is buying Treasury securities (and agency paper and mortgage paper) from the open market, thus putting the money into the economy. The Treasury already got its money when it issued the debt in the first place.

By purchasing Treasuries the Fed is doing what some call monetizing the debt. When the Treasury issues paper is actually reduces money supply, just as it does when it takes in taxes (it increases money supply when the gov't spends money). So if you look at gov't impact on money supply it's generally net neutral as the gov't borrows the amount of the budget deficit.

When the Fed buys securities on the market - which it has done for years - it is increasing money supply. When it sells securities it reduces money supply. The difference between what the Fed has traditionally done and what it's looking to do now is a question of maturity. Normally they work in the T-Bill market to keep the Fed Funds rate at its target. Now they are venturing into T-Notes.

Just to echo something Jagat said, by buying Bonds at the longer end of the curve, they will be reducing their yield - that is, how much "interest" they earn; the general idea is that banks (and "shadow banks") will be more inclined to lend to other banks etc. if the alternative yield on 10yrs is so low... so by buying 10yrs, the fed are making interbank lending more attractive (i.e. LIBOR should fall).

Not to mention taking the toxic stuff off the books (which IMO is pretty key), reducing mortgage rates to increase disposable income, etc...

fibonelli said:

QE will not work since the problem is one of excessive debt in the system due to a persistent asset price bubble since the 1980s

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1980s is that all. This is a problem since the 1700's. A good example of what asset price inflation, money suply, excessive debt etc... can do to a country is John Law and his Mississipi Company or "Mississipi Bubble", during the French reign of Louis XIV. There is a nive passage in Trader Vic and or have a look at John Law (economist) - Wikipedia, the free encyclopedia

Rhody Trader said:

Normally they work in the T-Bill market to keep the Fed Funds rate at its target. Now they are venturing into T-Notes.

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Correct. They are now buying long term bonds with fresh money they print to lower longer term interest rates and thus inflation expectations in an attempt to motivate Banks to lend longer term and also help mortgage repayments.

At the same time they are debasing the dollar and longer term interest rates should start going up soon after the money hits the street.

I don't like this quantitative easing idea at all. Sounds like a desperate, last resort attempt, before everything gets too nasty.