Can someone translate the FOMC statement for me.

[scose-no-doubt]

Can someone translate the doublespeak for me and also explain the implications of this

"To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature."

Are they trying to keep longer term yields low and if so doesn't that not mean that they are fighting the market who want higher yields?

 

[Martinghoul]

This time arnd (QE v1.5), they're trying to keep the size of their balance sheet constant, rather than tgt rates (which was the point of QE 1.0). What sort of impact on yields etc this might have is really for the mkt to decide.

 

[scose-no-doubt]

I think I get it. So when the banks risk free short term purchased bonds mature and they make the repayments on the MBS stuff to the fed the fed are buying up longer term bonds same bonds again? A transfer of reduced MBS liability for treasuries between the parties' balance sheets?

Did they only buy up short term treasuries with the QE program?

 

[Rhody Trader]

The Fed's QE program was largely one focused on MBS and agency debt (over $1 trln), but there was also a Treasury purchasing element to it (couple hundred billion). What the Fed has decided to do is to not allow that QE to naturally unwind, as it would if they did not reinvest principal repayments. This is in no way, shape, or form, new QE. It's just a progressive shift in their holdings from MBS/Agency to Treasury. To suggest they aren't targetting rates here is incorrect. They are maintaining the established level of QE to keep rates low.

 

[Martinghoul]

I disagree... It's a somewhat wonky and subtle distinction, but the whole point this time arnd is not addressing the "broken" monetary policy transmission mechanism (of which mtge rates are a symptom), which was the goal before. It's also not about adjusting the mix of assets on the Fed's balance sheet away from agency debt and agency MBS towards USTs. It's all about maintaining the size of the Fed's balance sheet (i.e. aggregate money supply) without introducing further excessive distortions into the mkt. To me, this subtle policy shift means that they're acknowledging the fact that US is following in Japan's footsteps in its "balance sheet recession" experience. So the latest QE 1.5, while not a big deal in and of itself, may be construed as a signal of bigger things to come (i.e. the Fed goes from "not shrinking" to "growing").

 

[Rhody Trader]

I disagree... It's a somewhat wonky and subtle distinction, but the whole point this time arnd is not addressing the "broken" monetary policy transmission mechanism (of which mtge rates are a symptom), which was the goal before. It's also not about adjusting the mix of assets on the Fed's balance sheet away from agency debt and agency MBS towards USTs. It's all about maintaining the size of the Fed's balance sheet (i.e. aggregate money supply) without introducing further excessive distortions into the mkt.

While it may or may not be about asset rebalancing (there are some theories floating around), we are in basic agreement and this is exactly why I do not consider this in any way additional QE (1.5, 2.0, QE Lite, or whatever folks want to call it). There's no balance sheet expansion, so where's the new QE? This is the Fed saying we don't want to unwind our original QE, which is exactly what would happen if don't we recycle the principal repayments.

To me, this subtle policy shift means that they're acknowledging the fact that US is following in Japan's footsteps in its "balance sheet recession" experience. So the latest QE 1.5, while not a big deal in and of itself, may be construed as a signal of bigger things to come (i.e. the Fed goes from "not shrinking" to "growing").

Agreed. While there are some structural implications to the reinvestment move in the rates market, the bigger thing for me is that it says the Fed is worried about the eocnomy. From there you can start thinking about what the next move(s) might be.

 

[Martinghoul]

Agreed on all accounts, Rhody...

 

[scose-no-doubt]

And you know they're worried about he economy because they don't think the economy has been jump started yet which is why they are re-investing the principle payments and extending the original QE?

Also what is buying up the treasuries going to accomplish? Artificially low yields?

 

[Martinghoul]

And you know they're worried about he economy because they don't think the economy has been jump started yet which is why they are re-investing the principle payments and extending the original QE?

Also what is buying up the treasuries going to accomplish? Artificially low yields?

Well, the fact that they feel sufficiently strongly to do something after so much has been done already is a signal that they're worried.

The goal is to pump the banking system (and thus the economy) so full of money that some of it actually ends up helping create meaningful economic activity.

 

[scose-no-doubt]

But how is buying up treasuries going to achieve that

 

[Martinghoul]

But how is buying up treasuries going to achieve that

When the Fed bought treasuries/MBS originally, it was done with newly created, fresh and crispy electronic money (aka bank reserves). That was the way they originally stuffed the system full of money, right? Now all they're trying to do is make sure that money doesn't come out of the banking system, as these securities redeem.

 

[MrGecko]

the Fed are sitting on a loat of bonds that pay coupons + principal when they mature. If they keep the coupons in their pockets, that represents a fall in the level of money in the system. So, to keep the level of money in the system the same, they are going to buy treasuries with the coupons and hold onto those instead of the cash.

thats my basic understanding.

 

[Martinghoul]

the Fed are sitting on a loat of bonds that pay coupons + principal when they mature. If they keep the coupons in their pockets, that represents a fall in the level of money in the system. So, to keep the level of money in the system the same, they are going to buy treasuries with the coupons and hold onto those instead of the cash.

thats my basic understanding.

Actually, they're not reinvesting the coupons, just the principal. The coupons get collected and given back to the US Treasury annually.

 

[Chartsy]

i always thought that when bonds were bought (i.e., people sold them) the money they sold for them was pretty much dumped into the banks ... am i wrong?

 

[Rhody Trader]

Actually, they're not reinvesting the coupons, just the principal. The coupons get collected and given back to the US Treasury annually.

Which does mean there will be a small running drain of monetary reserves as the Fed receives those coupons, but presumably much smaller than that represented by principal repayments.

 

[Rhody Trader]

i always thought that when bonds were bought (i.e., people sold them) the money they sold for them was pretty much dumped into the banks ... am i wrong?

If the Fed buys something from the market it creates reserves which go into the banking system and then could get lent against. When the Fed sells something, it pulls reserves out of the system, reducing the base upon which loans can be made.