Here is the key portions of the FOMC statement:

“Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months.”

“The pace of economic recovery is likely to be more modest in the near term than had been anticipated.”

“Inflation is likely to be subdued for some time.”

“Exceptionally low levels of the federal funds rate for an extended period.”

“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

Note that this is not quite QE2, so lets call it QE 1.5.

Also of interest: Hoenig voted against . . .

Category: Bailouts, Federal Reserve, Fixed Income/Interest Rates, Inflation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

34 Responses to “FOMC: QE1.5 Begins”

  1. call me ahab says:

    The pace of economic recovery is likely to be more modest in the near term than had been anticipated

    anticipated by whom?

    these guys are just aren’t that bright- are they?

    and I like that they think they can create prosperity by buying Treasuries-

    modern alchemy indeed

  2. Robespierre says:

    ” 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. ”

    There goes the timely unwind of their balance sheet…

  3. Robespierre says:

    “Purchases will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions via the Desk’s FedTrade system. The exact list of securities eligible for purchase will be made available at the beginning of each purchase operation. ”

    Treasury -> PD -> Fed

    Why do they need the PDs?

  4. X on the MTA says:

    this is going to be murder for securities like this. (based on the 30-2YCMS spread). Ugh, somehow I am not surprised that I saw 4 issues like this fly by my desk last week. This kind of stuff makes me feel ashamed to work in finance.

  5. dead hobo says:

    That’s pretty lame. No new printing. I suppose there are ways to focus the cash to assist 2010 bonus flows if they want to have a twofer and prop the markets a little on top of the refi. What are the dollar flows involved with respect to maturities per month? Anything more substantial than normal FOMC background noise?

  6. dead hobo says:

    call me ahab Says:
    August 10th, 2010 at 2:46 pm

    and I like that they think they can create prosperity by buying Treasuries-

    reply:
    ———–
    Where do you think big eyed friendly unicorns come from?

  7. obsvr-1 says:

    The FED already jumped into the deep end by buying up MBS to the tune of 1.2T — the balance sheet sitting at 2T or 1/7 of the N Debt — they can not be in a position of tightening so they have nothing else but to recycle the $ on expiration of assets while they stall in the hope of some magic recovery to appear

  8. Mannwich says:

    And meanwhile, on Main Street, in reaction to this “news”, the deer is still stuck in the headlights.

  9. NoKidding says:

    If they keep driving the 10Y down, the massive wave of mortgage refis under 4pct will clear out the non-defaulting parts of the MBS they hold. With the rollover, they are converting their mystery RE exposure to riskless treasuries plus known losses, completing the process of sucking poison from the big banks.

    There will be no bailout for small banks, nor the populace, nor the market.

    Holding MBS was to frightening for them. They live in a world of massive principal, low yield, no risk. How can people believe they want to buy equity in corporations?

  10. VennData says:

    The new QE 1.5! aka “Someone’s Getting Screwed”

    And, if you sell now, your trading ticket will be hand delivered to you by Jodie Fischer.

    Download it, today!

    (NOTE: to receive Jodie, please disable virus protection)

  11. James HPCP says:

    SGM, CC, and DRE “for an extended period.” SGM= Slow Growth Mode, CC=Cheap Capital DRE= Declining Real Estate

  12. JustinTheSkeptic says:

    Me feels like the boiling water is getting hotter…ah! but it feels so good to Froggy. Problem is – Bernanke is in the water with us. Not a clue on what to do except save his buddy bankers!

  13. cym says:

    I may not be understanding this correctly, but won’t this eventually increase mortgage rates? Who’s going to hold mortgage debt now?

  14. “Who’s going to hold mortgage debt now?”

    cym,

    what do you think “Pension Funds” are for?

  15. dead hobo says:

    cym Says:
    August 10th, 2010 at 3:58 pm

    I may not be understanding this correctly, but won’t this eventually increase mortgage rates? Who’s going to hold mortgage debt now?

    reply:
    —————
    That’s the really fun part of manipulating bond rates down. Eventually they rise and bond values fall. Bernanke is actively and proudly and openly creating a bond bubble that he probably thinks will cause no problems when rates eventually rise to more historic levels. Or maybe he thinks he can fix the problems that arise when his bond bubble bursts with new magical unicorns.

    In truth, when the bond bubble eventually bursts, he will probably notice his pants are on fire and decide the best way to deal with it is by pissing on his own leg. If anyone notices it, he plans to call it heroic, while trying to draw attention from the fact he did the Munchhausen thing and started the fire himself. Or maybe he will stall until his successor arrives in a few years. That might mean a flat yield curve of 0.0% is ahead soon. Find me a textbook that offers that possibility.

  16. constantnormal says:

    … they’re gonna need a biigger boat …

    … as this won’t keep the wheels attached much past the mid-term elections …

    … but then maybe that’s the goal here. Not to cure anything, only to kick the can past the mid-terms …

    Sounds like a Plan.

  17. dead hobo says:

    The only way this can end is massive and structural deflation and world wide depression. It will take years and degrade slowly and constantly.

    Otherwise,if market forces are allowed to return, bond bubbles will burst and fortunes beyond imagination will be lost when rates rise to market, rather than manipulated, levels. This will hurt, but it won’t be a permanent condition managed by benevolent government unicorns, such as what we are looking at now.

    Today we have a reversion to mean and commodity inflation. Tomorrow and beyond, the only way to avoid a bubble burst is the systematic destruction of the value of all assets. How do you think the Fed will manage that? This isn’t QE2, it’s Japan 2.0, only China has yet to be heard from from their bubble burst.

    The Fed’s new challenge: manage long term rates low forever or allow them to rise while providing a solution for the problem manufactured low rates created.

  18. “The only way this can end is massive and structural deflation and world wide depression. It will take years and degrade slowly and constantly.”

    Indeed.

  19. dead hobo says:

    I suppose leprechauns and pots of treasure will have to get involved to fix this mess, along with the rainbows and big eyed friendly unicorns. This must be the Fed’s final option. I have no doubt magical thinking will be a part of the minutes that are revealed by the Fed in a few years.

  20. louis says:

    So the next fear would be a deflationary spiral. The Fed’s actions are clearly a sign to keep proping up the creditor side. The debtor will be beat down very hard in the years to come.

  21. Mike in Nola says:

    ahab: “and I like that they think they can create prosperity by buying Treasuries-”

    Well they can create prosperity in those of us who bought lots for treasuries over the past year :)

  22. Mike in Nola says:

    Rates will eventually rise, but it could be a very long time coming. I remember reading that the Fed pegged the long bond at something like 2.5% for an extended period during and after WWII. My guess is that we will eventually get to long bond pegging, or at least buying, when the buying of 10 years doesn’t work.

    Of course, there will be plenty of treasury customers when the Euro crisis revives after main street in the PIIGS revolts against austerity for the purpose of paying bankers bonuses.

    Another factor: there is talk of how this will weaken the $ but the yen has been skyrocketing lately and the Japanese will likely soon be forced into buying dollars if they want to sell us more Toyotas.

  23. In the interest of bringing some standardization to Fed quantitative easing terminology, I’d simply clarify that today the Fed approved ‘QE Lite’ ($200 billion), and not ‘QE 1.5′ or ‘QE 2.0′ (estimated at anywhere from $1-5 trillion).

    Also, I’m not convinced that approval of QE Lite implies that the Fed will automatically go forward and execute QE 2.0. There is a huge difference between rolling $200 billion a year in MBS runoff into U.S. Treasuries, and QE 2.0. For those interested I’ve previously discussed this in more detail here:

    http://www.polycapitalist.com...

  24. Mike in Nola says:

    PolyCapitalist: what you said makes sense. The link was bad, though. Think you added some .’s. Here it is corrected.
    http://www.polycapitalist.com/

  25. constantnormal says:

    IS $200B enough to prop things up to get us past the elections?

  26. cn,

    why would you have anyconfidence that it is, merely, 200MMM?

  27. call me ahab says:

    a bit off topic- BR you can delete at your discretion- but if you do a links post today you may want to include it-

    a coming to Jesus moment for Stockman:

    Reagan Insider: ‘GOP Destroyed U.S. Economy’

    “In the past 40 years Republican ideology has gone from solid principles to hype and slogans. Stockman says: “Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses too. . .

    Today there’s a “new catechism” that’s “little more than money printing and deficit finance, vulgar Keynesianism robed in the ideological vestments of the prosperous classes”‘

    this heading to one of the segments kills me-

    the GOP should file for bankruptcy

    wow- tell me that’s not a good line

  28. Thor says:

    Ahab – off topic or not, that’s a great article.

  29. obsvr-1 says:

    call me ahab Says:

    Reagan Insider: ‘GOP Destroyed U.S. Economy’

    The US definitely needs to pull back on the war efforts — If the war is on terrorism we could do a lot more with a lot less spending. Pull the troops back from Iraq and Afghanistan — save a bunch of $$.

    Stage 3. Wall Street’s deadly ‘vast, unproductive expansion’
    — This stage is really the crushing blow and this wall street beast in concert with pull the strings on the Washington puppets is driving a huge wedge between the elites and Main street.

  30. Garrick,

    Are you, seriously, F_____n’ Crazy?

    with the Idea that the FedRes was created to “KeepPolitics out of ‘Monetary decisions’”

    See: “Give me control of a nation’s money
    and I care not who makes the laws.”
    Mayer Amschel Rothschild
    http://quotes.liberty-tree.ca/quote_blog/Mayer.Amschel.Rothschild.Quote.8BED

    at least, Good Soul, Rent an Eye, begin to See.

  31. farmera1 says:

    All I know is my head hurts.

    I feel like my head is inflating but my mood is deflating.

    My advice is to swing both ways, and keep an edgy finger on the trigger. Physical gold, farm land, commodities,oil, check, they are good to help with my sense of inflation. Lots of long term bonds (with my finger on the trigger, that is), no debt, they are good for my deflating mood.

    In the mean time, I hold high dividend stocks with good dividend coverage. Foreign stocks are appealing since it is obvious we (I’m including the FED and Treasury) have no clue where this will lead and largely the outcome is out of our (I’m including the FED and Treasury in our) hands.

    But be prepared for whatever. Going geothermal, PV cells, garden and fruit trees. I’m getting ready to rid the grid.

    Good night from way down on the farm and God bless.

  32. Mike in Nola says:

    It occurred to me that the Fed’s purchase of treasuries may actual push down yields more than by the effect of the purchases themselves. It keeps being repeated that the banks have been making easy money by giving us 0% on deposits and buying longer dated treasuries. If the Fed starts buying in the part of the yield curve that the banks have been using, they will be competing with the banks and lowering the yield in that part of the curve. To make the same yield as they have been, the banks will be forced further out on the curve.

    It also occurred to me as I was typing this that the purchases could simply be another way of subsidizing the banks. If the banks have been buying treasuries and the Fed forces down yields, the banks get an easy capital gain (just like I’m gonna :) ). The Fed may also be telling banks that it’s ok to buy even longer dated treasuries and that the Fed will cover them by pegging certain maturities at today’s rate so the banks won’t run any interest rate risk.

    Of course, this could be assigning too much intellectual prowess to the guys who couldn’t see any of this coming.

  33. @Mike in Nola, thanks for correcting the bad link!

    @Mark E Hoffer,

    The words “keep politics out of monetary policy” are not my own but straight from the Fed’s own website here:

    http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm

    If you read my article (below) you’ll see I comment on how the Fed is most certainly not immune to politics:

    http://www.polycapitalist.com/2010/08/why-qe-20-wont-be-announced-at-tuesdays.html

  34. Garrick,

    sorry for the “F____n’ Crazy”-crack..though, it was meant in a ‘Soft’-manner (if it can ever be so, in this 2-d framework)

    past that, yes, of course, it is the way the FedRes sells/advertises itself.

    Though, it doesn’t mean that it isn’t disingenuous, in the extreme.

    Simply, much as the Rothschild-Quote, above, illuminates, they (the FedRes) are, because of Congress’ abdication, as you point out, of their Constitution Powers– over the nation’s money supply (“to coin money, regulate the value thereof”)–an, eminently, Political Institution.