Have a look at these first two charts, then scroll down:

 

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Ron Griess of The Chart Store starts with these two as he chronicles the Fed’s actions. He reprints excerpts of their press releases, comparing what was said with charts of various asset classes before and after QE to see actually happened thanks to Fed intervention.

I found it highly informative . . .

 

 

QE1
Release Date: November 25, 2008
For release at 8:15 a.m. EST

The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)–Fannie Mae, Freddie Mac, and the Federal Home Loan Banks–and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters. Further information regarding the operational details of this program will be provided after consultation with market participants.

Release Date: March 18, 2009
For immediate release

…To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

Release Date: September 23, 2009
For immediate release

…To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.

Release Date: November 4, 2009
For immediate release

…To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.

Release Date: March 16, 2010
For immediate release

…To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month.

QE - 1 Ends
QE -2 Hinted
Release Date: August 10, 2010
For immediate release

…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.

QE – 2 Begins
Release Date: November 3, 2010
For immediate release

…..To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

Release Date: June 22, 2011
For immediate release

…..The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings.

QE – 2 Ends
Operation Twist Begins 
Release Date: September 21, 2011
For immediate release

…..To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.

Release Date: June 20, 2012
For immediate release

…..The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

We have applied the dates gleaned from the above news releases to 7 charts.  We have refrained from adding any comments to the charts so that the reader can draw his/her own conclusion.

 

More charts — 30 Year, CRB, Copper, Crude Oil, Gold — after the jump

 

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

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.

10 Responses to “Reviewing QE(s) and Operation Twist”

  1. RW says:

    Pretty clear what the effect of QE is but the cause remains unclear to me. Purchases of bonds by the Fed, large though it may be, is small relative to the overall size of the treasury market so there must be other components involved but how to tease them out and assess their implications for investment …

    For example, this paper teases out some of those effects and makes it clear that both QE1 and QE2 were not the same with the implication that QE3, if it begins as expected, could have a different impact than either of its predecessors. As always, it depends on which sandbox you play in.

    ABSTRACT We evaluate the effect of the Federal Reserve’s purchase of long-term Treasuries and other long-term bonds (QE1 in 2008-09 and QE2 in 2010-11) on interest rates. Using an event-study methodology, we reach two main conclusions. First, it is inappropriate to focus only on Treasury rates as a policy target, because quantitative easing works through several channels that affect particular assets differently. We find evidence for a signaling channel, a unique demand for long-term safe assets, and an inflation channel for both QE1 and QE2, and a mortgage-backed securities (MBS) prepayment channel and a corporate bond default risk channel for QE1 only. Second, effects on particular assets depend critically on which assets are purchased. The event study suggests that MBS purchases in QE1 were crucial for lowering MBS yields as well as corporate credit risk and thus corporate yields for QE1, and Treasuries-only purchases in QE2 had a disproportionate effect on Treasuries and agency bonds relative to MBSs and corporate bonds, with yields on the latter falling primarily through the market’s anticipation of lower future federal funds rates.

  2. The Window Washer says:

    Ben went with the wealth effect distraction twice and congress didn’t put it’s house in order.
    So now…
    Bite the pillow he’s realy f…ing means it, this is going to take a while and it’s going to hurt.

  3. The Window Washer says:

    “he really”

    Barry, please get us spell check. That was almost witty the first time.

  4. jb.mcmunn says:

    I don’t get the math for any new interventions. The Fed has sold pretty much all of its short term stuff, so Twist can’t really go on much longer. They already own a huge chunk of the long end. How much more can they buy before they are 100% of the 10-30 year bond market? So maybe they buy MBS as well.

    And what will they use to sterilize this?

  5. iamtheonepercent says:

    The Fed has been sterilizing the growth of money supply in its operations by selling short-term securities. The Fed’s overall balance sheet has not grown in the last year.

    However, there is the market dynamics question: as jb.mcmunn notes, the Fed has acquired a significant part of the 10-30 US treasuries market. However, there are over $6 trillion of agency securities outstanding, of which the Fed holds about $850billion. And they have pretty much signalled “we will be buying government sponsored mortgage-backed securities”. My guess is that they will continue to push interest rates in the same direction of the market – that is, lower long-term rates due to increased preference for bonds by most classes of asset holders. If the market wanted to sell long bonds from a portfolio/risk preference standpoint, I don’t think the Fed could stop rates from rising.

    However, I don’t think the problem is one of long-term interest rates. The Fed is desperately trying to get unemployment down via the tools that it has (and acquired creatively since 2008!). The problem is that money and credit creation in the household sector has been zilch, and this is the sector that can transmit money and credit into GNP (and thus employment) the fastest. The financial repression strategy has shored up banks’ balance sheets, and we have seen credit creation among corporates, who have added $700 billion in debt since 2008. However, both the banking sector and the corporates have not translated this into significant GNP growth. The banks have been shoring up their capital, rather than expanding lending (and their balance sheets), while the corporates have funneled their credit into cash, share repurchases, and dividend payments.

    I don’t think QE3, Operation Twist 2.0, or whatever we will end up calling this thing, will bring any significant change to the current economic environment of slow GNP and employment growth.

    The answer lies with the President and Congress. They need to get serious about rebuilding the income streams and balance sheets of the US population at large so that they can restart the engine of credit creation (and GNP/employment growth). Unfortunately, we are going in the opposite direction – with the Democrats playing class warfare, and the Republicans focusing on securing the investment environment and tax code for the elite.

    In terms of what Mr. Market will do, I think there is the possibility of the risk-on trade continuing coincident with QE3, but I think the more plausible explanation was given by Ritholtz in an earlier posting — that it is being driven by underperformance of fund managers who have been largely left in the dust by their benchmark indexes this year. However, it will be coincidence, not causal with the Fed’s actions this week.

  6. Petey Wheatstraw says:

    iamtheonepercent has it mostly right — if there is a “right” at all.

    The problem, as I see it, is the credit based economy, itself.

    QE attempts to get at debt by making the lenders whole — analogous to chopping a dead tree down from the top using a sledge hammer (or perhaps, putting out a fire with gasoline).

    As much as the idea is antithetical to the credit economy concept, the “new money” that is QE must be applied to the indebted. They, in turn, will settle their debt — making the banks/lenders whole, in the process — and return to a condition where the accumulation of debt isn’t used for necessities or minor purchases (Christmas gifts, clothing, restaurant meals, for example), but for major purchases (durable goods and investments that promise a return greater than the interest on the debt).

    The banks aren’t lending to the small and evaporating pool of what would be considered qualified borrowers in a robust economy. The velocity of money, right now, is more important than the quantity of money.

    If we have a deflationary trend develop in spite of QE, the fracture between the haves and have nots will become a chasm, and the middle class will be pushed into it.

    Then, it’s game over for pseudo “Capitalism.”

  7. Petey Wheatstraw says:

    BR, Could I bother you to, once again, take my comment out of moderation?

    Thanks.

  8. AHodge says:

    QE worked to start
    there is no oether explanation for the first 2% pt drop in late 08
    and there ar ere good fed system research on daily announcemt and episode studies documenting—
    it also weakens the dollar
    its effect is exhausting- partly on the view you literally cannot keep doing it forever-this is heart paddles and adreniline stuff
    its an old fashioned money supply and low long rates answer
    the problem is credit the capotal markets and securitization remain boken
    not that B and company have a clue about that

  9. Patrick Neid says:

    With stocks doubling since March 09 and employment and the econ going nowhere the wealth disparity indexes are rocking.

  10. [...] Great charts on QE's effect on various asset classes, review ahead of the Fed's decision tomorrow.  (TBP) [...]