Noteworthy in the Oct FOMC minutes was the discussion on the effects of the Sept announcement of QE3. They said “the initial effects were generally viewed as consistent with a marked easing in financial conditions. For example, yields on MBS dropped noticeably, leading to a decline in mortgage interest rates, and corporate bond yields generally moved lower.” The Fed now defines a 16 bps move lower in interest rates as “noticeable” as that has been the decline in MBS yields to 2.2% for the 30 yr FNMA coupon. The 16 bps drop is in the context of a drop already from 6% seen since 2008. Investment grade corporate bond yields have fallen but junk yields have gone up. On the markets inflation response which went up, “a couple of participants saw this increase as a sign that the open ended asset purchases posed a risk to the stability of longer term inflation expectations. However, others saw the effect on expected inflation as relatively muted or likely the result of reduced risks of undesirably low inflation.” On the actual economy, many members believed that lower rates “were providing support to aggregate spending, most notably” in housing, autos and other consumer durables. Lastly, QE4 is soon to come when OT expires as “a number of participants indicated that additional asset purchases would likely be appropriate next yr after the conclusion of” OT “in order to achieve a substantial improvement in the labor market.” This should not be a surprise.
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