QE4?

by Michael J. Howell12. December 2012 18:27

Todays Fed Statement and the similar tone taken by a recent speech from in-coming BoE Governor Carney both show the shift of thinking away from inflation and towards employment as the general 2013-14 policy goal. The Fed as expected emphasised the 'US$85 billion' monthly figure of new injections of cash and cleared any doubts that it might be compromised by the slated end to 'Operation Twist'. It may be a moot point whether this constitutes an increase on the previous QE3 and so can rightly be labelled a QE4. Whichever, investors must view these collective statements by policy-makers as events in 2012 but as processes for 2013. The two key things to focus on are (1) starting point and (2) future delivery. The starting point in 2012 is from a relatively low liquidity point, ie on our measures the Fed is still quite tight. Thus we are fed up of seeing the now standard Central Bank balance sheet graph in the Press showing strong rises since 2008. We simple cannot compare the Fed the BoJ the BoE and he ECB by their absolute balance sheet sizes without taking into account their institutional structures. In short our measures confirm that CBs have much room to ease. Second, promises are one thing and delivery is another. The previous post touched on why the Fed has not delivered yet. Therefore, see this renewed QE3 as a general easing process through 2013. Moreover others will join. Next up the BoJ?

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Where's Our QE3? -- Update

by Michael J. Howell6. December 2012 09:54
Fact: the US Fed balance sheet has barely expanded since Ben Bernanke's much trumpeted QE3 announcement on September 13th 2012. It should, according to our estimates now be ahead by a net US$150-200 billion from this date, but has mustered a puny US$34.7 billion. The bulk of Fed balance sheet movements are driven by changes in the size of the SOMA account. At end-November it touched US$2598.6 billion. It has barely changed since the September QE3 statement, and the slated $40 billion monthly step-up in MBS (mortgage-backed securities) purchases does not appear to figure. Rather than buying at this clip, the SOMA data show that the end-November the Fed has only purchased $40 billion of MBS in total. Does this mean that QE3 is not working? Or, more worryingly, that the Fed has somehow changed its mind and now, may be, awaiting clearer political progress on the 'fiscal cliff'? Both are possible, but we must also take into account the typically long settlement times involving in purchasing MBS (up to 180 days) because the SOMA and the Fed balance sheet are reported on a settlement basis. In short, 'in transit' bonds do not appear. However, we can get a handle on the potential rise by looking at reported 'commitments to buy'. This does show a large step-up confirming that US policy-makers are keeping to some of their promises. The figures highlight, again since mid-September, actual MBS purchases of $39.8 billion and new commitments of $47.3 billion. If it is fair to add these together, and it may not be, the indicated and inferred (to use a mining analogy) totals $87.1 billion, or some 85% of the slated target programme to date. The plain fact is that in terms of hard cash the QE3 has delivered only 39% of the MBS purchases the markets expected and taken overall, in terms of overall Fed balance sheet expansion the QE3 has produced a measly 18% of the promised $85 billion per month that the Fed hinted would be the net expansion after re-invested coupons were taken into account. This net increase is outside the Fed’s Maturity Extension Programme ('Operation Twist') that to date has sold US$595.7 billion US Treasuries of less than 3¼-year maturities and purchased US$622.1 billion of more than 6-year maturities. The bottom line in that QE3 is not delivering. Liquidity conditions in US markets may be OK but they are not expanding along the lines investors once hoped. This likely explains why the US dollar gold price has slipped back below US$1700/oz and why there has been some, but not enough yield curve steeping. These are two unambiguous liquidity signals and we closely watch them to confirm our more detailed analysis of Central Bank operations.

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