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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