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FOMC Introduces $600 Billion QE 2 Package
Written by article default Thursday, 04 November 2010 10:44
The FOMC has concluded its meeting and provided details about its Quantitative Easing 2 plans.The main details:
1. Fed will buy $600B of Treasuries, larger than the expected $500B coming into the meeting today.
2. Will go through through 8 months, not 6 that was expected.
3. No mention of buying Mortgage Backed Securities (MBS), and 30-year also not highlighted.
Overall, this package is slightly more than the market had priced in, and so we are seeing some USD selling in a knee-jerk reaction.
What will this new QE 2 accomplish? It will push down interest rates, which makes borrowing for consumers and companies easier. That can help boost borrowing and economic activity.
Also the Fed is hoping to stunt the deflationary environment and instead inject some inflation. Fed is trying to find the sweet spot, not too low inflation, but also not create an inflationary environment. Adding this much funds is likely to increase inflation expectations, and there are many other consequences to this policy that are not clear since we are in a bit of unchartered waters at this point.
The Fed did not specify that they would purchase more assets than just Treasuries.
That means no MBS, though the Fed probably leaving their options flexible and open-ended. Right now though there is pushback from some in the FOMC to not have QE at all – we had 1 dissent – but also to limit any more purchases to just Treasuries.
We now await new forecasts for inflation and growth from the Fed – but we won’t see those till the Meeting Minutes in 2 weeks.
Overall, this should be good for business, as well as the pledge to keep the benchmark interest rates near zero for an extended period, which looks to be pushed out to 2012 right now.
But, one of those unintended consequences could be that the Fed makes inflation a bigger problem – again they are trying to hit that sweet spot, and also could create bubbles, not just in US but abroad as well.
In terms of markets, this should be good for equities with all the cheap money floating around, Treasuries should climb higher as yields fall, and it’s the USDollar that will continue to weaken as a result of this plan over the coming months.
The Statement:
Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.
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. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.