NEWSFLASH: The Federal Reserve Isn’t Stopping Quantitative Easing!

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NEWSFLASH: The Fed Isn’t Stopping QE! (ZEroHedge, Nov 2, 2014):

What has been expected for quite a while has now officially happened. The Federal Reserve stated that it would stop intervening on the market where it has been buying treasury bonds and mortgage-backed securities like there was no tomorrow anymore. The program started at a rate of $45B per month but was upscaled rather fast to $85B per month before being gradually scaled back since the beginning of this year. The Fed’s balance sheet has expanded considerably as you can see on the next chart.

Federal-Reserve-Balance-Sheet

Whereas the total balance sheet of the Fed was less than 1 trillion Dollars by the end of 2008, this has been increasing exponentially and in just the last 24 months the assets on the Fed’s balance sheet increased by 60% to 4.5 trillion dollars. Yellen has kept her promise as she said she’d scale the open-market purchases back if the economy would strengthen sooner than anticipated.

Even though Quantitative Easing has now officially been stopped, the reaction in the gold price was actually quite muted. Gold bears have been predicting a crash of the gold price as soon as the money-printing stage would be reduced or stopped, but they have been proven wrong as the gold price dropped less than 2.5% on the news and subsequently lost another 3%.

This means that gold is much more resilient than originally thought and that the gold price is NOT purely depending on the effects of a Quantitative Easing program, as so many people want to make you believe.

But wait, let’s not get carried away by the so-called ‘End of Quantitative Easing’ and have a closer look at this MBS purchase program. The Fed’s announcement to stop purchasing additional Mortgage-Backed Securities was just talking about NEW investments paid for by freshly printed money. It is the central bank’s intention to continue to reinvest the returns on its $1.7 trillion dollar Mortgage-Backed Securities portfolio back in the market in the foreseeable future.

Federal-Reserve-MBS-Holdings

If we’d estimate the return on investment on these MBS’es to be 2.75% (which is roughly the return in the PIMCO MBS Fund where the average maturity of the MBS portfolio is less than 4 years), an additional $47B (on TOP of the maturing principal amounts) per year which would flow into the Fed’s treasury will very likely immediately be reinvested. That would mean that on average $4B per month in interest payments would continued to be invested in MBS, and this is just a 20% decrease versus the official $5B per month number. So even though the Federal Reserve pretends it will no longer spend $5B per month on mortgage-backed security purchases, it isn’t actually stopping the MBS purchases as these will continue at at least $4B per month. This number will very likely be even higher, as it is also the Federal Reserve’s intent to reinvest the principal amounts as well.

So in the MBS market, the Federal Reserve is saying one thing but is actually doing the complete opposite.

The only difference is that these aren’t called ‘MBS purchases’ but ‘reinvestments’. Whatever they want to call it, the Federal Reserve will still pump in excess of $45B per year in the MBS market so the life support will still be switched on in the foreseeable future. And the Federal Reserve has no official mandate to take the money back out of the market when the MBS mature. Theoretically, the central bank would be allowed to reinvest the principal amounts as well as the interest payments on these amounts in infinity. Even though market analysts at for instance Deutsche Bank expect the Fed to phase these investments out by 2017, the central bank is under no real obligation to do so.

The next chart shows you that the Federal Reserve has been doing this for a while. At the previous meeting of the FOMC, the Federal Reserve announced it would scale back the purchase of Mortgage-Backed Securities to just $5B per month. One would then expect the total amount of MBS on the Fed’s balance sheet to increase by roughly $5B. Caught in the act, the official numbers show you that in just one month the total amount of MBS increased by not less than $16B.

Federal-Reserve-MBS-Detailed

The real ‘credibility test’ for the Federal Reserve will no longer be in the official Quantitative Easing numbers but in the size of the balance sheet. We dare to bet the balance sheet of the Federal Reserve won’t shrink at all in the near future, and we expect the total balance sheet to remain at extremely elevated levels for the foreseeable future.

The official Quantitative Easing has ended, but the Federal Reserve isn’t stopping its interventions as the MBS purchases will continue at the same pace. It only wants you to believe it did.

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3 thoughts on “NEWSFLASH: The Federal Reserve Isn’t Stopping Quantitative Easing!

  1. This assumes the MBS will sell. The fact they are worthless, and the market is nearly dead save for high frequency skim and sell…….I wonder. Check in here in 90 days.

  2. $4-5 billion is a far cry from $80 billion a month. Of course they will try selling the junk filled MBS, where else can they sell them? The problem is much deeper, the FED is NOT part of the US government, and when the chips are down, the FED will act in accordance with what it is……a private bank. They are cutting back by $75 billion a month…….and I doubt they will be able to sell these MBS notes for anything close to face value. Even if they put the so-called profit back into the market, it won’t count for much. Each point on the DOW indicates a billion dollars………the FED is cutting the cord, they are about spent out for the US. There is no future here. Even greedy guts are moving east with their money.

    $432 billion interest on the US national debt to keep it current has been paid by the FED for years now. I don’t know the last time the US was profitable, every quarter, the losses are huge. The country has been gutted, and there isn’t much left to invest in, assuming it were a real bank. The debt level is so far in excess of what the US will ever earn under present management, that paying more into the mountain of debt isn’t good business.

    At some point, the bank will cut their losses even further and stop paying the interest on the US national debt that climbs so quickly, I cannot write down an accurate number. At a certain point, the FED will cut their losses. They probably have insurance to cover most of their losses, but finding future policies will become more difficult. Insurance companies used to finance commercial banking in this country, they have more money than anyone…..but their underwriters are not stupid.

    Putin did a masterful job of building a growing economy using a basket of currencies around the US and EU. The only isolated people are the US and EU, the rest of the world is prospering.

    Russia has debt of 33% to GDP, the US has 100% debt to GDP, and the Euro Zone is laden in debt in the multiple hundreds to GDP. Most nations who joined with Putin and BRICS, are far better off than US or EU. The economy they have built around the world does not use the dollar, and the numbers prove it.

    33% of world countries use the dollar; mainly comprised of EU members.
    67% do not which include (but not limited to) Brazil, Russia, India, China and most emerging nations in Africa including South Africa, Turkey, Iran and other middle east nations. Much of South and Central America have dumped the dollar, Japan joined after another round of sanctions on Iran, Australia, New Zealand, and other nations that I cannot recall.

    All of the EU nations were not honest about their debt level, so a very promising alliance is turning into a disaster. The US has fool leaders, so our debt level keeps rising, none of them seem to know or care our debt is beyond fixing……they spend on unnecessary CIA created wars that only enrich a few, at the cost of the rest of us.

    The people have lost all their power, so can do nothing.

    So very depressing.

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