Fed Launches QE3

[thereisnospoon]

All that liquidity has to go somewhere.

Seems pretty clear its going into the market.

And as the real estate market seems to be slowly turning around, the whole point of easing seems to be doing the job it was intended to do.

Liquidity? Are you kidding? This is merely increasing the supply of currency without regard to the loss in value of said currency.

Actually they're increasing bank reserves, not currency. And they're going to take it out when they're content with a recovery, just like Sweden and Japan have done.



Ah, hey genius, the way the Fed holds interest rates low is by printing money. That's their whole job, administering the supply of base money. They happen to choose a quantity of money which results in a Fed Funds rate of whatever their target is for 6 weeks. They don't just order banks to use a certain interest rate.

Interest rates should be permitted to float with the market.

Okay, sure. But how? Let them float by freezing the quantity of money, by freezing the exchange rate, by freezing the path of the price level, by freezing the path of nominal GDP? And why is, say, fixing the quantity of money any better than fixing an interest rate?

After the marketplace calmed down, an immediate upturn in business activity and thus consumer spending would cause interest rates to fall.

That causes interest rates to rise, not fall. I'm sure you're aware of demand and supply? Apply it to this.

Printing currency to prop up the stock market is not the way to go.
Increasing the money supply causes currency markets to sell off the US Dollar which weakens the currency and thus causes prices to rise. It's inflationary.
The marketplace should be the only decider of value. Not some government scheme.
None of this works. It's simply a temporary move and some say a political maneuver.
The federal reserve should stop screwing with the marketplace.
Through 3 phases of QE, two stimulus plans and out of control deficit spending, things have not gotten better, they have actually gotten worse. Just today an annual meeting of CEO's concluded there will be another 6 months of slow or even stalled economic activity
Let the economy fix itself.

 

[Rozman]

I am assuming that you are coming from an academic standpoint. I am telling you what I'm seeing in the financial markets.

Of course he's coming from an academic standpoint....They never have to produce any actual results out in The World.

The most famous line in a movie and my all time favorite from the movie Ghostbusters.
Dan Ackroyd says to Bill Murry....

"I've been in the private sector.They expect results".

 

[EdwardBaiamonte]

The federal reserve should stop screwing with the marketplace.

yes they should. American savers, for example, have been deprived of $400 billion a year in interest thanks to Ben's money printing low interest rates. Thats more than the amount of Barry's so called stimulus!!


If S=I (savings=investment) how do you account for the affect of Ben's policy on investment? Ben has attacked American savers and so American investors!!

The whole idea that libturd bureaucrats stimulate the economy and real inventors like Steve Jobs don't is beyond absurd; in fact its Nazi- like in its pure absurdity!!

 

[TakeAStepBack]

We're going to belly-up to the bankster custee bar again though.

 

[Toro]

Okay so I've been looking through some data trying to find any evidence that buying long bonds in quantity lowers their yield.

QE2 was announced Nov 2010. On Nov 18th 2010 the Fed held 806 billion in T-notes and bonds (here). By Jan 13 2011 they held 987 billion (here). They increased their holdings by $180 billion.

5-Year yields over that period:

Shouldn't buying up all those bonds have dramatically lowered the 5-year yield?

It did. But you're not looking at it correctly. First, you don't start in November. You start from when Bernanke gave his Jackson Hole speech on August 31, not when they actually began buying. THAT'S when the market began to price in QE. Markets moved in anticipation of the buying. The market also reacts because the market expects quantitative easing. So if the market believes that the Fed will buy again in the future, that will affect buying today. It used to be called the "Greenspan Put." Now, it's (less frequently) called the "Bernanke Put."

I should clarify. I said "rates" when I should have said "yield." Yield includes stock dividend yield. And you look at an integrated yield curve, i.e. of the entire bond and stock market, not just Treasuries. I remember when the second round of QE was announced. It caused a sell-off in bonds and a HUGE rally in stocks because investors thought it was going to goose either the economy, inflation, both, or it was just plain money printing. When it came to an end, stocks sold off and the Treasuries rallied because, at least in part, QE was ending. (The other reason for the rally in Tbonds was Greece.)

Low yields aren't exclusively because of QE. For certain, some of it has to do with a slowing global economy. But if it were entirely due to a slowing economy, you would expect high yield rates to have risen. But that isn't happening. In fact, high yield is about the same as it was when QE2 began whereas tbonds rates are significantly lower.

That is what I mean by the Fed having an influence right across the curve. The funds rate acts like an anchor to the entire bond market because spread products get bought when spreads get too wide. That buying lowers yields, or at least keeps them lower than they otherwise should be.


Anyways, here is the 5 year since.

It brought the 10 year lower.

And the 30 year

And, of course, mortgage rates have come down. The first round of QE began in November 2008.

Of course, that's not entirely due to QE, but if we're looking at hard dates to see if QE was effective, surely we can say that the Fed influenced the mortgage market.

In a piece published a few years ago, Goldman Sachs estimated that each $100 billion in QE lowered interest rates by 10 bps. If correct, rates are nearly 2% lower than they would otherwise be.

Also

ABSTRACT We evaluate the effect of the Federal Reserve’s purchase of long-term Treasuries and other long-term bonds (QE1 in 2008-09 and QE2 in 2010-11) on interest rates. Using an event-study methodology, we reach two main conclusions. First, it is inappropriate to focus only on Treasury rates as a policy target, because quantitative easing works through several channels that affect particular assets differently. We find evidence for a signaling channel, a unique demand for long-term safe assets, and an inflation channel for both QE1 and QE2, and a mortgage-backed securities (MBS) prepayment channel and a corporate bond default risk channel for QE1 only. Second, effects on particular assets depend critically on which assets are purchased. The event study suggests that MBS purchases in QE1 were crucial for lowering MBS yields as well as corporate credit risk and thus corporate yields for QE1, and Treasuries-only purchases in QE2 had a disproportionate effect on Treasuries and agency bonds relative to MBSs and corporate bonds, with yields on the latter falling primarily through the market’s anticipation of lower future federal funds rates.

The Federal Reserve has recently pursued the unconventional policy of purchasing large quantities of long-term securities, including Treasury securities, agency securities, and agency mortgage-backed securities (MBS). The stated objective of this quantitative easing (QE) is to reduce long-term interest rates in order to spur economic activity (Dudley 2010). There is significant evidence that QE policies can alter long-term interest rates. For example, Joseph Gagnon and others (2010) present an event study of QE1 that documents large reductions in interest rates on dates associated with positive QE announcements. Eric Swanson (2011) presents confirming event-study evidence from the 1961 Operation Twist, where the Federal Reserve purchased a substantial quantity of long-term Treasuries. Apart from the event-study evidence, there are papers that look at lower-frequency variation in the supply of long-term Treasuries and document its effects on interest rates (see, for example, Krishnamurthy and Vissing-Jorgensen 2010).1

www.kellogg.northwestern.edu/faculty/krisharvind/papers/QE.pdf

 

[Toro]

I should also add, there is a difference between "stock" and "flow." "Stock" is the total amount outstanding. "Flow" is the change. Both affect price. Flow is the incremental buying and selling and affects prices on the last tick. Stock affects prices in that it accumulates or disperses market power. If China, Japan and the Fed decided to sell all their Treasuries tomorrow, Treasuries would get crushed because the three own the majority of Tbonds.

 

[TakeAStepBack]

Hence, "it's now really about the flow."

The long end of the long curve turns yield negative. Straight from Goldman Sachs. So it's really now about the flow of asset purchases, because we have a dominating market actor.

 

[Toro]

Here's another graph of BB bonds, or the highest rating of the high yield market.

I posted CCC and lower-rated credit. That's the junkiest of the junk.

As you can see, BB are lower than they were when QE2 was signaled by Bernanke. That's not entirely because of QE, but junk bond yields usually rise when the economy is slowing. That's not happening.

 

[expat_panama]

...I'm claiming that QE doesn't lower yields on long bonds...

When the fed sells long bonds it makes yields go up. The fed buying long bonds lowers rates. Some call it QE, some call it 'bailout' but adults call it 'supply and demand'.

 

[Toro]

...I'm claiming that QE doesn't lower yields on long bonds...

When the fed sells long bonds it makes yields go up. The fed buying long bonds lowers rates. Some call it QE, some call it 'bailout' but adults call it 'supply and demand'.

Right. If OMO in the Fed funds market affects prices, why doesn't it affect the long end?

 

[william the wie]

Toro if you look at gross US births can you explain to me why sustainable recovery prior to 2027 when the 1984 hits maximum consumption age is at all likely? If the bond market is not discounting a decade and a half of negative growth then bond traders are dumber than dog squat.

 

[MisterBeale]

Because the first two were so successful. What makes anyone think our problem is high interest rates?
Fed Pulls Trigger, to Buy Mortgages in Effort to Lower Rates - Yahoo! Finance

It's tricky to know how far this 'sugar rush' will take the markets before the big crash. After more than 35 years of investing, I've got to say my adrenaline rush for riding this house of cards is at an all-time high. The last crash was fairly easy to predict, but not this one. It's like I'm surfing on a tsunami!

I can't believe the discussion on this thread. Almost nearly every post is a tacit admission that the Fed, a privately owned banking cartel, is in collusion with other private banking monopolies to manipulate the world economy.

Reading this whole thread is like one big argument for getting rid of this corrupt system. Sure, if you are wise you know how to get obscenely wealthy off of this system, I mean, that is why the political, cultural, and financial elites instituted the system in the first place; to institutionalize a sort of modern day caste system among the upper class, and upper-middle classes.

What the hell ever happened to the good 'ol notion of a meritocracy? This system is destroying the nation and the world since it abandoned the constitution and congress gave up it's power to regulate the money supply. It's immoral, evil, and antithetical to freedom.

 

[DSGE]

I should clarify. I said "rates" when I should have said "yield." Yield includes stock dividend yield. And you look at an integrated yield curve, i.e. of the entire bond and stock market, not just Treasuries.

Okay, I was talking about just Treasuries. The subject which started this, if I recall, was whether or not the Fed can control long Treasury rates with QE.

Low yields aren't exclusively because of QE. For certain, some of it has to do with a slowing global economy. But if it were entirely due to a slowing economy, you would expect high yield rates to have risen.

I'm lost. Why would we expect that?

That is what I mean by the Fed having an influence right across the curve. The funds rate acts like an anchor to the entire bond market...

.

Yes. My point is that that anchor is dropped as far as it can go at the ZLB. When the FFR is zero, the only way to affect long Treasury yields is through expectations of inflation and how long the FFR will be left at zero.

Of course, that's not entirely due to QE, but if we're looking at hard dates to see if QE was effective, surely we can say that the Fed influenced the mortgage market.

I'll agree that the Fed influenced the mortgage market, but it's not clear from those charts that it was QE which causally affected those Treasury yields.

In a piece published a few years ago, Goldman Sachs estimated that each $100 billion in QE lowered interest rates by 10 bps. If correct, rates are nearly 2% lower than they would otherwise be.

www.kellogg.northwestern.edu/faculty/krisharvind/papers/QE.pdf

That paper confirms what I've been saying. Remember when I said:

"The only way OMOs work at the ZLB is as forward guidance; if the market takes it as a signal that the Fed will hold rates at zero for longer, thus changing the term structure. But this is a really weak and unclear form of forward guidance, so it takes billions and billions of dollars of purchases just to shift long yields a couple of basis points."

That paper concludes that all of the effect of QE2 on Treasury yields came from the signalling channel; exactly what I said.

 

[DSGE]

...I'm claiming that QE doesn't lower yields on long bonds...

When the fed sells long bonds it makes yields go up. The fed buying long bonds lowers rates. Some call it QE, some call it 'bailout' but adults call it 'supply and demand'.

Actually, adults check that the assumptions their model uses do in fact hold in the setting they're trying to investigate. You're implicitly assuming downward sloping demand curves for long treasuries, and that doesn't hold. Therefore the childishly simplified version of "supply and demand" that we learn in high school cannot be applied. Maybe go back and read some of the conversation.

 

[Toro]

Low yields aren't exclusively because of QE. For certain, some of it has to do with a slowing global economy. But if it were entirely due to a slowing economy, you would expect high yield rates to have risen.

I'm lost. Why would we expect that?

Defaults increase during a recession.

Similarly, US stocks are near their all-time highs. That usually doesn't happen when Treasuries are rallying because of a fear of an economic slowdown. Normally, high yield and stocks sell off when the market is discounting a slow down.

 

[Toro]

...I'm claiming that QE doesn't lower yields on long bonds...

When the fed sells long bonds it makes yields go up. The fed buying long bonds lowers rates. Some call it QE, some call it 'bailout' but adults call it 'supply and demand'.

Actually, adults check that the assumptions their model uses do in fact hold in the setting they're trying to investigate. You're implicitly assuming downward sloping demand curves for long treasuries, and that doesn't hold. Therefore the childishly simplified version of "supply and demand" that we learn in high school cannot be applied. Maybe go back and read some of the conversation.

I'm still unsure why you think the Fed buying long bonds doesn't affect the price.

 

[DSGE]

Low yields aren't exclusively because of QE. For certain, some of it has to do with a slowing global economy. But if it were entirely due to a slowing economy, you would expect high yield rates to have risen.

I'm lost. Why would we expect that?

Defaults increase during a recession.

Sure, but real yields and expected inflation also fall. So... I don't think there's a way to expect which effect will be stronger, so I wouldn't expect anything about the direction high yields will move.

Similarly, US stocks are near their all-time highs. That usually doesn't happen when Treasuries are rallying because of a fear of an economic slowdown. Normally, high yield and stocks sell off when the market is discounting a slow down.

"All time high"? It doesn't make sense to say that since a) it's a nominal price and b) it grows over time at some non-zero rate anyway. That's like saying "GDP is at an all time high. The economy mustn't be all that bad". The stock market is roughly where it was before the recession. Being in the same place it was five years ago isn't impressive.

So it's possible for stocks to be at the level they are now but there still being the expectation of lower productivity of capital in the future; hell it can still go up even further if the outlook for the labour market improves. Also there may well have been a shock to the rate of time preference keeping real interest rates down.

 

[DSGE]

When the fed sells long bonds it makes yields go up. The fed buying long bonds lowers rates. Some call it QE, some call it 'bailout' but adults call it 'supply and demand'.

Actually, adults check that the assumptions their model uses do in fact hold in the setting they're trying to investigate. You're implicitly assuming downward sloping demand curves for long treasuries, and that doesn't hold. Therefore the childishly simplified version of "supply and demand" that we learn in high school cannot be applied. Maybe go back and read some of the conversation.

I'm still unsure why you think the Fed buying long bonds doesn't affect the price.

Because I think you're assuming a downward sloping demand curve, which doesn't hold.

Here, think about this:

We've hit the zero lower bound. The FFR is down to zero and so is the yield on 3 month T-bills. If the Fed suddenly buys half of all the 3 month T-bills, does that push their yield further down? Can the Fed lower 3 month T-bill rates as negative as they like just by purchasing more and more?

 

[Toro]

I'm lost. Why would we expect that?

Defaults increase during a recession.

Sure, but real yields and expected inflation also fall. So... I don't think there's a way to expect which effect will be stronger, so I wouldn't expect anything about the direction high yields will move.

Similarly, US stocks are near their all-time highs. That usually doesn't happen when Treasuries are rallying because of a fear of an economic slowdown. Normally, high yield and stocks sell off when the market is discounting a slow down.

"All time high"? It doesn't make sense to say that since a) it's a nominal price and b) it grows over time at some non-zero rate anyway. That's like saying "GDP is at an all time high. The economy mustn't be all that bad". The stock market is roughly where it was before the recession. Being in the same place it was five years ago isn't impressive.

So it's possible for stocks to be at the level they are now but there still being the expectation of lower productivity of capital in the future; hell it can still go up even further if the outlook for the labour market improves. Also there may well have been a shock to the rate of time preference keeping real interest rates down.

I've been doing this for nearly 20 years. Stocks and high yield bonds don't go up when the economy is slowing and Treasuries are hitting highs. Stocks and high yield bonds will begin to rally before it becomes obvious that the economy is turning, but it is a contradiction to say that Treasury bonds are rising because of a slowing economy with high yield bonds and stocks rallying. That's not how markets work.

 

[Toro]

Actually, adults check that the assumptions their model uses do in fact hold in the setting they're trying to investigate. You're implicitly assuming downward sloping demand curves for long treasuries, and that doesn't hold. Therefore the childishly simplified version of "supply and demand" that we learn in high school cannot be applied. Maybe go back and read some of the conversation.

I'm still unsure why you think the Fed buying long bonds doesn't affect the price.

Because I think you're assuming a downward sloping demand curve, which doesn't hold.

Here, think about this:

We've hit the zero lower bound. The FFR is down to zero and so is the yield on 3 month T-bills. If the Fed suddenly buys half of all the 3 month T-bills, does that push their yield further down? Can the Fed lower 3 month T-bill rates as negative as they like just by purchasing more and more?

Yes, we've had brief periods when t-bills yielded less than zero. But the 10 year isn't at zero.