An unbylined "Q&A" column at the Associated Press yesterday began with the following false declaration: "The $4 trillion experiment is over." That just isn't so.
Maybe the Federal Reserve is done building up its debt holdings — that is by no means certain — but the "experiment" known as "quantitative easing," or "QE," won't be over until the Fed fully unwinds those balances. In the meantime, it has unwarranted leverage over the stock and bond markets. Fed Chair Janet Yellen has what appears to be a de facto veto over Washington policies she doesn't like should she decide to use her leverage in that manner. The rest of the AP item wasn't much better, particularly how it wormed around the reality that if the Fed wishes to avoid winding down its balances, it's going to have to keep buying Treasury and mortgage-backed securities as current holding mature:
Q: So now the Fed owns $4 trillion in bonds. Does it have to sell them?
A: No, they can sit on them. Some analysts wonder how the Fed will be able to unload its massive collection of bonds without disrupting markets. Very, very slowly, is the Fed's answer, and only if needed. One way is to stop re-investing money from bonds when they mature.
The last part of the answer proves that its first part is wrong.
The only way to keep its $4 trillion in balances at its current level is to continue re-investing money from bonds when they mature. In other words, they can't just "sit on them." They have to decide what to do when these bonds mature.
Robert Romano is the senior editor of Americans for Limited Government, explains further:
Read the fine print, QE is not really over
“[T]he Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”
That was the Federal Reserve announcing the supposed conclusion of quantitative easing (QE), that is, its U.S. treasuries and Government Sponsored Enterprises (GSE) mortgage-backed securities purchase program that was announced in late 2008 in the middle of the financial crisis.
In the same breath, the central bank announced that there are still be tens of billions of dollars of asset repurchases every year. As mortgage principal is paid down, the Fed will continue to purchase new mortgage debt. As Treasury debt matures, it will continue to buy new Treasury debt.
Call it QE forever.
Well, QE won't really end until that entire $4 trillion balance is wound down. That may not be forever, but it will be a long time. And until that happens, regardless of what the AP just told its readers, it won't be over.
Cross-posted at BizzyBlog.com.
