Karim writes:

  • Statement dropped reference to bank credit contracting
  • Several references to inflation being too low; 2nd paragraph completely overhauled to specify that Fed is missing both parts of the dual mandate and also characterizes progress towards objectives as ‘disappointingly slow’
  • Buying 600bn thru end of Q2-2011; added to reinvestment of MBS proceeds, total purchases estimated at 110bn/mth.
  • Increasing avg duration of purchases from 4yrs in ‘QE1’ to 5-6yrs link
  • ‘Regular review’ of total size of program and ‘will adjust’ to meet its dual mandate opens possibility of increasing pace of purchases and lengthening period in which they are buying past next June

Release Date: November 3, 2010
For immediate release

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.

Release Date: September 21, 2010
For immediate release

Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. 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 are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.

Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.

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 also will maintain its existing policy of reinvesting principal payments from its securities holdings.

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to 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; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.

Voting against the policy was Thomas M. Hoenig, who judged that the economy continues to recover at a moderate pace. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth. In addition, given economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from its securities holdings was required to support the Committee’s policy objectives.

46 Responses

  1. $600 billion in 30-yr T-bonds by the middle of next year ?

    FED’s new motto? “An irrelevant action next year is always worse than any approximately appropriate move this week?
    (Treasury’s motto too; meanwhile, they’re working on something even worse)

    Banks rallying – just not the “general welfare of the people”

    (tell me again, what are banks for? & what is government of the people, by the people & for the people … for?)

  2. Quick question for the intelligentsia:

    What are the operational steps for quantitative easing? Who are the securities purchased from? Is it done via auction? Does the government set the price? I would like to know more about the nuts and bolts of the procedure and I haven’t found a site that explains the process. Any help would be much appreciated. Thanks in advance.

  3. Fed usually uses the primary dealers.

    http://www.newyorkfed.org/markets/pridealers_policies.html

    They are offering to purchase more than all the securities the commercial banks have added to their portfolios since the crash

    http://research.stlouisfed.org/fred2/series/USGSEC

    It will be interesting to see if C&I loans start another down leg or turn the corner. It would be a pretty quick turn around if it happens.

    http://research.stlouisfed.org/fred2/series/BUSLOANS

    1. Thanks for the info Winslow. Unfortunately, I read the links and still don’t understand the process. Do you, or anyone else for that matter, have a simple explanation? Does the fed use a reverse auction?

      1. Banker,
        For QE1, they bought MBS mostly. My take is they were not trying to modify the term structure of rates in QE1. At the start of QE1, they were all monetarists, they believed that the banks lent out the reserves. So they proceeded to purchase (with newly created reserves) about 1.5T of mostly MBS/small amt Agency Bonds/small amt of Treasuries to replace the $1.5T commercial paper market which disolved near intantaneously in the GFC. They thought that once the banks had these new reserves it wouldnt take long for them to start lending again and functionally replace the Comm Paper mkt $4$ with reserves if necessary. Boy were they wrong!

        In QE1 they both bought and sold MBS, they did it thru contracted agents (PIMCO, etc). Here is a link to the FRBNY site that tracked MBS purchases in QE1:

        http://www.newyorkfed.org/markets/mbs/SalesArchive/sales_archive.html

        You can see they both bought and sold MBS, this to me means they were targeting a range for interest rates rather than directly trying to lower rates in QE1. Why would you sell MBS if you were trying to lower rates? It was about quantity not price for them imo. This is in direct conflict with Warren’s advice which is it is about price not quantity. Their bad. In fact, after they got out of QE1 at end of March, interest rates have fallen substantially. And they are scratching their heads.

        Now for QE2 have they learned their lesson? Will they hit the offered prices and help raise the bond prices to thus lower the rates? Do they finally realize it is about price not quantity? Too early to tell, I have almost no confidence in them.

        They will probably set up a website at the FRBNY’s site to report on progress similar to what they did for QE1…stay tuned.

        Resp,

        PS If they are buying effectively $110B/mo net that is just about all of the new net issuance.

      2. Banker – explore the site a little….

        Why is the Desk purchasing longer-term Treasury securities?
        Purchases are being conducted in connection with a directive from the Federal Open Market Committee (FOMC) to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, and to continue to reinvest principal payments from agency debt and agency mortgage-backed securities (MBS) holdings into longer-term Treasury securities. Together, these purchases are anticipated to bring total SOMA holdings of domestic securities to about $2.654 trillion by the end of the second quarter of 2011.

        http://www.newyorkfed.org/markets/lttreas_faq.html

      3. they buy longer term secs because they offer ‘more bang for the buck’ from a program that’s quantity limited by the fomc. it shouldn’t be quantity constrained. it should be a simple rate target, just like fed funds, as quantity is of no consequence. but they don’t know that

      4. Matt Franko, Interesting comments. For Fed officials and staff to admit (even to themselves) they had it wrong with QE1 is to admit they just pointlessly stuffed billions if not trillions of dollars down a rathole. The cognitive dissonance on this must be like a black hole’s event horizon. Its not like the Fed has ever been confused with the Sisters of Charity in their humility. To quote the ever-quotable Kartik Athreya from the Richmond Federal Reserve Bank:

        [M]acroeconomics is not, by any reasonable measure, simple. Macroeconomics is most narrowly concerned with the tracing of individual actions into aggregate outcomes, and most fatally attractive to bloggers, vice versa…

        The majority of the training of new Ph.D.s in their macroeconomic coursework is giving them a way to come to grips with the feedback effects that are likely present…. Writers who have not taken a year of Ph.D. coursework in a decent economics department (and passed their Ph.D. qualifying exams) cannot meaningfully advance the discussion on economic policy….

        [E]conomics is far, far, more complicated than most commentators seem to recognize.
        http://delong.typepad.com/sdj/2010/06/attempted-delong-smackdown-watch-unsuccessful-attempt-by-kartik-malibu-barbie-athreya.html

      5. They obviously still don’t understand it’s about price and not quantity because they announced it as such. They said they would buy $600 billion. They did not say, “we’re going to set 5-year rates at 1%, for example.

      6. They said they would buy $600 billion. They did not say, “we’re going to set 5-year rates at 1%, for example.

        Mike, you just reminded me of something I read this morning before work…

        It then became the Fed’s duty to purchase government securities in any amount and at any price needed to maintain the interest-rate pegs for Treasury…
        http://www.prospect.org/cs/articles?article=the_federal_reserve_we_need

        That’s from a recent article by law professor Timothy Canova about Federal Reserve operations during World War II. Pretty interesting read actually.

    2. Of course.

      What profits will the banks realize from this? A few hundred billion? Look at 10 year prices. QE II is a bank bailout.

  4. The fed funds rate is zero. This is rate banks can borrow at. QE is buying longer-dated maturities, thus lowering longer-term yields. Banks make money off the spread in the yield curve, so I don’t see how QE is a bank bailout.

    The real-world alternative to QE is higher yields. In an economy with a high output gap, higher yields are destructive. In an ideal scenario we would have much more in the way of fiscal stimulus and it would be done by crediting bank accounts rather than through bond-issuance. But there is no chance of this happening, especially in light of what happened on Tuesday. QE might not help out too much, but it is the best alternative in my mind.

  5. Different subject. Please explain how exports are a cost. For example, we produce way more food that we can consume so we export food to other countries. How is that a cost? At exactly what point does it become a cost? Is it when we are competing for the same scarce resources?

    1. Its a cost in the context of production costs. Time, energy, and other inputs are needed to harvest bananas.

      1. Whereas importing the bananas for electronic dollar deposits
        ‘costs’ nothing in real terms.

      2. But don’t we get yen or euro in exchange which allows us to purchase something of value from those countries?

    2. Even if we couldn’t consume that the food that we export, there is an opportunity cost: the people who are producing that food to send elsewhere could be doing something else that directly increases our standard of living.

      It’s not that exports are “bad”, any more than working for a living is “bad”. I work to get money to buy things – and the country as a whole exports to get foreign money to buy foreign things. But people who valorize exports in and of themselves are like people who say you should be glad to work twice the hours for the same pay, because work is it’s own reward.

      1. But this seems to fly in the face of competitive advantage. If we can be the low cost producer of food and Saudi Arabia is the low cost producer of oil, we’re better off exporting food and importing oil. We shouldn’t take resources away from farming and put them into oil exploration (politics aside) as this would reduce our standard of living.

    3. “How is that a cost? ”

      First, rephrase the question,, “how is that a real cost”

      Second, realize the framework is based on distinguishing between the goods and services flows to the foreign and domestic sector.

      It is a real cost when we use real resources to grow food for export ‘crowding out’ the creation of other goods and services for domestic consumption.

  6. Although QE has its definite drawbacks and obvious weakness compared to fiscal policy, the following is an unusually good speech about how it should work (generically) in theory, to the degree it can work at all, from the Deputy Governor of the Bank of England, about a year ago. Among other things, he gets bank reserves right, to his great credit – i.e. QE has absolutely no transmission value in terms of creating bank reserves – which is consistent with actually understanding that the multiplier is bunk. Equally impressive, he focuses fairly clearly on the potential effect on bank deposit liabilities instead of reserves, and on non-bank portfolios more broadly, which is pertinent to the proper explanation of QE:

    “The reason for going through this in such mind-numbing detail is to make the point that the level of commercial banks’ reserves in aggregate is determined by the way we have funded the asset purchases, not by the commercial banks’ own decisions. The size of banks’ reserves cannot, as is frequently claimed, be a sign that they are “sitting on them”. No matter how rapidly or how slowly the economy is growing, or how fast or slow the money is circulating, the aggregate amount of reserves will be exactly the same. So it should be clear that the quantity of central bank reserves held by the commercial banks is useless as an indicator of the effectiveness of Quantitative Easing.

    … Fortunately, increased bank lending is not necessary for Quantitative Easing to work. Indeed, it was precisely because the Monetary Policy Committee expected the additional monetary injection not to stimulate bank lending directly at the current juncture, that the Asset Purchase Facility’s purchases were targeted at assets held primarily by the non-bank private sector1. So if the Asset Purchase Facility buys gilts from pension funds or asset managers, they will then have to look for another home for their money. As it is not very rewarding just to hold it on deposit, they are likely to look to put their money into other assets, including equities and corporate bonds. Thus not only does the price of gilts rise as a consequence of the Asset Purchase Facility’s initial purchases, but also the prices of a whole spectrum of other assets. That in turn lowers the cost of non-bank finance and encourages increased corporate issuance. Also the rise in asset prices increases wealth and improves balance sheets. In this way, Quantitative Easing helps to work around the blockage created by a banking system that is still undergoing a process of balance sheet repair.”

    http://www.bis.org/review/r091019c.pdf

    1. Very interesting JKH, thanks!

      So if I understand correctly, by pulling out gvt. sponsored opportunities under investor’s feet, corporations have been flooded with new money, the hope being that this would be used to make productive investments? Seeing as this last part hasn’t happened for lack of demand, I’ve been wondering to what extent QE and the savings glut can not only be considered unproductive but actually counter-productive in that it fosters further financialisation? And are corporations being let off the hook by no longer having to invest themselves out of misery? Who do we expect to take on risk? Can one force risk upon an economy?

      1. I think the point that is correct in the speech is that if QE works, it must work through the “back door” of banks – i.e. through money held by non-banks and the effect on related portfolio decisions, and not through the front door of reserves and bank lending based on reserves, which is based on false theory. This is a normative rather than a positive description of QE.

        That’s not to say that QE isn’t a poor second best to fiscal. Also, as you point out, a good deal of any real economy effect may be diluted first by much more of an effect on the financial economy, ex real. A lot of financial leakage from the desired real objective.

        But it’s all they have as a central bank – Bernanke after all is not responsible for fiscal policy. I’m not sure how fair it is to crucify the guy for not being in charge of fiscal policy or for not ranting on about it when he has his own portfolio to look after; all he can do in actual practice is use the last arrow in the quiver of his own responsibilities. He doesn’t run Congress or the Treasury – unless a central bank chairman is supposed to resign out of principle because the Congress and Treasury aren’t doing their jobs.

      2. 🙂

        Think about it, though – the preeminent problem along MMT lines is the presumed independence of the central bank. Any sitting CB Chairman is therefore in a de facto conflict in recommending expansion of CB into fiscal or incursion of Treasury into monetary. It’s a huge problem in terms of designing optimal policy. It sort of rejects the idea that there may be an optimal mix of fiscal and monetary – because nobody has the power to enforce such a mix let alone recommend it. It’s actually pretty crazy from that perspective, since that sort of thing could still work in theory with two separate entities. But there is nobody in that super portfolio management position.

      3. Yes, I guess that is all they have. All the more reason to push the MMT consolidated government view of things, I’d say.

        Thanks for continuously sharing your expertise, btw. Always very appreciated!

      4. jkh:

        bernanke has nice post at princetone he will return to when his term is up. there is no reason he cannot be honest about how economy actually works (assumings he does understand it).

        Seriously, what word would you use for a person who keep million unemployed for no reason other than to extend not even his position, but a position that he occupy for a moment before returning to perfectly nice gauranteed for life position?

        bernanke should simply tell the truth. her is not even technical politician. And if he is politician, they why not make Fed another elected spot and be honest about thats?

        you let the beard off too much easy

    2. jkh: excellent indeeds.

      oliver: no. what he say is that by driving down gilts, corporations will be driven to seek yeild. also lower interest rate may goose private sector credit expansion, and inflate asset price because discount rate is lower.

      i think drive to yeild is bad as it can erode credit analysis. yeild may bi higher for goods reason. i do not see much private sector credit expansion due to lack of demands. final, i do not know how much lift there is to asset price, as risk free rate is already low and asset price has multiple compression issue.

      corporations are still “on the hook” but seriously, what do you expect local dry cleaner to do when customer has lost job?

  7. Looks to me like what QE2 is designed to do in addition to influencing yields is to drive risk by decreasing the quantity of risk-free assets. Bernanke expect these funds to go into risk assets, driving prices, e.g. of equities, “higher than they would be otherwise.” He is shooting at a wealth effect in equities as well as a wealth effect in RE by flattening the yield curve. Unintended consequence are that this will spill into commodities, and it will also increase the global pool of hot money, some of which will flow abroad, creating distortions in global finance — already a concern of many emerging countries.

    Bernanke has thought from the get-go that he can use the wealth effect to stimulate both consumption and investment. Bill Mitchell takes up wealth effects in Wealth effects – been down that road before

  8. JKH,

    In your quote of Charles Bean, deputy governor of the BoE, he is seen saying

    “So if the Asset Purchase Facility buys gilts from pension funds or asset managers, they will then have to look for another home for their money. As it is not very rewarding just to hold it on deposit, they are likely to look to put their money into other assets, including equities and corporate bonds. Thus not only does the price of gilts rise as a consequence of the Asset Purchase Facility’s initial purchases, but also the prices of a whole spectrum of other assets. That in turn lowers the cost of non-bank finance and encourages increased corporate issuance. Also the rise in asset prices increases wealth and improves balance sheets.”

    That is equivalent to saying central bank “pumping liquidity” though the latter usage is usually pejorative.

    I actually believe the above and its a bit Monetarist without being monetarist. The non-government sector allocating more money into other assets. It is not just a price related portfolio decision (ie comparing returns), it is also quantity related. (More deposits chasing assets which increases their price)

    Fed’s Dudley also has many good things to say about QE and he has stressed that it doesn’t cause any inflation and emphasized that one has to be clear about this. He has emphasized that keeping yields low may cause refinacing of mortgages at lower rates and increases consumption as people will use the difference in monthly payments gained in consuming (the Fed doesnt believe in Ricardian Equivalence, thankfully) and he knows it hasn’t happened because of problems in obtaining refinancing.

    1. Ramanan,

      Dudley’s given a couple of reasonably good speeches on QE, but not as good as Bean in flatly debunking the bank reserve channel while explaining the non-bank money channel, IMO.

      It’s not Q related for the bank channel at all. And it’s not primarily Q related for the non-bank channel, IMO.

      Holdings of financial assets by non-banks remain at the same Q level. It’s the change in P on treasury bonds that drives the initial sale of bonds for money, and the change from P on money to P on risk assets that drives the subsequent portfolio shift.

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