Fed Moving Closer To QE3

Today the WSJ reports that the Fed may be moving closer to QE3—as soon as next week or in September. Interestingly, mortgage bonds (MBS) that rates are tied to backed off a bit in late trading today, and price changes for the worse on consumer rates have been coming through. Could be an early sign of “sell the news” after a massive MBS rally in recent months driven by QE3 rumors and bond investors seeking a safe haven from European turmoil.

If a round of quantitative easing (QE) was announced, it would be the third. QE1 ran from January 1, 2009 to March 31, 2010, and the Fed bought $1.25 trillion in MBS as a rate stimulus exercise—rates drop when bond prices rise. QE2 ran from November 3, 2011 to June 30, 2011 and focused on $600 billion in Treasury buying. Here’s a timeline of QE1 and QE2.

In addition to these measures, they also engaged in Operation Twist, which had two tiers: trading their short-term Treasury holdings for longer ones, and also reinvesting proceeds from MBS bought during QE1 into new MBS. Here’s an explanation in plain English. And on June 20 of this year, they extended Operation Twist which was previously set to expire June 30, 2012.

It’s unclear whether possible QE3 would focus on MBS, but it’s explicitly noted in all of the investor and media chatter.

Here’s an excerpt of today’s WSJ piece with story link below that:

Amid the recent wave of disappointing economic news, conversation inside the Fed has turned more intensely toward the questions of how and when to move. Central-bank officials could take new steps at their meeting next week, July 31 and Aug. 1, though they might wait until their September meeting to accumulate more information on the pace of growth and job gains before deciding whether to act.

Fed officials could take some actions in combination or one after another. Fed Chairman Ben Bernanke, in testimony to Congress last week, listed several options under consideration, including a new program of buying mortgage-backed or Treasury securities, new commitments to keep short-term interest rates near zero beyond 2014 or an effort to push already-low benchmark short-term interest rates even lower.

There are several reasons why Fed officials might wait for their September meeting to decide whether to proceed. By then they will have seen two more monthly unemployment reports and two more months of data on output, spending and investment. Fed officials update their economic projections at the September meeting and Mr. Bernanke holds his a quarterly news conference after, which would give him an opportunity to publicly explain the Fed’s thinking.

Reference:
Fed Sees Action If Growth Doesn’t Pick Up Soon (WSJ)

QE1 and QE2 Timeline & Rate Recap

How Fed’s Operation Twist Programs Lower Rates

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