Saturday, October 6, 2012

QE3: What's The Holdup?

“The purchases of additional agency MBS will begin tomorrow (9/14), and are expected to total approximately $23 billion over the remainder of September.”
--FOMC Statement, Sept. 13th, 2012

The Fed published the above statement on September 13th. As of that date, the Fed held $844 billion of MBS. $844B plus $23B in new purchases should result in an MBS portfolio of $867B. As of Oct. 3rd, the Fed’s MBS portfolio stood at $835B, a shortfall of $32B. Inexplicably, the Fed now has an MBS deficit of $35B. Almost a  month after the announcement of QE3+, nothing has happened, despite the Fed’s promise to start buying “tomorrow”. (By the end of October, the Fed’s MBS portfolio should be $907B, a gap of $72B from today.)

Obviously, this is some sort of screw-up. There is no valid reason that I can think of why the Fed is selling MBS when it has said that it will be buying it.
The whole point of using transparency to manage expectations is that public statements are reliable, not aspirational. Now it appears that we will need to decide in future which of the Fed’s forward-looking statements are sincere and which are whimsical.

It is ironic to see so many pundits now saying that QE3+ hasn’t worked, when it hasn’t started yet. My prediction is that Bernanke will get his act together in the next two weeks, and the OMO desk in New York will in fact start buying MBS, and that these purchases will not be sterilized by selling other assets. When this happens, there should be a gradually swelling impact on the monetary base, the money supply and, more importantly, inflationary expectations. This should be bullish for equities, because it will mean faster nominal and real growth.

Presumably, at some point the “transparent” Fed will explain to us why it chose to delay its buying program by three weeks and counting. If there is an explanation somewhere on the Fed’s website, I can’t find it. On the NY Fed’s website under Open Market Operations/MBS, it states that “During the period of July 22 to September 30, 2010, no transactions of this type were conducted.”

This is indeed a mystery, which one hopes will be resolved quickly.

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