QE could be coming to an end--so what?

It is important to review the minutes released recently by the Fed, since they may well signal a turning point in monetary policy.

The programs of active purchasing of government debt and commercial assets may be curtailed. Yet, as we have often discussed at length, it is not the most important element. There are other factors of monetary policy to be considered: interest rates for one, and the Federal Open Market Committee suggested they may start to discuss interest rate hikes. The so called taperie (small version of tapering) process discussed earlier in the Market Overview appears to be slowly finalizing:

Members judged that the economy had sufficient underlying strength to support ongoing improvement in labor market conditions and a return of inflation toward the Committee's longer-run 2 percent objective, and thus agreed that a further measured reduction in the pace of the Committee's asset purchases was appropriate at this meeting.

Accordingly, the Committee agreed that beginning in July, it would add to its holdings of agency MBS at a pace of $15 billion per month rather than $20 billion per month, and it would add to its holdings of Treasury securities at a pace of $20 billion per month rather than $25 billion per month.

The famous (and infamous) program of asset purchases finallseems set to fade away. Each month the Fed plans to buy fewer and fewer securities. 15 billion dollars per month will be turned down in October probably at once. Another option is to decrease the buying program to 5 billion dollars, and then terminate it the next month. But it seems a minor technical issue, and most of the members agreed to turn off the program at once. There are no possible huge macroeconomic consequences of this slight difference, hence there is no reason to linger on with these 5 billion for another month to come. In case that happens, it will still have a negligible effect.

 


As we emphasized many times those asset purchasing programs were highly overrated by the public. This was mainly because the most active side of monetary policy performed by the Fed involved low interest rates and the great expansion of Fed’s balance sheet through various operations (not only the ones associated with the asset purchase program). The absurdly low interest rates added to existing problems and supported the weaknesses of the current system. Boosted balance sheets on the other hand, combined with the lowered interest rate, were strategies that had been the major program for stimulation. It had started way before we heard about Ben Bernanke’s special programs to invest in securities. After the Lehman collapse the Fed had already started it combined with interventions having differing recipes on how to boost the falling market. It all resulted in colorful expansions of balance sheets. The asset purchase program had impressive press and publicity but depicted only part of what has been going on. Quantitative Easing was actually way larger than what had been described. It went well beyond what is being said.

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