On 12.18.2013 we had the “most important FOMC announcement ever,” again, which also happened to be Ben Bernanke’s last one where he partook in a press-conference as the chairman of the FOMC. The FOMC voted that beginning in the month January they will reduce the LSAPs done in a single month by an aggregate total of $10B: $5B from US Treasuries and $5B from Agency MBS. Totaling in an ever-still astounding $75B in asset purchases every single month. Of course, while still reinvesting the principal of matured Agency paper that is paid out to them, as well as rolling over USTs. As stated in the minutes release:
Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per 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.
As those of us in finance, as well as those in law know very well, language is everything. As I read this statement several times over, the language used in it makes it apparent as to why US equity indices shot up to new highs right after the release: the language. As an example, look at the way I wrote what their decision was, and look at how they wrote the decision. No, this is not a class in semantics, but in the real world, semantics is very much a part of life whether you like it or not. Therefore, it is something that has to be paid attention to, whether you like to or not. Simple fact is: if you do not, it will cost you money. What am I getting at here?
Well, it is something completely different to say: we are reducing x by y, than to say: we are buying x at a rate of y instead of at a rate of z. In the former we are getting straight to the point and are not attempting to make it sound like anything besides what it is. Whereas in the latter, we beat around the bush to get to the result of the statement. The only way to interpret what the Fed has stated in its statement is: QE trade is still on. Why is that?
To start, they are still doing QE, so nothing has changed. There will still be POMOs, so nothing has changed. They are still monetizing debt, so nothing has changed. The amount of reinvested principal is no small amount by any means, and neither is the amount of USTs that are rolled over. So when you take 2 seconds to think through the words used in the release: nothing has changed. What is $10B in reduced asset purchases on a monthly basis? Especially when it is just $5B per leg of this accommodation.
$10B is a seemingly insignificant amount, as the Fed still chooses to continue to engage in debasement of the USD at a tune of $75B per month. That equates to $900B a year. Not a small sum by any measure. However, take note of the arrogance that the Fed continues to display for all to see:
The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.
Now, the omnipotent Fed is still hanging on to the notion that stock matters more than flow. I do not know how much higher rates have to go to disprove this ridiculous notion. It should be clearly apparent that it is not the case by now, as the amount of USTs and Agency MBS that the Fed owns has only gone up over the past year, while interest rates have gone up as well. There are some market participants out there that claim: the purpose of QE is to get rates higher. That nonsensical notion is due to the fed stating that it wants inflation as part of its dual mandate. However, there is something deeper that those making such a claim ignore: real rates. I will discuss this at another time in detail, but needless to say there exists a term structure of interest rates. Focusing on the nominal is a fools game.
In closing, QE4EVA & carry on.