Quantitative Easing II postponed, but no drain.
From August, 10 Fed meeting statement:
“To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal
Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency
mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal
Reserve’s holdings of Treasury securities as they mature. ”
US Federal reserve has 18 billion in Treasury bond coupon passes scheduled for the next 30 days
Formally this means what the Fed has already printed will not be sterilized and will be rotated into treasuries as
MBS on balance sheet mature. The Fed stated they will keep their SOMA account unchanged at $2.054 Trillion.
However, we wonder if the Fed will actually engage in covert printing under the table. One obvious way to do so
happens when the MBS trash on the Fed’s balance sheet defaults. Then there is “double printing”. The first time
was when the Fed actually bought the trash from the banks, the second time when it defaults and the Fed “replaces”
it with treasuries, while keeping it’s SOMA account unchanged.
For example, if ALL MBS trash were to default, the total amount of printing would be a double of what the Fed
allocated to MBS in QEI – the first time printing happened when the Fed bought MBS from banks at face value,
creating money out of thin air to do that. The second time will happen when the trash defaults and the Fed creates
that money AGAIN to buy treasuries.
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