QE1 purchased MBS, QE2 purchased treasuries, and QE3 is expected to be targeted towards MBS. What are the motivations and/or advantages to picking one over the other?
Bernanke seems to be very interested in the makeup of the Fed balance sheet, I’m just not sure I completely understand his logic.
Source: http://blogs.wsj.com/economics/2009/01/13/bernanke-you-say-quantitative-easing-i-say-credit-easing/
If you look at the minutes of November FOMC statement, it says: "In the household sector, incoming data on retail sales were somewhat stronger than expected, and participants reported scattered optimism among their contacts regarding the prospects for holiday spending. Some participants thought that the effects of balance sheet deleveraging might be running their course or that such effects could be less powerful than had been thought. Others noted that the recent pickup in consumer spending outpaced growth in after-tax incomes and was accompanied by a decline in the saving rate, raising doubts about its sustainability unless income growth picked up. In addition, households appeared to remain pessimistic about the prospects for their future income, the job market was still weak, consumer confidence was historically very low, and credit conditions for many households were still tight. The housing sector continued to be depressed, and some meeting participants indicated that the elevated supply of available homes and the overhang of foreclosures, together with limited access to mortgage credit, were continuing to put downward pressure on house prices and housing construction. A few participants noted that recent government initiatives aimed at helping high-loan-to-value borrowers refinance could be useful steps toward stabilizing the housing market. " If you look at the December FOMC statement, it says that ‘the housing sector remains depressed’: http://www.federalreserve.gov/newsevents/press/monetary/20111213a.htm I don’t remember where I saw it but the reason why the Fed wants to purchase MBS is because by lowering mortgage costs, they will be able to more directly stimulate the housing market which they believe would result in lower unemployment (the impact on unemployment is higher than by that from purchasing Treasuries).
There’s an added “benefit” of the Fed buying RMBS…there’re still dozens of financial institutions and even countries that need to unload them. The Fed will say it’s about keeping mortgage rates low, but it’s really just a liquidity pump (as all QE measures are).
That’s interesting. I’m surprised that buying MBS lowers mortgage rates moreso than buying treasuries. I would have guessed the opposite, as the treasury curve typically dictates other rates. Is the RMBS market relatively illiquid? Is it safe to say that the institutions that need QE the most tend to hold a disproportionate amount of RMBS, thereby benefitting the most?
I’m not convinced it does, but that’s what the Fed will say when they do it.
Overall no, it’s not an illiquid market. Just the securities banks and countries need to get rid of are illiquid. Yes, I do believe it’s safe to say “troubled” banks hold the most bad RMBS. How much they benefit is certainly up for debate. So far it doesn’t appear they’ve used the cash that’s been handed to them to rid themselves of their shitty assets. Doing so would require them to mark them to market and write down HUGE losses. Instead they’ve preferred to hoard cash and kick the can. Another aspect of QE: It’s nearly impossible for banks to make money in a prolonged flat yield curve environment (especially with reduced prop trading). Since the Fed is forcing a flatter curve with Op Twist, they’ll eventually have to make it up to the banks by providing QE3. Then it truly becomes a negative feedback loop. QEx forever.