QE Is Officially Over

March 9, 2022   |   Tags:
QE Is Officially Over

Earlier today, we reminded readers that as the Fed transitions from QE and perpetual post-covid easing to QT and inflation-battling tightening, today would be the final POMO under the existing QE.

And sure enough, at 10:30am today, the 20 minutes POMO operation in which the Fed looked to buy $4 billion in bond maturing between 2024 and 2026 came to a close (after $17.4 billion par value in bonds submitted) and with that QE is now officially over (although technically, the NY Fed will be holding mortgage operations running through the end of the week so not really over just yet).

QE comes to an end after purchasing nearly $6 trillion of Treasuries and mortgage bonds in the past two years after the onset of the Covid pandemic.

As Bloomberg details, the current QE - which we are confident will make a fresh reappearance in a few months just as stocks implode and the economy slides into recession, perhaps alongside the Fed's direct purchases of stocks and equity ETFs -  which included more than 580 separate operations to buy Treasuries and 1,200 to purchase mortgage-backed securities, dwarfed all three of the Fed’s previous quantitative-easing programs combined, helping to grow the central bank’s balance sheet to an unprecedented $8.4 trillion.

Of course, the Fed won’t be fully out of the bond market, where it will remain keenly involved through its day-to-day management of policy and also intends to purchase some securities through auction add-ons as those it currently holds mature and roll off. But this week marks the end - for now at least - of the program it’s been conducting in the secondary market to expand the balance sheet through bond-buying.

Here’s how the program that’s winding up compares in size to the earlier ones aimed at growing the Fed’s total holdings, in billions of dollars. All these programs were done at times when the Fed’s policy rate was effectively 0%, in order to keep additional downward pressure on yields.

In addition to these, the Fed conducted a fifth program in 2011-2012, commonly known as Operation Twist, which essentially replaced $667 billion of short-dated debt with longer-term securities, but didn’t change the overall level of debt holdings. It also pretended it didn't hold a QE in the aftermath of the repo crisis in Sept 2019, and even though Powell claimed it was "NOT QE"... it was.

The total quantity of purchases under the program exceeds growth in the Fed’s System Open Market Account over the same period. That’s because a portion of its purchases of mortgage bonds was in fact reinvestment of funds returned by the issuer as borrowers repaid principal on the loans underpinning those securities. By contrast, reinvestment of maturing Treasuries was handled separately, via auctions, rather than through secondary-market buying.

Hilariously, Fed officials have said they’re likely to begin to shrink the balance sheet, beginning as soon as this year, just as the next global depression hits, by not replacing a fixed dollar amount of its maturing Treasury holdings each month.

Good luck with that.

Tyler Durden Wed, 03/09/2022 - 10:44