QE3 So Far: Nothing!

Let’s give a status update on the QE3 $40 billion/month MBS buying and $45 billion/month U.S. treasury buying.

If we take a look at the federal reserve balance sheet, we see that in October 2012, nothing at all has happened. The amount of treasuries is constant (light brown + orange area). The amount of MBS is also constant. The balance sheet is even shrinking instead of expanding!

Chart 1: Federal Reserve Balance Sheet

This can be confirmed here.

Table 1: Federal Reserve Balance Sheet Detailed

So where is the promised QE3, Mr. Bernanke?

Composition of Fed Balance Sheet Indicates Low Interest Rates For Eternity

I have been talking a lot about the federal reserve balance sheet. But what is it composed of? And how did it evolve higher?

Chart 1 gives the composition. You can see that QE1 and QE2 were mainly bond purchases (light brown area). QE3 should be another round of bond purchases and should expand the light brown area again.

Second, the spike in 2008 was mainly lending to financial institutions at the time of the banking collapse. This lending has been paid off in 2010.

But the most interesting part is the mortgage backed securities area in brown. In that period, congress passed the Emergency Economic Stabilization Act of 2008, which authorized the Treasury to purchase mortgage-backed securities. As a consequence, the brown area increased in size at the same time when lending to financials decreased. That means that the federal reserve has bought approximately $US 1 trillion of mortgage backed securities in an attempt to support the housing market. It didn’t do much to the housing market. New home sales and housing starts were flat, but the housing market index improved a bit though.

I will point out the importance of convexity to make my case of lower interest rates in the foreseeable future.

Chart 1: Federal Reserve Balance Sheet

To read the analysis go here.

How Likely is QE3? 70% likely.

Ben Bernanke has been saving his ammo in the past months. Each time the fed meeting was held, markets were hoping for QE3, but they didn’t receive any. This is evidence by the U.S. federal reserve balance sheet on Chart 1.

Chart 1: U.S. Federal Reserve Balance Sheet

Today, we have passed several months and we already see that the economy is starting to deteriorate. Not only in Europe and the emerging markets, but especially in the United States. In this article I will focus on the key macroeconomic data in the U.S.