24 Sep 2011

Operation Distract

Economics, Federal Reserve 4 Comments

Whoa! Everybody is getting all bent up about the bond duration aspect of Operation Twist, but I just noticed this in the Fed’s official statement:

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

This is new, right? (I’ve put the significant word “now” in bold.) It was my understanding that up till now, the Fed was maintaining its overall balance sheet by rolling maturing assets into Treasuries.

Do you concur? And if so, do you approve?

4 Responses to “Operation Distract”

  1. Papi says:

    Yes, it does seem new and would constitute a kind of mini-QE as it stands.

    If Ben does intend to double-down, buy Treasuries on the sly, (y’know, for technical-balancing) then Twist seems like it’s QE3.

  2. von Pepe says:

    I saw this on the plane and looked around: “Does everybody see this”?!

    It is just another example of how they have total discretion, unknown and shifting goals, ad hoc policies, and continue to learn the devastating reality of unintended consequences.

    Mises’ theory of interventionism playing out before our eyes to tragic outcomes for regular people.


    • Bob Murphy says:

      You should have pulled a Will Ferrell: “I feel like I’m taking crazy pills!” (Not sure if you were referencing Zoolander yourself.)

  3. EB says:

    You’re right Bob. Reinvestments per QE Lite are only running $15-$20 billion/mo., so this will not have much of an immediate effect on mtg rates.

    Conspiracy theory of the day is that this is the Fed’s part of a one two punch with the Administration, whereby a big new mortgage writedown program is rolled out. Someone has to buy the new 3.5% coupons and keep mtg rates low for a while. Even further down the tinfoil hat road is one program in particular pushed by George Soros.

    I wrote about this in the above link.