Tuesday, August 10, 2010

"Quantitative Neutrality"

by Bill McBride on 8/10/2010 06:14:00 PM

People are struggling with a name for the Fed's action today. I've seen QE 1.5 and variations, but perhaps the best comes from Asha Bangalore at Northern Trust who called it Quantitative Neutrality (QN), see: Fed Moves from "QE" to "QN"

The Fed's goal (according to the technical note from the NY Fed) is to "maintain the face value of outright holdings of domestic securities" at approximately $2.054 trillion.

Federal Reserve balance Sheet Aug 4th Click on graph for larger image in new window.

The red line on this graph is the amount of outright holdings on the Fed's balance sheet. The dashed line is the new target level. This is about $17 billion below the peak of a few weeks ago.

The outright holdings were expected to fall by about $200 billion by the end of 2011 (some have estimated as high as $400 billion), and that would represent tightening in the face of high unemployment and below target inflation.

The NY Fed will announce the size of the September purchases tomorrow and that will give an idea of how much the Fed expected the outright holdings to fall. The recent increase in refinance activity might have accelerated the process.