NEWSFLASH: The Fed Isn't Stopping QE!

Sprout Money's picture


What has been expected for quite a while has now officially happened. The Federal Reserve stated that it would stop intervening on the market where it has been buying treasury bonds and mortgage-backed securities like there was no tomorrow anymore. The program started at a rate of $45B per month but was upscaled rather fast to $85B per month before being gradually scaled back since the beginning of this year. The Fed’s balance sheet has expanded considerably as you can see on the next chart.

Federal Reserve Balance Sheet

Whereas the total balance sheet of the Fed was less than 1 trillion Dollars by the end of 2008, this has been increasing exponentially and in just the last 24 months the assets on the Fed’s balance sheet increased by 60% to 4.5 trillion dollars. Yellen has kept her promise as she said she’d scale the open-market purchases back if the economy would strengthen sooner than anticipated.

Even though Quantitative Easing has now officially been stopped, the reaction in the gold price was actually quite muted. Gold bears have been predicting a crash of the gold price as soon as the money-printing stage would be reduced or stopped, but they have been proven wrong as the gold price dropped less than 2.5% on the news and subsequently lost another 3%.

This means that gold is much more resilient than originally thought and that the gold price is NOT purely depending on the effects of a Quantitative Easing program, as so many people want to make you believe.

But wait, let’s not get carried away by the so-called ‘End of Quantitative Easing’ and have a closer look at this MBS purchase program. The Fed’s announcement to stop purchasing additional Mortgage-Backed Securities was just talking about NEW investments paid for by freshly printed money. It is the central bank’s intention to continue to reinvest the returns on its $1.7 trillion dollar Mortgage-Backed Securities portfolio back in the market in the foreseeable future.

Federal Reserve MBS Holdings

If we’d estimate the return on investment on these MBS’es to be 2.75% (which is roughly the return in the PIMCO MBS Fund where the average maturity of the MBS portfolio is less than 4 years), an additional $47B (on TOP of the maturing principal amounts) per year which would flow into the Fed’s treasury will very likely immediately be reinvested. That would mean that on average $4B per month in interest payments would continued to be invested in MBS, and this is just a 20% decrease versus the official $5B per month number. So even though the Federal Reserve pretends it will no longer spend $5B per month on mortgage-backed security purchases, it isn’t actually stopping the MBS purchases as these will continue at at least $4B per month. This number will very likely be even higher, as it is also the Federal Reserve’s intent to reinvest the principal amounts as well.

So in the MBS market, the Federal Reserve is saying one thing but is actually doing the complete opposite.

The only difference is that these aren’t called ‘MBS purchases’ but ‘reinvestments’. Whatever they want to call it, the Federal Reserve will still pump in excess of $45B per year in the MBS market so the life support will still be switched on in the foreseeable future. And the Federal Reserve has no official mandate to take the money back out of the market when the MBS mature. Theoretically, the central bank would be allowed to reinvest the principal amounts as well as the interest payments on these amounts in infinity. Even though market analysts at for instance Deutsche Bank expect the Fed to phase these investments out by 2017, the central bank is under no real obligation to do so.

The next chart shows you that the Federal Reserve has been doing this for a while. At the previous meeting of the FOMC, the Federal Reserve announced it would scale back the purchase of Mortgage-Backed Securities to just $5B per month. One would then expect the total amount of MBS on the Fed’s balance sheet to increase by roughly $5B. Caught in the act, the official numbers show you that in just one month the total amount of MBS increased by not less than $16B.

Federal Reserve MBS Detailed

The real ‘credibility test’ for the Federal Reserve will no longer be in the official Quantitative Easing numbers but in the size of the balance sheet. We dare to bet the balance sheet of the Federal Reserve won’t shrink at all in the near future, and we expect the total balance sheet to remain at extremely elevated levels for the foreseeable future.

The official Quantitative Easing has ended, but the Federal Reserve isn’t stopping its interventions as the MBS purchases will continue at the same pace. It only wants you to believe it did.

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cdude's picture

During QE3 the Fed was purchasing $45B/ month in MBS.

robnume's picture

Abolish the Feral Reserve System!

razorthin's picture

Exactly what I've been saying.  Fucking liars.  I can't believe that most thought they were just thieves.

lasvegaspersona's picture

posted elsewhere today...but this seems a better place:

Many here at ZH understand the problems with gold derivatives (ie 'paper gold'). They know that there is far more paper traded than there is actual physical gold to fulfill those trades should buyers demand physical. They also understand that some entities, with an agenda to see the price of gold kept low, act in ways that accomplish that end, they sell large amounts with no ability to deliver...ever. They clearly see that the paper market must eventually fail. And it will.

The problem is that these same individuals see the paper market eventually failing in a huge rise in the price of gold as the demand for paper gold increases and short are forced to cover. They believe the same forces that are able to massively naked short the market will somehow be forced to make good on their contract and pay off the longs.

This is unlikely. What is far more likely to happen is that the shorts, with whatever backing they have (maybe a central bank?) will continue to sell(forcing prices even lower)  until the market breaks and no more physical can be sourced. At this point, instead of a grand windfall for longs, we should expect the forces that enable this naked shorting, to further support the process by allowing cash settlement at low market prices. If you were TPTB and it was your money which would you prefer?...failed bullion banks or a few upset goldbugs?

As the price of gold continues to fall, this might just be 'the big one'. Gold prices may just fall to the level at which no sane holder of physical will part with another ounce and the olde force majeure is declared.

I am not clairvoyant. I don't know whether this is more of the same or the final run. I do know that those who hold gold would be wise to see that this outcome is possible and indeed the more likely finish to this long story. When gold is $300 per ounce and not a gram can be sourced...don't say you never thought is could happen.

Don't worry. Gold is still demanded by all major producers. If you have physical it will come out of this crazy period better than ever. Just don't get tied to a scenario and be blindsided by an unexpected turn.

Gold is down $8.50 in the usually quiet Sunday Asian markets. 


daveO's picture

Right. That would actually be the beginning of the end for the dollar, if it gets that far. Therefore, they really need to crash the global markets, at this point, to pull money back into the US and boost the 'reserve currency' status. They can't realistically wage war on the BRIC's, like Gaddafi, so sucking the money out of their economies is plan B. 

delacroix's picture

this is what happens when the parasite grows bigger than the host.    ( how did I get on top?  I like it)

GreatUncle's picture

Smoke and mirrors ... they were forced in 2008 to reveal how much was in fact being created YOY and now they want to put it back into the shadows.

The same level of QE hidden or not has to be created just to keep the system inflating and how much the FED has on the balance sheet reveals this nicely.

jtlien's picture



The new QE will be disguised as currency market intervention...

You will recognize it when the FED announces that in order to stem the rising value of the Dollar on international markets, it is starting a program to exchange dollars for yen, euros etc.   Freshly printed yen exchanged for freshly printed dollars.   The average Joe will still think QE is over, we are all good.    Whats a little exchange rate manipulation to the aver Joe?   But the effect will be QE outsourced to Japan.


I Write Code's picture

Good post.  Even $5b/month is not insignificant, but $5b recycled is a lot less harmful than $5b printed.  The bigger point is that the federal reserve *member banks* are being required to buy bonds for the next year.  That may show up on a different FRED2 chart, but it should still be visible somewhere.  Now officially this is also "real" money and not newly printed so it should not be as diluting and inflationary as QE, in fact it might be deflationary, but it will maintain the status quo in the capital markets.

Everyone is playing by ear these days, we'll find out shortly what it means.

SAT 800's picture

I agree. it is a good post. And it's exactly what I assumed. the central financial institution will continue to support, artificially, create artificial markets, for MBS, and other distressed areas of the financial world. None of this has been a direct cause of inflation; it's an artificial support system for the bubble world. The "money" or whatever it is, doesn't escape. it's used to prevent collapse.

whyami's picture

No surprise at all! How are they going to pay for the billions of interest on the debt each month if there was no QEs?

atthelake's picture

Remember that Muslim who tried to blow up the Fed? Where is he now?

Infinite QE's picture

And yet no one mentions Brussels.

Vendetta's picture

Brussel sprouts are like green shoots ... only for bankers though

BuddyEffed's picture

Dont'cha mean Belgium?

And as far as the 0.0001 percent class is concerned, it really doesn't matter which CB prints, as long as someone does (in order that there be more virtual money to cover the virtual interest on the combined virtual debt).  They can take turns.  Case in point.  Japan.   Who's next?  China?

the grateful unemployed's picture

Once you accept the reality then consider going the US off balance sheet with the budget, or parts of it. (they did this with the Iraq war and by analogy the Iraq war is the Feds economic shock and awe, or QE,  item 1) break it you bought it, - we broke Iraq so what? The US economy is a little closer to home, but follow the process, they run along parallel lines of development.

Remember when we pulled troops out of Iraq, gee that felt sorta good for a while, just like TAPER. QE was over, the economy had recovered? Guess it didn't. Now we're back in Iraq but no boots on the ground this time (along the economic parallel no QE this time, just REPO and POMO, and PPT, all the old tools that jacked up the stock market before 2008). This is the equivalent of returning to the old No Fly Zone policy in Iraq, and in this cute parable to the war in Iraq, here comes comes the Islamic state, which is blowback from our ovelry ambitious and destructive war policy. The equivalent to ISIS in Iraq is the Tea Party in Congress. They want a fundamentalist MONETARY state.

Hows it all going to work out? In Iraq, the Sunnis will get their own state, a patch of empty desert east of Baghdad. The Kurds will get theirs, though that is more problematic. We will have to go to war with the Peshmerga before those boundaries are settled. The USG is really helpless to guide events any longer. On the economic front, off balance sheet we go. The Tea Party wins a balanced budget amendment, or PayGo as Pelosi once proposed. The Chinese buy the American embassy in Baghdad.

Romney runs again and wins. He's not Bush and he's not Clinton.

wrs1's picture

How much of the MBS portfolio has been defaulted?  If they never get paid back then there isn't any new money to QE with.  I wonder if there is anywhere they report how much they lose due to default.

daveO's picture

Yes, at Satan's Altar, not open to the public, not even Congress.

AdvancingTime's picture

This is not unexpected as the Fed is far from transparent. If the economy was healthy and balanced we would not be experiencing slow growth while massive amounts of money are being printed and poured into the system. The crux of our problem remains in the fact that both people and governments have lived beyond their means by taking on debt they cannot repay.

Over the last several decades we have created entitlement societies built on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances. Promises were made on the assumption that the advantages we enjoyed would continue in both Europe and the US. Ever greater prosperity and entitlements were to be sustained through debt financed consumption growth.

In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about evermore growth. Debt does matter and the following article delves deeper into why kicking the can down the road will ultimately fail to bring about growth and in the end destroy the system.

ucde's picture

The language you use to describe our situation ties into the larger oligarchic narrative that "an honest man repays his debts", e.g. that the poor are to blame for falling into debt. 

Placing an emphasis on personal responsibility is gratifying in some regards, and perhaps has some truth to it, but it simultaneously provides a quasi-moralized stance which very conveniently fits with the interests of those to whom these debts are owed. Debt oligarchs like nothing more than the idea that their claims on wealth are backed by a kind of holy moral mandate. It is one of the main things protecting them from loss!

"Living beyond their means" places the burden on the debtor. Remember that there was also a creditor who "lent beyond the ability to repay". Who should suffer the loss?

JimS's picture

I gave you an up arrow. Another aspect to this situation: many of these "MBS" securties were put together by placing the same mortgage in multiple "MBS" issues. That was part of the whole fraud-fever. I am guessing that many of the FED's purchases fall into that category.

CHX's picture

Money printing will continue mainly through quasi unlimited cheap credit lines to the TBTF banks.

Stoploss's picture

Nothing better than a bag holder with a printer.

They can never stop buying MBS because Wall St. offloaded everything to the FED in a 'quasi' sort of way.

All one needs to look at to see what the fed is doing need look no further than new and existing home sales, rates, and fed balance sheet, and their interaction between the four of those.


Transparency, clear as a fucking bell...

bitterwolf's picture

ya know this QE strategy was supposed to be temporary..right..stimulate and withdraw ...right. So now what if all major feds in our little inter-connected global financial "house of cards" do the same thing....and no bond sell offs ever happens...sticky points (credit flows) are ampy lubricated with liquidity and new legislation forcing banks to co-operate in this global three card monty....who says they cant do this ad infinitum...who says??? gubbermints,consumers, banks, international corporations,soros....??lol

The Most Interesting Frog in the World's picture

Great point and certainly the question to be answered, "who says they cant do this ad infinitum...who says???".  It does seem like there is zero accountability, when theoretically there should be.  

The assets are being propped up for the greatest generation and baby boomers globally.  Where things come unglued, I believe, is the generations that follow.  Inflated asset prices, stocks, bonds, RE, will make it virtually impossible for younger people to buy a home or retire.  Their wages have not risen in real terms, but their retirement and down payments on houses are going up exponentisal.  Not to mention the fact that youg people are paying the bulk of senior's medical costs, despite living paycheck to paycheck.

daveO's picture

And this is why DC is pushing amnesty. A new round of slaves for the plantation. 

bitterwolf's picture

Thats exactly flesh out the bottom of the pyramid/ponzi scheme to pay for my Gen X ass, lol

TabakLover's picture

Why would we  think the Fed balance sheet will reflect the truth?

q99x2's picture

Nobody mentions Belgium Japan Austrailia Canada or England. It is all one big central bank where Draghi can go up my FAFSA or tax US workers and businesses. It is the basis for what Putin calls the NWO. The US is a conquered nation-state of a foreign kingdom

Comte d'herblay's picture

And who, besides the dead, didn't know that?

SKY85hawk's picture

No body has spoken of the quality of the MBS bonds the FED holds, since 11/29/2013.

The board changed financial accounting standards 157, 124, and 115, allowing banks more discretion in reporting the value of mortgage-backed securities (MBS) held in their portfolios and losses on those securities.  Ie. Mark-to-Market became Mark-to-Fantasy


Have any credible measurements of the true value of these MBS been available for public review? 

blackbeardz's picture

Its Marky Mark time! Feel those good fed vibes, time to marky mark those securities with good vibrations, a la Funky Bunch -cause they got nothing

Colonel Walter E Kurtz's picture

Can we not just assume they assume they are crap? I do not think the banks would have been offloading truly profitable MBS's. But if the Fed is taking the income stream from the MBS's and intends to buy more, then that means at least some of the homeowners are continuing to pay. However, just because some are paying, I guess it does not mean the FED actually has to reveal the amount of individuals who are not paying. I guess the losses really do not mean anything to the FED, since they have the CTRL-P button and probably do not have to report losses. I mean, who would know, since we cannot audit the FED.

After writing that circular nonsense, I think all I have to say is, F the FED!


McCormick No. 9's picture

This is a stupid post. 5 billion a month in reinvestment in MBS is not 85 billion a month in QE purchases of Treasuries.

Even the most rabid ponzi-maddenned banker can see that without an engine, MBS reinvestment is going to be a losing proposition.

This is what the author said:

"It is the central bank’s intention to continue to reinvest the returns on its $1.7 trillion dollar Mortgage-Backed Securities portfolio back in the market in the foreseeable future." (emphasis mine)

Without QE, (the real kind, where the Fed buys Tresauries) there is no liquidity. Where is the market going to get the financial crystal meth it needs to stay UP all the time?

The Fed, if it "reinvests" MBS in long positions, it is going to lose all that money it gained by pumping up the stock market (and increasing the "value" of its MBS portfolio, er, garbage) through the QE meth it cooked up in the backwoods RV. If this happens, the Fed will get a black eye politically. Losing money on toxic investments the FED purchased from banks in 2008/9 is political kryptonite.

The BoJ gambit to keep the stock market pumped cannot last forever. If there are any crafty. psychopathic traders at the Fed, my guess is they will short sell the MBS toxins, and flush them into the system secretively, in order to demonstrate how "smart" they were to buy those worthless tranches in the first place.

This can only end badly. Once the bond selloff begins, and interest rates take on momentum upwards, this whole FUCKING charade will go up in smoke.

But reinvestment of MBS, even if it is done with spectacular criminal genius, is not QE. Sorry, it just isn't.

One World Mafia's picture

Never gonna happen...will take a plague for The Fed to resurrect QE, something on the order of ISIS spreading Ebola.  Oh wait a minute...

Edit:  Historians have noted the aftermaths of plagues are actually quite good for economies so long as there's a high death rate.  The plague itself can be economically handled by quarantining people in tents which has already started.  Lest you think King Obama is against Ebola quarantines, well not really.  Last July he signed an executive order allowing for the aprehension and detention of Americans who merely show signs of respiratory illness.

shovelhead's picture

Ya gotta admit that 85 Billion a month is a pretty hard act to follow.

Except for Japan.


MontgomeryScott's picture

It's like a group of rapists pulling a train on a victim. When one is temporarily spent, the next one moves in right behind to continue the act.

Fed spent, BOJ next up...

Dingleberry's picture

My thoughts exactly.  All CBs are in this shit together....and the fed will backdoor cash to them to swap in our markets.

The ECB...and those pesky trillionaire Belgians (who knew they had so much cash?).....the Chinese.....all one big enterprise.

Tonesvette's picture

If QE ends, then from where will the federal deficit be financed ?   

Excess reserves ?   Same bank different name.

China's trade surplus ?  Doesn't even come close.

National savings ?   Yeah .. I know .. funny, right ?

I don't see any pool of money in the world ready to plug the half trillion dollar deficit and no how, no way is the Fed going to allow interest rates to rise high enough to truly finance it.

Maybe the Japanese central bank will buy our paper in a fit of revisionist hari-kari ?  

Who knows ?   Anybody ?

BringOnTheAsteroid's picture

You are thinking too hard about this and the way governments stop their citizens thinking too hard is to distract them with a war. When missles start raining down on US soil you aren't going to be worried about deficit spending and where the money is coming from.

Cheney must be ready to lob that nuke into Manhattan by now. Think of all that malfeasance covered up, the pyscopaths dream.

daveO's picture

If the bankers have unloaded all their trash, they will let rates rise, regardless. More profits in higher rates. Politicians know not to cross them, or they'll be shot. Either the Fedgov. cuts the budget and/or raises taxes to fill the gap.

blackbeardz's picture

fed goes Napoleonic, crashes market and buys it all up to save our souls. bubble, burst, repeat till they own enough to control the NWO.

- you did say anybody

Redneck Hippy's picture

The yield on U.S. Treasuries looks great compared to JGBs or European sovereigns.  Institutions that need relatively safe yield will fall all over themselves to buy Treasuries, particularly as the federal deficit and the trade deficit are rapidly declining, diminishing supply.

Plus the BOJ is displacing investors in JGBs, since they are effectively cornering the market.  Where does that money go?  All stimulus is fungible.

Tonesvette's picture

" All stimulus is fungible."

Thank you ...

So the global fiat system that commenced in 1999 with the Swiss Franc's delink to gold and repeal of Glass-Steagal is just going to steamroll any alternative currency's stand ?

Will Russia really make a stand or will they take heed to what happened in Libya and Kaddafi's oil backed dinars ?   I shudder to think of the tyranny that will follow on the heels of the NWO's conquest of the last remaining holdouts to joining the banking cabal.



TVP's picture

Russia has something Libya did not - the BRICS bank, and cooperation of the other nations that make it up.

America (aka the military arm of the cabal) won't be much of a threat to anyone after those nations dump US debt and establish payment systems outside the petrodollar (already happening).  

disabledvet's picture


PHUCK YOUR "FORCE" and all worthless "OB-wan this" and "feelings" that. We can blow up planets and that's exactly what we're going to do!

We'll put a team to investigate the whole choke hold thingy though.

I mean seriously "make some dollars, buy some shit." It's not some evil "cabal" that made Trichet into a total moron or caused Putin to be acting out his fantasy world. I feel for Japan because it is possible that..."however unlikely" (which is very) that Fukushima tsunami was no accident. Fukushima itself was not however.

If something is an accident waiting to happen don't be surprised if it does.

This is why we have Government folks...not just to plan...but to plan in advance from our own stupidity. Like say "CDO's squared." What could possibly go wrong there?

exartizo's picture

The price of gold has nothing to do with QE any more.

Xibalba's picture

gold has nothing to do with the price of gold anymore

GreatUncle's picture

Once gold or any other item is purchassed with FIAT you can kiss any notion of price away.

That is the power of FIAT if you can create as much as you want.

Me? Gimme a computer and how fast can I start adding 0's to the number until such time as the number exceeds the numerical value of the USA or any other country.

So a puzzle, how much QE was the FED allowed to CTRL-P you know a number predetermined? Oh infinite ... I see.