Fed Clarifies QE Policy - Sort Of

I was involved with a blog debate a month ago. The broad topic was the Fed’s quantitative easing policy (QE). More specifically there was a question of what types of Fed actions should be included in the QE definition. At the time I made some assertions and a number of folks took issue with me. I was left wondering who was right. So I wrote to the Fed. My note to them and their response:

From:BK
Can you please help resolve a misunderstanding?

On 8/12/09 the Fed put out the following report.

This report described the POMO purchases that have/will be made. It included $1.25 t of Agency MBS, $300b of Treasury obligations and $200b of Agency Bonds.

Should all of this be included in the definition of Quantitative Easing? I have put forward an argument that the $200b of Agency debt should be excluded from the total of QE purchases.

Can you clarify this for me please?

Thank you,
Bruce Krasting


From Fed:
Thank you for your inquiry.

Regarding your question if the New York Fed's operations create reserves, the Federal Reserve is the owners/definers of "reserves". That said, the Federal Reserve has developed several programs in response to current economic conditions. Information on these programs is available on our website at this link.

Information is also available from the Board of Governors website at:

From this information you may choose which programs embody your own definition of quantitative easing. I hope this information is useful to you.

Regards,

Kimberly Hooks
Media Relations and Public Affairs
Federal Reserve Bank of New York


While I am thankful to Ms. Hooks for her response I must confess that I am still confused. I did look through the information in the links provided and they do contain some clarifying information. But I felt it also opened the door for even more questions about the QE policy.

I was struck by the response: ”you may choose which programs embody your own definitions of quantitative easing”. I get to choose? I have no vote in this matter. Maybe 20-30 people in the whole country have a voice in this that counts. My view on what is and isn’t QE is irrelevant. I just wanted the facts. A Yes or No was what I was hoping for.

The following chart can also be found here. It is from this list of Fed activities I am to choose from. Possibly Ms. Hooks provides a clue in this with her words, “If the New York Fed's operations create reserves, the Federal Reserve is the owners/definers of "reserves". I take this to mean that if the action creates Reserves then it should be considered as part of the QE program. When she says: “the Federal Reserve has developed several programs in response to current economic conditions”, I assume that to be a ‘hint’ that the programs that have been created in direct response to the current economic crisis should be the ones included in the definition of QE. Of course this could be completely wrong. I am still left guessing on this. This is as clear as mud. In my simplistic view the Reserves are borrowed, not owned and I am not sure what a “definer” is. The chart:


The first category on this list, OMO (Open Market Operations), does create reserves and it does include agencies. I think this answers the question of a month ago. The Fed's purchases of direct agency debt securities (different from Agency MBS) should be included in the definition of QE.

But if you define QE as an action that creates Reserves and it is new, then there are nine additional categories that can be included as part of the QE effort. My conclusion on this is that if the market believes that the Fed is limited to purchases of Treasury coupons, agency direct debt obligations or Agency MBS to achieve their QE policy objectives they are wrong. There are no bounds on this policy.

By any definition the QE policy launched by the Fed to address the economic crisis is the largest single financial choice that has ever been made. It is having a dramatic effect on our economy today. Its impact both positive and negative will be felt for the next decade. And I can’t get a straight answer on how to define it or how big it is.