Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter


Is the Fed Engaged in Quantitative or Qualitative Easing?

Interest-Rates / Quantitative Easing Dec 03, 2009 - 03:28 PM GMT

By: Paul_L_Kasriel


Best Financial Markets Analysis ArticleAs I define it, qualitative easing. If the Fed were pursuing a quantitative easing policy, its balance sheet would be growing at an unusually high rate. The Fed allegedly began to engage in quantitative easing at its mid-March FOMC meeting this year.

So, let's look at the rate of growth in the Fed's balance sheet from the last Wednesday in April through the last Wednesday in November and compare this current rate of growth with rates of growth in the Fed's balance sheet for comparable periods in previous years. This is shown in Chart 1. I have arbitrarily set the end-of-April to end-of-November growth rates equal zero for 1999 and 2008 so as not to distort the scaling in the chart for other years. As you will recall, in the lead up to Y2K, the Fed ballooned its balance sheet in order to accommodate an anticipated surge in the demand for currency. The Fed's balance sheet ballooned after September 2008 in the wake of the Lehman failure.

In the most recent April-to-November period, Fed credit outstanding grew by 6.8%. This is well above the median for the 1989 through 2009 time span (with 1999 and 2008 set at zero) of 2.5%. Nevertheless, this relatively high rate of growth in the Fed's balance sheet in the 2009 interval is hardly unprecedented. In fact, in four prior years - 1990, 1992, 1993 and 2001 - the April-to-November rate of growth in the Fed's balance sheet exceeded the 2009 growth of 6.8%. And in 1991, the Fed's balance sheet grew by 6.6%, close to the 2009 growth rate.

Chart 1

Chart 2 shows the level of Federal Reserve Bank credit outstanding. After the Lehman failure in September 2008, Reserve Bank credit shot up, largely because of a surge in Fed discount-window borrowing and other special Fed credit facilities (the red line in Chart 2). After the crisis atmosphere subsided, discount-window borrowing edged lower and so did Reserve Bank credit. Then, in mid March 2009, the Fed began its program of outright purchases of Treasury coupons, GSE debt and mortgage-backed securities (the blue line in Chart 2). Notice that total Reserve Bank credit has not exactly surged as the Fed has been purchasing securities in the open market inasmuch as discount-window borrowing has continued to trend lower. The decline in discount-window borrowing is partially offsetting the increase in Reserve Bank credit emanating from the Fed's open market purchases of securities. If the Fed were pursuing a quantitative easing policy as I perceive one, the Fed's open market purchases would offset the decline in discount-window borrowing sufficiently to increase the slope of the green line (Reserve Bank credit outstanding) in Chart 2.

Chart 2

Chart 3 plots the annualized rate of growth in the nominal M2 money supply. Notice that since the Fed allegedly commenced with its quantitative easing policy in March 2009, growth in M2 slowed markedly, in fact, contracted on a 3-month basis in August and September. Is this what Milton Friedman would have characterized as a quantitative easing policy? It looks to me more like a Bank of Japan version of quantitative easing.

Chart 3

In the eight months ended November, mortgage-backed securities on the Fed's balance sheet have increased by about $616 billion; Treasury coupons by about $295 billion; and GSE securities by about $105 billion. It is interesting that since the Fed began its alleged quantitative easing policy, biased toward the purchase of mortgage-backed securities, the yield spread between the 30-year conventional mortgage and the 10-year Treasury security has narrowed to pre-crisis levels (see Chart 4). Although the yield spread between the high yield corporate and the 10-year Treasury security has also narrowed, the spread still remains above its pre-crisis levels (see Chart 5).

Chart 4

Chart 5

I would argue that since mid March of this year the Fed has engaged in a qualitative easing policy, not a quantitative easing policy. The Fed's balance sheet has not shown exceptional growth when compared with some recent years. Rather, the composition of the Fed's balance sheet has been changed in favor of mortgage-backed securities, which has coincided with a return to normal spreads of conventional mortgage rates relative to Treasury bond yields. If the Fed were pursuing a true quantitative easing policy, the M2 money supply would be accelerating in growth, not decelerating.

Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2009 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules