FED Converts Operation Twist to QE 4.0

As expected, the US Federal Reserve via the Federal Open Market Committee (FOMC) has converted the expiring Operation Twist into a monthly $45 billion US Treasury buying program or chapter 4 of its unlimited QE program (QE 4.0).

From the Bloomberg

The Federal Reserve for the first time linked the outlook for its main interest rate to unemployment and inflation and said it will expand its asset purchase program by buying $45 billion a month of Treasury securities starting in January to spur the economy.

“The conditions now prevailing in the job market represent an enormous waste of human and economic potential,” Fed Chairman Ben S. Bernanke said in a press conference in Washington today after a meeting of the Federal Open Market Committee. The Fed plans to “maintain accommodation as long as needed to promote a stronger economic recovery in the context of price stability,” he said.

Rates will stay low “at least as long” as unemployment remains above 6.5 percent and if inflation is projected to be no more than 2.5 percent, the FOMC said in a statement. The thresholds replace the Fed’s earlier view that rates would stay near zero at least through the middle of 2015.

The move to economic thresholds represents another innovation by Bernanke, a former Princeton University professor and Great Depression expert who has stretched the bounds of monetary policy as he battled the recession and then sought to jolt the world’s biggest economy out of a subpar recovery.

How the Fed “innovates”, from the same article:

While the FOMC dropped its calendar-based guidance on interest rates, it said the new thresholds are “consistent” with the previous outlook. A majority of Fed officials don’t expect to raise the main interest rate until 2015, when the jobless rate is forecast to fall to between 6 percent and 6.6 percent, according to projections released after the statement.

The bond buying announced today will be in addition to $40 billion a month of existing mortgage-debt purchases. The FOMC said asset buying will continue “if the outlook for the labor market does not improve substantially” and hasn’t set a limit on the program’s size or duration.

The latest move will follow the expiration at the end of this year of Operation Twist, in which the central bank each month has swapped about $45 billion in short-term Treasuries for an equal amount of long-term debt. That program kept the total size of the balance sheet unchanged, while the new purchases will expand the Fed’s holdings.

The decision to embark on outright Treasury purchases doesn’t “significantly” increase the level of monetary stimulus, Bernanke said. The Fed “intends to be flexible” in setting the pace of its asset purchases, and will use “qualitative” criteria to determine the size of its bond- buying program, he said.

Markets have practically greeted this with a yawn. Gold fell, oil rose, the US stock markets closed the day mixed.

That’s practically because the FED has telegraphed this move where 48 of the 49 economists earlier polled by the FOMC expected such actions from the FED.

Fed’s communication strategy (signaling channel) has been to float a trial balloon then lather rinse and repeat the message as part of a classical conditioning approach in shaping market’s expectations.

Yes realize that the FED effectively tries to apply mind control techniques on the markets.

The implication is that the FED’s supposed “innovation”, has in reality been a grand experimentation whose unintended consequences, which should impact the entire world, has yet to be revealed.

The FED’s buying of US treasuries will account for an estimated NINETY percent (90%) of US treasury supply!!!

From another Bloomberg article,

With the Fed buying about $85 billion a month in Treasuries and mortgage bonds next year, the net supply to the private sector will be about zero as the central bank effectively soaks up about 90 percent of new issuance of those assets.

So you have the FED fertilizing the already implanted or sown seeds of hyperinflation or a currency crisis. To be clear, what I am saying is that the doubling down of current FED actions have been INCREASING the risks of such scenario.

For now, such FED purchases will provide tailwinds to global financial markets, as well as, the Philippine Phisix, which will be seen as a "boom"

I maintain my prediction:

Since price movements of gold seems aligned with global stocks which have accounted for a risk ON or risk OFF environment, a confirmation of the Fed’s expansion of the QE most likely during the FOMC’s meeting in December 11-12 will likely push gold and global stock markets higher.

So this also means that both external and domestic policies will likely serve as tailwinds in support of a higher Phisix perhaps at least until the first quarter of 2013. Of course this is conditional to the above. Emergence of unforeseen forces, most likely from the dimensions of political risks may undermine this scenario.

But do expect sharply volatile markets with an upside bias until at least the first half of 2013.