On September 13th the Fed statement was extremely
accommodative. Here are some highlights:
- Extending language "exceptionally low … federal funds rate are likely to be warranted at least through mid-2015"
- New round of QE to MBS (not Treasuries) & rolling maturing MBS from previous asset purchases "purchasing additional agency mortgage-backed securities at a pace of $40 billion per month... maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities... increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year"
- Extending operation twist "continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June"
- Asset purchases appear open-ended (as opposed to a set $ amount) "outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability".
- Fed officials also upgraded their economic forecasts significantly.
So
that was the announcement. The takeaways?
- There also isn't a consensus this is actually economically stimulative. I myself wonder how will lowering already low mortgage rates will help stimulate demand? I will post on this shortly after I look into some data.
- Even if it doesn’t help the economy, does that mean QE is meaningless? No. If it follows the past QEs stocks and commodities should have a nice go of it.
- So if we assume it doesn’t help the economy, how can it help stocks? Multiple expansion.
- One measure of stock value is Price/Earnings. So if Price is $100 and Earnings are $10 then P/E = 10. If we assume QE doesn’t affect the economy then earnings stay at $10, but QE does help a stock’s P goes to $110. The P/E is now 11, however fundamentals remain unchanged.
- The open ended comment essentially assures Treasury yields shouldn't have a large move up and volatility in that market should be muted.
- Treasury and agency spreads should narrow further.
- The Fed won't be tightening until there is a dramatic change in the economic data.
- Is the Fed now out of bullets?
In
my next post, I want to touch on what happened to various asset prices the last
two times we have QE.
