Quant Easing:

• What? "quantitative easing. That is Fed speak for buying a few trillion or so dollars of government debt and injecting said cash into the economy".  QE is designed to increase inflation expectations, so if there is an open-ended commitment to undertake further QE until inflation is sufficiently high (the Fed's unofficial core PCE target is ~1.75%, with the core CPI sitting about 0.5% higher than that),
• How? Fed purchases longer dated treasuries to push up price, down yield, and flatten yield curve.
• why? "Recessions are by definition deflationary, but if we go into recession when inflation is already as low as it is, the Fed will be behind the curve. But telling us they are going to start easing because they are worried about a recession is not a good recipe for a positive market reaction...To be sure, the inflation data do matter, but the growth indicators matter more because, from the Fed's perspective, the pace of growth in economic activity is a leading indicator of inflation....growth in the US economy. If we are above 1.5-2%, I think they will hesitate, for reasons I go into below. If we drop below 1% and it looks like we are getting weaker, then they are likely to act. A slide into recession would bring about deflation. As noted, they are viscerally opposed to deflation.
• Examples: 
• "The Fed purchased $1.25 trillion in mortgage assets last year. The theory was that injecting money into the economy would cause banks to take that money and lend it, jump-starting the economy and bringing us back into a normal recovery."  Source: John Mauldin's E-Letter 
  

Fears:

• "The efficacy of the policy--which aims to drive up the prices of long-term bonds in order to push down long-term interest rates--is being hotly debated among economists and Fed officials. Some Fed officials are pushing for an aggressive stimulus (Reuters), while others are skeptical of the idea altogether. The market expectation is for the Fed to initially commit to buying at least $500 billion in Treasury debt over five months. Markets could interpret the announcement as an open-ended commitment by the Fed to boost the recovery, driving up U.S. stocks and government bonds and pushing down the U.S. dollar. Some Fed officials are concerned (FT) about the difficulty of eventually selling the assets they buy, the risk of distorting the Treasury market, and the political implications of moving into fiscal policy."  CFR.org, Oct 2010

Will it work?

Negative view:

"The government’s efforts will eventually fail as ballooning government debt devalues the dollar, causes investors to flee U.S. assets and takes the S&P 500 to its eventual bottom in 2014, Napier said.  “Bear markets always end for exactly the same reason, and that is the market begins to price in deflation,” he said. “Equities will be incredibly cheap.”

Questions to consider:

1. What is the Impact on the Fed's Balance sheet?
2. How will this effect the US dollar?

Humorous:

quantitative easing (a word invented by central bankers because 'printing money' smacks too much of Zimbabwe)

Impact on interest rates:

The first year of the crisis was marked by three upward spikes in the price — and sharp falls in yield — of short-term Treasury bills: one in August 2007 (subprime, quant funds), one in the spring of 2008 (Bear) and one in September 2008 (Lehman, AIG, Merrill, etc..)

New tools to fight deflation....."Quantitative easing"

Fed officials are “going to continue to buy assets, and they are going to try” to hold down longer-term Treasury yields of some research papers.

With quantitative easing, a tool pioneered by the Bank of Japan, central banks can stimulate inflation by printing money and flooding the market with cash in order to encourage consumers to spend.

Is the Fed really "quant easing"?  Maybe not...

the term "quantitative easing" is a bit out of synch with the policy approach embraced by "the Fed." This is from Chairman Bernanke's January 13 Stamp Lecture at the London School of Economics:

"The Federal Reserve's approach to supporting credit markets is conceptually distinct from quantitative easing (QE), the policy approach used by the Bank of Japan from 2001 to 2006. Our approach—which could be described as 'credit easing'—resembles quantitative easing in one respect: It involves an expansion of the central bank's balance sheet. However, in a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank; the composition of loans and securities on the asset side of the central bank's balance sheet is incidental… In contrast, the Federal Reserve's credit easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses."

At Economist's View, Tim Duy zeroed right in on the point:

"Woodward and Hall are confused because they do not recognize that the Fed has not initiated a policy of quantitative easing…because the Fed sees their actions as credit market related, they would have no problem with the balance sheet contracting if credit market conditions dictate."

 

read more:  http://macroblog.typepad.com/macroblog/2009/02/contraction-not-tightening.html

 

 

Commentary:

http://feeds.feedburner.com/~r/MacroMan/~3/525254897/will-they-or-wont-they.html

There's obviously nothing they can do on rates, so the big issue is whether the Fed takes the leap and announces a program to buy longer-dated Treasuries.

Such an outcome would hardly be unprecedented; the BOJ, for example, has purchased JGBs in the secondary market for more than a decade via its rinban program. For the Fed, it would seem to be more a matter of "when", rather than "if", they pursue such a policy; after all, buying government duration is part of the "Bernanke QE playbook" that he's been following to a tee so far.

Regardless, the Fed will probably not be best pleased to see 30 year Treasury yields some 50 bps higher than at the time of their last meeting. More to the point, the uptick in 30 year mortgage rates is an unwelcome development for BB and co., given the perceived target of 4.5% and the recent signs that refinancing demand was responding to lower rates.

Data to consider:

source:  macroman blog