So Much for Quantitative Easing


The Treasury will increase the holdings of its Supplementary Financing Account. This is a facility that the Treasury has been using to (apparently) sterilize the macro effect of MBS purchases by the Fed. Why they would want to do that is beyond me. Apparently we’re not in a liquidity trap, we’re in a liquidity prison!

Treasury anticipates that the balance in the Treasury’s Supplementary Financing Account will increase from its current level of $5 billion to $200 billion. This will restore the SFP back to the level maintained between February and September 2009.

In doing this, the Treasury will in effect sterilize the last of the Fed’s “quantitative easing” strategy, which was very disappointing to begin with. Everyone was telling me (and the like) that I was wrong about the discount rate hike; that low interest rates will prevail forever as a sign of easy money, and that it was a “purely technical” move on the part of the Fed. Am I to believe the same of this announcement?

From the Wall Street Journal:

“The intention always was to resume SFP issuance when the debt ceiling was increased on a permanent basis, which finally happened earlier this month,” said Lou Crandall, a money market analyst at Wrightson ICAP LLC. “The Treasury kept $5 billion of SFP bills outstanding throughout all the debt limit negotiations as a placeholder to indicate that it wanted to go back to the status quo ante.”

The practical effect of this move is that the Fed will be able to finish $1.25 trillion of purchases of mortgage backed securities by the end of March without printing more money.

There is kind of a mystery surrounding this move, but I think the WSJ gets it pretty much correct.

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