Despite recently launching a third round of quantitative easing, the Federal Reserve is once again expected to announce another bond buying program this week. The additional easing would replace Operation Twist, an asset purchase program where the central bank sells short-term notes to purchase long-term notes. However, its replacement will likely be outright bond buying, as the Federal Reserve is running out of short-term notes to sell.
Only three months ago, the Federal Reserve decided to prove it is willing to do whatever it takes to prop up asset prices. Throwing savers under the printing press again, the Federal Open Market Committee launched QE3 in September, or QE-to-infinity-and-beyond, an open-ended program to buy agency mortgage-backed securities at a pace of $40 billion a month. There is no set limit to how long the fresh money printing will last, but Fed Chairman Ben Bernanke said the central bank is looking for sustained improvement in the labor market, and a highly accommodative stance of monetary policy will remain even after an economic recovery strengthens. QE3 increased the Fed’s long-term holdings to $85 billion each month, but $45 billion of that is scheduled to conclude at the end of this year with Operation Twist expiring.
With the market firmly fixed like a drug addict on quantitative easing, many believe the Federal Reserve will replace Operation Twist with another QE program, or more money printing. The FOMC meets this week, and will announce its decision on Wednesday. All signs point towards more QE. In the previous FOMC statement, released last month, the central bank explains, “Looking ahead, a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market.” John Williams, president of the San Francisco Fed, recently said, “A decision not to continue buying long-term Treasuries when Twist expires would be a surprise to markets and that would be counterproductive.”
The Federal Reserve’s balance sheet shows no signs of slowing down.
QE programs not only help to juice markets higher through dollar devaluation, they expand the Federal Reserve’s balance sheet to record breaking levels. The central bank’s balance sheet is already nearing $3 trillion and could hit $4 trillion by the end of 2013 if more QE is announced on Wednesday. Francisco Blanch, a global investment strategist with Bank of America, believes the Federal Reserve will maintain bond purchases until the end of 2014, a move that could send the central bank’s balance sheet skyrocketing to $5 trillion.
The exploding balance sheet at the Federal Reserve will also make it extremely difficult, if not impossible for the central bank to exit its current monetary easing stance. “There is certainly an issue about unwinding the balance sheet that is effective and continues to support the recovery without creating inflation,” explains James Bullard, president of the St. Louis Fed, according to Bloomberg. JPMorgan Chase, a member on the board of directors at the New York Fed, estimates that a $40 billion QE program to replace Operation Twist will cause the Fed to be “effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets.”
Naturally, the Federal Reserve’s massive presence in the market has caused many investors to become cautious. True safe havens such as gold and silver have outperformed the market over the past decade, as investors seek protection in an asset that can not be printed at will and has stood the test of time.
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