As is well known by now the Fed will not be 'expanding' their balance sheet any further (for now), but will continue to keep the balance sheet constant in size, by purchasing new bonds to replace those which have run off. After some 2+ years of QE measures the Fed balance sheet has now expanded from some $800B to nearly $3T in size, so simply reinvesting run off, is a QE onto itself - estimates are $300B over the next 12 months, or approximately $25B a month. While not as huge as QE1 or QE2 on a monthly basis it's still a very hefty support... and if my prediction for QE3 comes to fruition (perhaps operation twist) by next winter you'll have the $25B a month (QE 2.5) running concurrent to QE3.
As for claims the Fed is not monetizing the debt because eventually they will sell the bonds back into the market, one wonders how the Bernank can say that with a straight face when short term bonds are obviously being held to duration and expiring - requiring the Fed to replace them on the balance sheet.
- The Federal Reserve will remain the biggest buyer of Treasuries, even after the second round of quantitative easing ends this week, as the central bank uses its $2.86 trillion balance sheet to keep interest rates low. While the $600 billion purchase program, known as QE2, winds down, the Fed said June 22 that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300 billion of government debt over the next 12 months without adding money to the financial system.
- A total of $112.1 billion of the Fed’s government bond holdings will mature in the next 12 months, 7 percent of the $1.59 trillion in Treasuries held in its system open market account, known to traders as SOMA. Replacing those securities will require the Fed to buy an average of $9.4 billion of Treasuries a month through June 2012.
- The Fed also held $914.4 billion of mortgage-backed debt and $118.4 billion of debentures, the debt of government sponsored enterprises Fannie Mae and Freddie Mac, as of June 22. UBS AG, Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. and Royal Bank of Canada say $10 billion to $16 billion will mature each month, depending on the pace of prepayments.
- The Fed began its first round of quantitative easing in November 2008 after the collapse of Lehman and the central bank’s $85 billion bailout of insurer American International Group Inc. with a program to buy $500 billion of mortgage securities and $100 billion of agency debentures. In March 2009 it boosted planned purchases to include $300 billion of Treasuries and raised its target for mortgage debt to $1.25 trillion and $200 billion of government agency bonds.
- Asset purchases, even at a smaller scale, “still promotes what the Fed was trying to accomplish,” said Tony Crescenzi, a money manager and strategist at Newport Beach, California-based Pacific Investment Management Co., which runs the world’s biggest bond fund. “Even with the stoppage of QE2, the fundamental forces remain intact.”