What shape QE2?
Atlanta Federal Reserve Bank president Dennis Lockhart wants it BIG.
How BIG? This BIG:
Oct 19 (Reuters) – Atlanta Federal Reserve Bank President Dennis Lockhart said on Tuesday that further easing by the Fed has to be large enough to help boost demand, and purchases of $100 billion of securities a month would be a possibility.
“If we’re going to pursue another round of quantitative easing, it has to be a large enough number to make a difference,” Lockhart said in an interview on CNBC.
“As a monthly number ($100 billion) is fairly consistent with what we did before, and so I think it would certainly be in the range of numbers one might consider … but if you were talking about $100 billion as simply the overall program, I think that’s too small,” he said.
So much for that subtle price level-targeting? Now the Fed’s last bout of asset purchases — $1,700bn of over the course of 15 months — means it might be rather more restricted this time around, even if it does decide to shock and awe.
Please meet the so-called Soma limits.
Those rules currently limit the Fed to owning up to 35 per cent of any one Treasury issue. And after QEI, the Fed has already reached the limit in at least 15 issues.
Deutsche Bank had some interesting things to say about this:
If the Fed does authorize QE2 in large size, one action it could take is to lift the SOMA limit of 35%. This limit of the Fed’s holdings in each Treasury issue to the amount outstanding is a self-imposed rule that could be changed at any time. The rule was first imposed in 2000, when the US government was running surpluses, and the Fed was concerned that its open market operations would reduce the liquidity in floating issues. That concern has now substantially diminished, thanks to large auction sizes. If the Fed raised the limit from 35% to, say 50%, the coupon Treasuries available to them would increase from $1.1 trillion to $2.0 trillion, and could serve to forestall a movement toward tapping the primary market through add-ons. Even if the SOMA limit is raised, the Fed needs to buy Treasuries from other holders in the event of large QE2. While Treasury supply is still large by historical standards, the trend is declining next year. In fiscal year 2011, we expect gross issuance of coupons to be $1.9 trillion. 35%, or $665 billion, is available to the Fed. With $60 billion needed to be rolled over, that makes available another $605 billion for the Fed to buy for the next 12 months. A large QE2 would take a significant portion, if not all, of net new supply.
So that’s $2,000bn of QE plus US financing done and dusted for 2011.
Nice.
Related links:
What the Fed can’t buy – FT Alphaville
A QE-easy trillion - FT Alphaville