by Dave in Denver:
The Fed minutes for January were released today and it suggests that the Fed will consider changes to the current QE policy of buying $85 billion of Treasury and mortgage bonds per month. But does anyone really think this will happen? Really?
Let's "play the tape" on what would happen. To begin with, the Fed holds 41% of all 30yr Treasury bonds issued since 2009. This month, the Fed purchased 75% of the recently issued 30yr Treasury auction. Assuming the Fed continues buying at least its stated policy of $45 billion in Treasuries every month, and assuming the Treasury will be issuing roughly $100 billion per month (this is actually likely a low-ball estimate based on the annual increase in Federal debt over the past 4 years), the Fed will buying nearly 50% of all new Treasury debt issued.
Imagine what would happen to interest rates if the Fed were to curtail it's Treasury purchases. Imagine what it will do to the Government's interest expense if the Fed stops buying Treasuries and the market adjusts to a much higher "natural" interest rate.
How about mortgage paper? I have written recently about the amount of money being thrown at the housing market by both the Fed and the Government to try and stimulate housing sales. We're already seeing a significant slow-down in housing market activity based on mortgage application data and non-seasonally adjusted housing data. If interest rates spike up, the housing market will be decimated. In fact, the entire economy will fall further into a recessionary abyss. ...