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QE-shmooey

An early release of the Fed minutes caught me by surprise this morning. Not the "leak" in and of itself (DaRAHma!) but what the minutes revealed.  While Bernanke suggested tapping the brake pedal  on QE appears to be in order, the minutes tell us Fed members are not unified in this.  

Of everything I've read, Barry Habib offers the most intriguing take thus far.   Below is exerpted from this morning's Daily Update at www.MBSHighway.com.  

Within the Minutes, Fed members raised concerns that the jobless rate was elevated and that they are not confident of sustained improvement.  Remember, these Minutes were originally taken from the Fed Meeting prior to the most recent dismal Jobs Report.  Score one for keeping QE around longer.  On the other hand, there were several members who appeared to be in favor of the concept of a mid-year tapering down of QE purchases.  It looks as if the Fed is divided on when QE should begin to be tapered.

And speaking of the Fed and QE 3, supposedly QE 3 is defined by $85 billion in monthly Bond purchases.  This is supposed to be $45 billion of longer dated Treasuries and $40 billion of Mortgage Backed Securities (MBS) each month.   But swept under the rug is the fact that the Fed can reinvest principal – meaning that any MBS holdings that have been paid off, like individuals who are refinancing or principal payments, can be reinvested in buying MBS.  I think most would find it surprising that this amount actually exceeds the amount of buying they are supposed to be doing.  For example, last month, the Fed purchased their normal $40 billion in MBS plus an additional $45 billion.  This totals $85 billion in Mortgage Bond purchases.  So, when the Fed eventually gets around to using this tapering mechanism, we will need to listen to see if it includes reinvestment, because this figure can be very significant.