QE & ZIRP

Fed Chairman Ben Bernanke yesterday confirmed that QE-2.0 will be followed by QE-2.5. The Fed will purchase Treasuries with the proceeds from maturing securities in its portfolio. Here is a brief history of QE:

(1) QE-1.0 started during the week of November 25, 2008, when the Fed began buying mortgage-backed securities (MBS) and agency debt for the first time. The program terminated in March 2010, when this portfolio peaked at $1.24 trillion and the Fed’s balance sheet had risen to $2.31 trillion.

(2) QE-1.5 was announced on August 10, 2010, when the Fed started purchasing Treasury securities to offset maturing MBS and agency debt. (During QE-1.0, the Fed added $300.3 billion in Treasuries to its existing portfolio of these securities.)

(3) QE-2.0 was first vetted by the Fed Chairman in his August 27, 2010 speech at the Fed’s Jackson Hole meeting. It was officially implemented on November 3 with the announcement that the Fed would purchase $600 billion in Treasuries by the middle of 2011, and offset maturing securities with additional purchases of such securities. At the time, the Fed’s holdings of Treasuries was $839.9 billion. The latest figure shows that it was up to $1.39 trillion during the week of April 20.

During all the rounds of quantitative easing, the federal funds rate has remained near zero. In my opinion, the main impact of them was to reinforce the Fed’s zero interest rate policy (ZIRP). There was no chance that the Fed would raise interest rates while it was engaged in QE. ZIRP is the policy that is boosting stock prices and commodity prices and depressing the dollar. And, just as a reminder, ZIRP will continue for “an extended period.” Fed Chairman Ben Bernanke explained yesterday that means no rate hike for at least the next two FOMC meetings.