Reader Richard writes …

“Hi Mish I hope you can explain something. Everyone talks about QE of $85 billion per month, but where does the alleged money go?  The fed’s balance sheet doesn’t reflect it.  The balance sheet was up $720 billion from Aug 1, 2012 to Aug 1, 2013 ($309B in treasuries and $393B in MBS) but that is only $60B per month.  Where is the other $25B per month everyone talks about.  And from Aug 1, 2011 to Aug 1, 2012 (give or take a day or so), the Fed balance sheet only went up $9.997B in treasuries and went down $43.862B in MBS. So if QE is $85B a month, where is it and why doesn’t it show up in the Fed’s balance sheet.”

Fed’s Balance Sheet

QE History

Here is a bit of QE History from Wikipedia.

Quantitative Easing 1 (QE1, December 2008 to March 2010)

“On November 25, 2008, the Federal Reserve announced that it would purchase up to $600 billion in agency mortgage-backed securities (MBS) and agency debt. On December 1, Chairman Bernanke provided further details in a speech. On December 16, the program was formally launched by the FOMC. On March 18, 2009, the FOMC announced that the program would be expanded by an additional $750 billion in purchases of agency MBS and agency debt and $300 billion in purchases of Treasury securities.

Quantitative Easing 2 (QE2, November 2010 to June 2011 )

On November 3, 2010, the Fed announced that it would purchase $600 billion of longer dated treasuries, at a rate of $75 billion per month. That program, popularly known as “QE2”, concluded in June 2011.

Operation Twist (2011)

The Federal Open Market Committee concluded its September 21, 2011 Meeting at about 2:15 p.m. EDT by announcing the implementation of Operation Twist. This is a plan to purchase $400 billion of bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years, thereby extending the average maturity of the Fed’s own portfolio. This is an attempt to do what Quantitative Easing (QE) tries to do, without printing more money and without expanding the Fed’s balance sheet, therefore hopefully avoiding the inflationary pressure associated with QE. This announcement brought a bout of risk aversion in the equity markets and strengthened the US Dollar, whereas QE I had weakened the USD and supported the equity markets. Further, on June 20, 2012 the Federal Open Market Committee announced an extension to the Twist programme by adding additionally $267 billion thereby extending it throughout 2012.

Quantitative easing 3 (QE3)

On September 13, 2012, the Federal Reserve announced a third round of quantitative easing (QE3). This new round of quantitative easing provided for an open-ended commitment to purchase $40 billion agency mortgage-backed securities per month until the labor market improves “substantially”.

The Federal Open Market Committee voted to expand its quantitative easing program further on December 12, 2012. This round continued to authorize up to $40 billion worth of agency mortgage-backed securities per month and added $45 billion worth of longer-term Treasury securities. The outright Treasury purchases as part of the augmented program continued at a pace comparable to that under “Operation Twist”; however, the Federal Reserve could no longer sell short-dated Treasury securities to buy longer-dated ones since they had insufficient holdings of short-dated Treasuries.

Timing Issues

It appears most of the discrepancy is a timing issue. It was not until December of 2012 that the Fed authorized up to $85 billion in asset purchases per month, adding an additional allocation of $45 billion per month of long-term treasuries.

Other Issues

Nonetheless, I bounced the question off Pater Tenebrarum at the Acting Man blog and he cited some additional factors that may cause discrepancies in Fed Balance Sheet reporting.

  • Delayed settlement of MBS buys (i.e. the  payments and balance sheet increases tied to mortgage backed securities occur with a delay)
  • Balance sheets adjustments due to unamortized discounts on securities held
  • Fluctuations in repo balances
  • Shrinkage in outstanding currency swaps
  • Fluctuations in the treasury’s cash balances with the Fed
  • Declining balances of the Maiden Lane portfolio
  • Changes in non-reserve bank deposits with FR banks
  • Valuation changes in foreign currency assets
  • Declining face value of mortgage backed securities as underlying mortgages are paid back

In essence, the Fed’s balance sheet does reflect announcements (and of course the absurdity of those announcements).

Mike “Mish” Shedlock