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How Can QE3 Be Working? It Hasn’t Started Yet

In the video accompanying this story, Michael McKee repeats the error that has been current in the media lately that QE 3 isn’t “working.”

It can’t be “working” because it has not started yet. The effects of QE are felt when the cash begins to flow, not when the announcement is made. QE1 and 2 involved purchases of Treasuries from Primary Dealers. The settlements took place the day after the transactions, and the cash was credited to the dealers’ accounts at the Fed immediately. That’s where the leverage chain begins and the effects are felt, as the dealers redeploy the cash to purchase securities. In the cases of QEs 1 and 2, they redeployed some of that cash to repurchase Treasuries or MBS, to buy stocks or futures, or to lend to their customers to do the same.

In the case of the MBS reinvestment program the MBS purchases are forwards, usually 60 days. The same is true with QE3. The Fed began purchasing the additional MBS soon after the announcement, but again all on a forward basis. The posted schedule of those transactions from the first month of the program show the first settlements take place on November 14. That’s when the cash from QE3 will begin to flow and we should start to see the negative effects of surging commodity and stock prices. That will send a signal to the market to sell Treasuries. I expect value of Treasuries to fall, in spite of the Fed’s buying of MBS. Any new program of Treasury purchases will only exacerbate the problem as the dealers and the leveraged speculating community in general will seek money substitutes.

Any beneficial effects that may come from concurrently rising stock prices should be overwhelmed by the negative unintended consequences from rapidly rising commodity prices.

Bernanke Seen Attacking Jobless Rate With QE Through 2013 – Bloomberg

Federal Reserve Chairman Ben S. Bernanke says he’ll stoke the economy until the job market recovers “substantially.” That promise may force him to keep buying bonds until the final months of his term ending in January 2014, according economists in a Bloomberg survey.

Sixty-eight percent of 60 economists said the Fed chairman’s third round of quantitative easing will last until late next year or beyond. Just 51 percent of them said the strategy will help boost employment, with a median estimate of 116,000 jobs over the course of next year.

“The recovery in the labor market is probably going to be more sluggish than the Fed recognizes” said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York and a former Fed economist. He said policy makers have “painted themselves in a bit of a corner, waiting to see a significant improvement in the labor market.”

via Bernanke Seen Attacking Jobless Rate With QE Through 2013 – Bloomberg.

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  1. Ted Striker

    If Ben’s money goes to MBS at Fannie Mae and Freddie Mac to keep those GSEs from going bust, how does that money end up at Wall Street?

  2. Lee Adler

    It starts on Wall Street. The Fed buys the MBS from the Primary Dealers, not the GSEs. All open market operations are conducted with the PDs as the Fed’s counterparty.

  3. flaunt

    I downloaded the results spreadsheet from the Fed website for 9/14-10/11 and looked through the settlement dates. I do see a bunch that settle out on 11/14, but I also found many that settled out mid-October totaling about $21B. I don’t know if that data was missing when this was written, but it’s certainly there now.

    While I agree that those calling QE a “failure” are incredibly ignorant and mistaken, based on the Fed’s data it appears to be untrue that none of the purchases have settled.

  4. Lee Adler

    The spreadsheets also include the dates of those sales. They are from the existing MBS reinvestment program, not QE3. The QE 3 sales begin to settle on November 14. The ones that settled around 10/20 were not QE3 transactions.

  5. flaunt

    I must be missing something. How do you tell which ones are QE3 transactions? All of the purchases took place after the FOMC announcement so any of them could be related to QE3 as far as I can tell.

  6. Lee Adler

    If you dig into the scheduled reinvestment purchases from Aug and Sept you will see that all of the settlements in October were scheduled before the QE3 announcement.

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