The Fed will start new QE Lite in October. It will reinvest up to $20 billion per month in maturing and prepaid Agency and MBS holdings. But it will not buy more GSE and MBS. Instead, it will buy Treasuries directly from Primary Dealers.
Here’s the important part of the New York Fed announcement, found in the FAQs.
Who is eligible to transact with the Federal Reserve under this program?
The Federal Reserve Bank of New York’s primary dealers are eligible to transact in these operations directly with the Federal Reserve. Dealers are expected to submit offers for both themselves and their customers.
This means that the Fed will begin reliquifying Primary Dealers at the rate of up to $20 billion per month beginning in October.
By then, it will be too late. The damage to the markets from massive Treasury issuance combined with ongoing Fed draining operations will have been done.
In addition, the $20 billion monthly injections (maximum) to the Primary Dealer accounts, pale in comparison to the $100 billion per month in expected Treasury issuance. Market liquidity will be constantly depleted dealers and institutions are forced to absorb that constant onslaught of supply. $20 billion per month will not be sufficient to reverse the bear market that I expect.
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New York Fed Statement on New Fed QE Lite
Here’s the New York Fed Statement issued today:
On March 20, 2019, the Federal Open Market Committee (FOMC) provided additional information regarding plans for its securities holdings via its Balance Sheet Normalization Principles and Plans. Beginning in October 2019, principal payments received from agency debt and agency MBS holdings will be reinvested into Treasury securities through secondary market purchases, subject to a maximum amount of $20 billion per month; any principal payments in excess of $20 billion will continue to be reinvested in agency MBS. Treasury securities purchases will initially be conducted across a range of maturities to roughly match the maturity composition of Treasury securities outstanding. The FOMC will revisit this reinvestment plan in connection with its deliberations regarding the longer-run composition of the SOMA portfolio.
Under this guidance, the Federal Reserve Bank of New York’s Open Market Trading Desk (the Desk) plans to distribute secondary market Treasury reinvestment purchases across eleven different sectors, including nominal coupons, bills, Treasury Inflation-Protected Securities, and Floating Rate Notes. The approximate amount of purchases in each sector will be determined by sector weights. These sector weights will be based on the 12-month average of the par amount of Treasury securities outstanding in each sector relative to the total amount outstanding across all sectors, measured at the end of September.
The monthly amount of Treasury reinvestment purchases will be announced on or around the ninth business day of each month and purchases will generally be conducted over the one-month period until the next announcement. The Desk will also release a tentative schedule of purchase operations expected to take place over the monthly period. The Desk plans to release the first schedule of purchase operations on October 11, 2019.
Additional information on Treasury reinvestment purchases can be found in the following locations:
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