Photo: flickr / Gordon Wrigley
The BofA strategy team is out with its reaction to the Fed’s announcement of open-ended buying of mortgage-backed securities today – and they say the Fed is officially all-in for a LONG time.BofA economists Michael Hanson and Ethan Harris write in a note to clients, “This is the Fed engaging all their major policy tools to support a stronger recovery in the labour market.”
Hanson and Harris see the open-ended QE – which at the outset will consist of $40 billion per month of MBS purchases on the secondary market – lasting until unemployment hits 7 per cent, which means likely past 2014.
Here are their thoughts:
Take it to the limit
The Fed announced they would continue easing until the labour market improved substantially. Left unstated was what exactly that means for policy. In our view, that likely translates to a decline in the unemployment to 7 per cent if not below, in a way that reflects a broader improvement in labour market conditions — not simply a further reduction in the participation rate. Moreover, they promised to deploy their full range of tools until this improvement is realised. This is a strong and very dovish commitment to further easing. Under our forecast, these easing steps are likely to remain in place through 2014, if not beyond. The Fed has now shifted to a more aggressive, but more incremental, policy framework. We continue to expect further policy innovations from the Fed.
BofA rates strategist Priya Misra weighed in as well, writing that the Fed will buy more Treasuries after Operation Twist is finished at the end of the year to supplement the MBS purchases the central bank just announced.
Here is her take:
Level of rates: As we have argued in the past, the market was pricing in a high chance of QE3 before today’s announcement. The Fed ratified these expectations and exceeded to the extent that QE3 is open ended. On the surface, the buying only in MBS might be construed as being negative for Treasuries. However, the Fed is taking out additional $20bn/month in 10-year equivalents, which should positive for Treasuries. Also, we expect the Fed to buy more Treasuries once Twist ends since the improvement in the labour market will not be satisfactory. Ultimately rates will depend on the economy and the outcome of the fiscal cliff. We therefore look to fade any significant rise in rates due to a perceived disappointment today in terms of Treasury buying.
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