Alan Blinder says that the Federal Reserve may have learned its lesson.
The first round of quantitative easing, or QE1, worked well because the Fed bought mortgage-backed securities. The second round of easing, QE2, concentrated on buying short-dated Treasury bonds, which was less effective. Now the Fed is buying long-dated Treasurys (QE3/"Operation Twist") and some mortgage-backes securities.
For more than a year now, the Fed has been allowing its portfolio of agency debt (e.g., Fannie Mae and Freddie Mac) and mortgage-backed securities (MBS)to shrink naturally as mortgages are paid off and securities mature. To maintain the size of its balance sheet, the Fed has been reinvesting the proceeds in Treasurys. But starting "now" (the Fed's word), and continuing indefinitely, those proceeds will be reinvested in agency bonds and MBS instead.
The objective here is exactly what it was for the first round of quantitative easing, QE1: to reduce spreads between MBS and Treasurys (which had widened a bit), and thereby to help the ailing housing market. The amounts involved will not be large at first, perhaps in the $150 billion to $225 billion per year range. But the idea is, as they say, scalable. A future round of quantitative easing (QE4?) that concentrates on private-sector securities like MBS, rather than on Treasurys , is now imaginable.
Blinder goes on to say that if we "indulge ourselves in a bit of blue-sky thinking," the Fed might launch QEs in corporate bonds, syndicated loans, consumer receivables, and so forth.
Questions? Comments? Email us atNetNet@cnbc.com
Follow John on Twitter @ twitter.com/Carney
Follow NetNet on Twitter @ twitter.com/CNBCnetnet
Facebook us @ www.facebook.com/NetNetCNBC