Exit Strategy? What Exit Strategy?

Today the Federal Reserve issued this Policy Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities.

On December 12, 2012, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase longer-term Treasury securities after the maturity extension program is completed at the end of December 2012, initially at a pace of about $45 billion per month.  The FOMC also directed the Desk to continue purchasing additional agency mortgage-backed securities (MBS) at a pace of about $40 billion per month.  These actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The FOMC also directed the Desk to maintain its existing policy of reinvesting principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS, and, in January, to resume rolling over maturing Treasury securities into new issues at auction.

Beginning in January, the purchases of longer-term Treasury securities will be distributed across 7 sectors based on the following approximate weights:



Under this distribution, the Desk anticipates that the Treasury securities purchased will have an average duration of approximately 9 years, roughly the same as the net of the duration of the securities purchased and sold under the maturity extension program.  The distribution of Treasury securities purchased could change if market conditions warrant.

Recall when the Fed pretended it was working on an exit strategy to reduce its balance sheet at the appropriate time?

It was a lie then and it's an even bigger, more apparent lie now (which is why you no longer hear Bernanke mentioning it) . The simple fact of the matter is that every Fed asset purchase makes it more difficult to exit.

When interest rates do start to tick up (which could be a while based on Fed statements), interest on the national debt would soar if the Fed unloaded treasuries. Likewise, mortgage rates would soar if the Fed unloaded agencies at a time interest rates were creeping up.

There never was an exit strategy and there never will be one.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com