What Has the Fed Accomplished?

The Fed has purchased roughly $610Billion worth of mortgage-backed securities and Treasury bonds in the past several months alone. What have these actions actually accomplished? In terms of substantive improvement of the economy, it is still unclear whether history may yet judge the campaign of aggressive quantative easing as a net positive. However, we have come across several bits of analysis which cause us to lean towards the opinion that the Fed's actions have amounted to a Net Nothing.

In a recent analysis, J.P. Morgan estimated that the Fed's recent MBS and Treasury buying spree have allowed some 2 million borrowers to refinance their mortgages at lower interest rates. Unfortunately, this all comes at an estimated cost of $2500/borrower. Logic would tell us that more refinancings equals more affordable payments equals less foreclosures. In reality however, certain economic relationships are often correlated in an entirely illogical fashion - think tax rates v. tax revenue. In fact, we are co-signers of the theory, already shown by the most recent data, that a pool of modified mortgages will grow delinquent at a Faster Rate than a similar pool of non-modified mortgages. 

More importantly we believe, is the fact that the Fed has failed to control that what it was created to control: interest rates. Recent days have brought violent fluctuations in Treasury yields, to the point that one might confuse the associated price/yield chart with a stock market snapshot from October of last year. In our opinion, the upward rate pressure is merely the manifestation of a concept that ordinary folks understand at a basic level: There is no such thing as a free lunch.

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