It’s a Fed day but there is surprisingly little enthusiasm about the decision.
Economists are sheepishly gathered around an $85 billion monthly asset purchase program — $40 billion MBS and $45 billion Treasuries.
The second part of the equation is the intriguing part. The $45 billion in new purchases would replace Operation Twist, which ends on Dec. 31.
Bullard argues that it will take less than $45B to replace Op Twist, he thinks $25B in new purchases is enough. There are also questions about liquidity in the long-term bond market with the Fed holding $1.65 trillion in Treasuries.
Bullard makes good points and another one is that the Fed seems positively bubbly about the effects of its MBS buys so far, with some members even taking credit for the the recent uptick in housing.
The enthusiasm for MBS buys raises the risk that the Fed could increase monthly purchases to $50 billion while adding $25-35B in Treasuries.
The knee jerk reaction to lower Treasury buys will be higher yields and higher USD/JPY.