Last week brought the long-anticipated end of "the taper." The Federal Reserve, because it thinks the U.S. economy is doing so well, decided to close down its quantitative easing program.
Many news stories framed the Fed action as the end of monetary stimulus, but that's not quite correct. In fact, the Fed will continue buying Treasury and mortgage-backed securities at a rate that was unthinkable until 2008. Their own press release said so. Here is the "money" quote:
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
In other words, the Fed will stop buying new Treasury and mortgage bonds, but it won't sell what it already owns. It won't allow those bonds to mature, either. The Fed plans to keep refinancing all this paper indefinitely, and even reinvest the interest in more bonds.
What amount are we talking about here? The press release doesn't define "sizable," though it is obviously an important detail. The answer is in the Quarterly Report on Federal Reserve Balance Sheet Developments, the latest edition of which came out in August.
As of July 31, 2014, the Federal Reserve System owned $2.42 trillion in U.S. Treasury securities, $42 billion in federal agency debt securities, $1.674 trillion in mortgage-backed securities, plus a few other miscellaneous items we will ignore for now.
Add it up: the Fed owns $4.136 trillion in Treasury, agency and mortgage bonds. These are outstanding loans to the federal government and Wall Street . . . and the Fed just said it has no intent of ever letting those loans come due.
Let's put this amount in perspective. The total face value of Federal Reserve Notes (i.e., paper dollars) in circulation is only $1.242 trillion. If you had every piece of U.S. currency that exists, you would still have less than one-third of the Fed's "loans" to Washington and Wall Street.
Here's another comparison. How many $500,000 houses could you buy with the $1,674,000,000,000 the Fed has invested in mortgages? The answer is 3,348,000 half-million dollar homes.
I could go on, but I think you get the point. To say that the Fed has stopped stimulating the economy is patently false. The growth rate is now slower, but the continued refinancing all this debt is itself a massive economic subsidy.
If not for the Fed's open-ended line of credit, all this debt would mature and the borrowers (mainly the U.S. Treasury) would have to find new lenders.
Relieving Washington and Wall Street of that chore is a very generous gift, one that Fed Chair Janet Yellen apparently plans to keep giving indefinitely.
You can call this whatever you want. I call it stimulus, and it hasn't stopped yet.