Wednesday, October 24, 2012

Plans For QEternity Are Complete; Is the NY Fed's QE Architect, Brian Sack, Finally Splitting

By Bob English

As we've written previously, it's been a whirlwind tour through the bowels of the Fed's balance sheet for Mr. Brian Sack over the last three years.  First hired to wind down QE1 in June 2009, he would end up one of the architects of QE2, Twist and now QE3 (after all, it was he who authored with Mr. Bernanke the now-famous paper titled Monetary Policy Alternatives at the Zero Bound).  Mr. Sack was then scheduled to depart June 29, 2012 (and to be placed on leave until September 14), but stayed on at the behest of Mr. Dudley of the New York Fed to be his senior adviser "with respect to monetary policy, financial markets and the U.S. economy."

That was until he listed his house for sale on October 17, 2012, just one week before today's scheduled FOMC announcement.  Just exactly what did Mr. Sack do between his June 29 about-face in which he withdrew his resignation and now?  In the minutes from the August 2012 FOMC meeting (prior to the next meeting's QE3 announcement), we learned the Fed "staff" [sic Mr. Sack] had prepared a report that demonstrated "substantial capacity for additional [Treasury and agency MBS] purchases without disrupting market functioning."

Exactly what can we surmise from Mr. Sack's departure from the house in which he has lived throughout his most recent New York Fed tenure?  Likely, the research and support required for the Fed's complete balance sheet [expansion] plans for the foreseeable future are complete.  When exactly the Fed announces (as is now expected) that it will mutate Operation Twist into a new LSAP upon expiration this December is unknown (providing some $40-$50 billion in additional unsterilized liquidity per month).

What can be surmised is that, assuming Mr. Sack leaves the New York Fed as his home sale suggests, any hopes of him fulfilling his original mandate of winding down the Fed's balance sheet are now dashed.

Good luck to Mr. Bernanke.  We'll give him 30 minutes.

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