“Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates.”The first comment that jumped out was this notion of the Fed ‘printing money’. QE is nothing more than the Fed merely exchanging one financial asset (Federal Reserve notes) for another financial asset (Treasury bonds). Following the exchange, the private sector still holds the same exact amount of net financial assets. Asset durations in the private sector change, but QE alone will not cause inflation. Mike Norman expands on this issue and more in The Fed's "new and improved" QE.
Apart from this misconception of ‘printing money’, the specific durations that the Fed might buy and sell piqued my interest. Just last September Operation Twist was enacted, whereby the Fed purchased long-term Treasury bonds in exchange for short-term Treasury bonds. Read the description of Sterilized QE again. Under this program, the Fed plans to buy long-duration bonds and sell short-duration bonds. The size of the Fed’s balance sheet remains the same. Aside from the possible inclusion of long-term mortgages, Operation Twist and Sterilized QE are, in practice, exactly the same.
The Fed appears to have recognized the ineffectiveness of QE on the real economy, resolving to adjust perceptions by changing the name of its programs. While this may encourage greater speculation in stocks, commodities and MBS once again, one has to wonder how many versions of QE the Fed can perform before investors realize the truth behind these actions.