Bloomberg Businessweek - USA (2019-05-27)

Duringthefinancialcrisis,theFederalReserve
beganbuyingTreasurybondsandmortgage-backed
securities—aprogramknownasquantitativeeasing—
to help keep interest rates down and boost the econ-
omy. With the economy growing steadily, you might
think the Fed was done with QE. You’d be half-right.
As soon as next year, the Fed will resume large-
scale bond-buying—just U.S. Treasuries this time—
in amounts that may ultimately exceed its crisis-era
purchases, analysts say. According to an estimate by
Wells Fargo & Co., the Fed will add more than $2 tril-
lion to its holdings of Treasury debt.
Of course, the purchases won’t be called quan-
titative easing. Rather than trying to keep a lid on
interest rates, the Fed is buying Treasuries to replace
its mortgage-bond holdings as they mature and to
ensure ample reserves in the banking system. But
the effect may be largely the same. “For anybody
that has been in the market for the last 10 years, it
will feel like QE,” says Priya Misra, global head of
rates strategy for TD Securities. “This will be a very
bullish Treasury-market dynamic.”
And what happens in the U.S. Treasury market

mayhavelastingconsequencesforthebroader

economy. Not only do Treasury yields reflect how

much the government pays to borrow, but as a

benchmark for lending they also determine inter-

estratesoneverythingfrommortgagestoauto

loansandcorporatedebt.ThetheorybehindQE

wassimple: While the Fed has the power to set

short-term rates, it doesn’t control long-term rates,

which are determined by bonds being bought and

sold in the open market. Having the Fed as a big,

steady buyer meant more demand for bonds. That in

turn meant bond prices would go higher and yields

lower. The more the Fed bought and held through

QE, the theory went, the cheaper it would be for

consumers and businesses to take out loans.

During the post-crisis era, yields on 10-year

Treasuries have averaged just under 2.5%—about

half the level in the decade before the recession.

Thanks to all the Fed’s debt holdings, monetary pol-

icy is “a little more stimulative today than it would

have been pre-crisis,” says Jay Bryson, a global econ-

omist at Wells Fargo. The big takeaway for the aver-

age person is that, all else being equal, rates on

35

● The Federal Reserve’s

stockpile of Treasuries

is poised to double

Quantitative Easing

By Another Name

2014 2029

$6t

4

2

0

● FederalReserve

balancesheet

◼Treasurybills

◼Mortgage-backed

securities

◼Treasurynotes

andbonds

◼ Other

Forecast

flows.“Wehavetolookfornewmarkets,”says
JuandeDiosSegura,anolivegrowerinLaRodade
Andalucía,who’swaryoftheU.S.asa reliabletrad-
ingpartner.“It’sa politicalissue,it’snota trade
issue.”AnofficialattheU.S.EmbassyinMadridsays
Spainremains“astrongeconomicpartner.”
Spanishexportersarealsoworkingtocircum-
ventthetariffs.Lastsummer,Spanishcooperative
DcoopandMoroccanassociateDevicoboughta
20%stakeinBell-Carter,oneoftwoU.S.companies
whoseinitialcomplaintsformedthebasisforthe
tariffs.Theyaimtoshipuntreatedgreenolivesto
theU.S.andturnthemintoblacktableolivesthere,
a processthatinvolvesbriningthefruitinvats.
That’sfrustratedsomeCaliforniagrowers,who’ve
longcampaignedformeasurestodeterlower-priced
Spanishimports.“Theyjustbeatustodeathon
prices,”saysAdinHester,formerheadoftheOlive
GrowersCouncilofCalifornia.“We’veworkedon
tryingtogetatariff charge against Spanish olives
for years. We’d like to see it happen to all countries.”

If Spanish farmers can’t find new markets for

their olives, they may be forced to sell their crop

to olive oil processors, who pay less. Growers can

also try automating to lower costs, but the pro-

cess isn’t simple. For smaller growers, many of

whom still pick by hand, mechanization would

require tearing up existing trees and replacing

them with younger ones planted closer together.

“You’re uprooting 100 years of history,” says José

Maria Bohorquez, an olive grower enjoying a glass

of aguardiente at a bar in Arahal, a town that puts

on a festival in September to celebrate the table

olive harvest.

“I’m a romantic when it comes to olive trees,”

he says, adding that some of his peers have

already started pulling theirs up. “It makes me

want to cry. But we can’t survive on emotions.”

�JeannetteNeumann,withBryceBaschuk

THE BOTTOM LINE The 35% tariff Trump slapped on black table

olives from Spain is spurring producers there to seek other markets,

illustrating how protectionist policies can remap trade flows.

◼ ECONOMICS Bloomberg Businessweek May 27, 2019