At Econbrowser , James Hamilton takes issue with those who think the pending/likely/coming-to-a-central-bank-near-you tapering of the Fed's large scale asset purchases will have a large effect on the markets. Hamilton sees any Fed action on QE3 as important because of what it signals, not because of what it means for the flow of funds. No one expected the Fed to announce a complete cessation of its purchases at the September meeting, only a "taper", or gradual slowdown in the pace of net purchases. Suppose for illustration that the Fed had announced at the last meeting that it was going to start reducing its net purchases of Treasury securities by $2.5 B per month beginning in October, so that it would be down to zero net purchases by November 2014 (in other words, back to maintaining a constant stock rather than allow its holdings to continue to grow further). Even though the Fed did not make such an announcement after its September meeting, there should be no doubt that a similar announcement is coming soon. Let's say that in fact the Fed is not going to begin tapering until January, with net purchases not reaching zero until February 2015. The difference between the two paths I just described is that the Fed would end up holding about $100 B more in Treasury securities at the end of 2014 than if it had begun the tapering immediately. That's a difference of less than 1% in the current stock of Treasury debt. This news is supposed to shave 30 basis points off the 10-year yield? Some argue that it is not the Fed's holdings as a share of the stock of outstanding debt that matters, but instead the share of the flow of newly issued debt that is purchased by the Fed. Of the $862 B in net bond sales from the Treasury to the public between June 2012 and June 2013, the Fed ended up with $277 B, or 32% of the new flow as opposed to 17% of the outstanding stock. A change in the flow of $2.5 B per month such as discussed above would represent 3.5% of last year's flow pace of $862 B/year. There are in any case substantial problems with the "flow" view of the importance of QE3. For one thing, it is hard to arrive at it from any economic model. Anyone who holds Treasury securities is free to sell them at any time they like, which is why the equilibrium price (or yield) must be such that the stock currently held is the quantity investors want to hold. That is a theory of the equilibrium interest rate that is based on stocks, not flows. Moreover, there's been zero change so far in the flow, meaning the entire argument comes down to a story based on anticipation of future flows. And how can anticipation of future flows matter? It only matters insofar as it leads to a reassessment by investors about whether they want to be holding the existing stock given the current and anticipated future yield. In other words, the only way to get a story based on flows to work is ultimately to reframe it in the standard way, namely in terms of finding the yield at which investors are willing to hold the current stock. Another and perhaps more important component of QE3 has been purchases by the Fed of mortgage-backed securities. Here it is more difficult to calculate the fraction of the total stock of such securities the Fed is holding, because there is a range of assets with similar characteristics. What I have done in the graph below (partly because it seemed the simplest thing to do given the way the Fed's Flow of Funds accounts are structured) is to look at the Fed's MBS holdings relative to the total stock of agency- and GSE-backed securities. As of June, the Fed's $1,277 B in MBS represented 17% of the total stock. Read Who's afraid of the big bad taper? here .