We have lift off.
Last Wednesday, as stocks hit session lows amid fears that the Fed was so polarized on further easing and with the Fed’s dot plot suggesting no more cuts this year that odds of further rate cuts in 2019 dropped precipitously, Chair Powell catalyzed a dramatic rebound in risk assets when during his press conference he said that “It is certainly possible that we’ll need to resume the organic growth of the balance sheet sooner than we thought.“
One day later, with the Fed engaging in overnight repos to unfreeze the clogged up plumbing in the repo market, the release of the Fed’s weekly H.4.1 statement confirmed that Powell was spot on: the Fed had indeed resumed the growth of the Fed’s balance sheet “sooner than we thought.” Whether or not said growth is “organic” is the topic of a separate discussion, but as expected the week’s rolling $75 billion overnight repo facility meant that the Fed’s balance sheet posted its first substantial increase for the first time since the end of QE3 in 2014, rising by $75 billion to $3.845 trillion.
The offsetting balance sheet liability was the Treasury General Account, or the cash the US Treasury holds at the Fed, which soared by a whopping $119 billion in one week, rising to $303 billion as of September 18, which increase frequent readers will recall, was precisely the catalyst we said at the start of August would precipitate a dollar shortage, and unleash a tantrum in the repo market. That’s precisely what happened.
Incidentally, we also said that since both overnight and term repos would be insufficient to resolve a problem that was ultimately a function of too few reserves in the system, that this would culminate with a return of open market purchases of securities by the Fed, i.e. QE.
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