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The Debate Is Over: In Two Months “Not QE” Officially Becomes QE 4
The Debate Is Over: In Two Months “Not QE” Officially Becomes QE 4
While Neel Kashkari may be theatrically appealing to the intellect of “QE conspiracists” – which as of today in addition to Robert Kaplan, Larry Kudlow and James Gorman also includes as per the chart below Bank of America, in addition to any other person with an even modest understanding of monetary policy…
… to explain to him how the Fed is moving prices with its $60BN in monthly purchases of T-Bills (something we did last week), an key development is coming that will make all such debates moot: in a few months the Fed’s “Not QE” will officially become “QE 4.”
The reason: following an update to BMO’s bill supply forecasts, the bank’s rates strategist Jon Hill sees a great likelihood that the Fed will need to reduce its “demand burden” on the bill market, i.e., there won’t be enough Bills available for the Fed to monetize without it distorting the market, and will extend the purchase program to include short coupons in the process officially ending any debate whether the Fed’s manipulation of the market under the guise of saving repo, is “Not QE”, because it is limited to Bills and thus no duration is taken out of the market, or is “QE 4”, in which the Fed purchases at least some coupon securities in addition to Bills.
Once the Fed makes the shift, BMO expects the monthly sizes of $60 bn, or $30 bn post assumed taper, would be composed of both bills and short coupons, “helping to reduce expected pressure in the bill market. “
At this point, Hill puts 75% odds on this change occurring by mid-March, meaning that any farcical “debate” whether the Fed’s injection of anywhere between $60 and $100BN in liquidity each month into the equity market, is or isn’t QE, will very soon be mercifully over.
Opinion: The Federal Reserve is stuck in quantitative-easing hell
Opinion: The Federal Reserve is stuck in quantitative-easing hell
The central bank’s short-term buying of securities could morph into long-term easing
Imagine doing the same thing over and over again, with little progress and no relief. Sounds like most people’s vision of hell — or the Federal Reserve’s current predicament.
Since September, the central bank, through the Federal Reserve Bank of New York, has been purchasing securities hand over fist to alleviate short-term pressures in the overnight money markets. It has used repurchase (“repo”) and reverse repurchase (“reverse repo”) agreements to provide liquidity and keep overnight borrowing rates from spiking.
But these complex money market operations already have caused the Fed to buy a net $400 billion worth of securities, after Chairman Jerome Powell shrank the Fed’s balance sheet by $700 billion. That “normalization,” which also included raising the federal funds rate through late 2018, is now effectively dead and the Fed’s balance sheet is growing again.
Powell and the Fed have repeatedly denied this is a new phase of “quantitative easing (QE),” three rounds of which added $3.6 trillion to the Fed’s balance sheet in the years after the financial crisis. And indeed, in the earlier rounds of QE, the central bank bought Treasuries and mortgage-backed securities of various maturities. The current buying has been focused on Treasuries with maturities of 12 months or less.
On the way: QE4
But that may not continue, says Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence, a Dallas-based boutique research firm. Booth, who worked on both Wall Street and in the Federal Reserve Bank of Dallas, has been a critic of Fed policies since the central bank pushed fed funds down to near zero and launched its three rounds of QE after the financial crisis. (She also was one of the few people to connect the dots between the housing bust and Wall Street before the crisis hit.)
…click on the above link to read the rest of the article…
Is A Global Crash Just Around The Corner? Central Banks Are Cutting At The Fastest Rate Since The Financial Crisis
Is A Global Crash Just Around The Corner? Central Banks Are Cutting At The Fastest Rate Since The Financial Crisis
There is something very fishy about the world’s economic situation. On one hand, US president Trump keeps repeating that the US economy is the strongest it has ever been, with global strategists, economists and officials parroting as much they can, repeating that the world economy is also set to rebound sharply any minute now. And yet, two things stand out.
As we pointed out first last month, and as Convoy Investments echoed last week, with the US economy allegedly doing very well, the Fed’s balance sheet is now expanding at a rate matched only briefly by QE1, and faster than QE2 or QE3, in the aftermath of September’s repo fiasco which provided Powell with an extremely convenient scapegoat on which to hang the return of “NOT QE” (which, we now know, is in fact QE.)
The Fed’s unprecedented balance sheet expansion in a time of alleged economic stability and solid growth is a handy explanation why the S&P has been soaring in the past two months, and as we pointed out, a remarkable correlation has emerged whereby the S&P is up every week the Fed’s balance sheet is higher, and down whenever the balance sheet has declined.
And so, while helping us understand what has been the fuel for the market’s recent blow-off top meltup, the Fed’s emergency intervention does beg the question: is there something amiss more than just the repo market, and is Powell telegraphing that a far more serious crisis may be looming.
It’s not just Powell, however. It’s everyone.
…click on the above link to read the rest of the article…
The Federal Reserve Is Directly Monetizing US Debt
The Federal Reserve Is Directly Monetizing US Debt
In a very real way, MMT is already here
Sure, it’s not admitting to this. And it’s using several technical jinks and jives to offer a pretense that things are otherwise.
But it’s not terribly difficult to predict what’s going to happen next: the Federal Reserve will drop the secrecy and start buying US debt openly.
At a time, mind you, when US fiscal deficits are exploding and foreign buyers are heading for the exits.
How It’s Supposed to Work
Here’s how it’s supposed to work when the US government issues new debt:
- If the US Treasury needs to raise new funds, it announces an upcoming auction of US Treasury bills/notes/bonds.
- A date for the auction is set.
- Various participants bid for those bills/notes/bonds (including ‘regular folks’ like you and me if we’re using the government’s Treasury Direct program).
- At a later date, the Fed can buy those US Treasury bills/notes/bonds. The various holders of that debt submit offers to sell, and the Fed (presumably) selects the best offers on the best terms.
The Federal Reserve, under no conditions, buys Treasury paper directly. The Federal Reserve’s own website still maintains that this is the case:
There are two important claims plus one assertion I’ve highlighted in there, each in a different color:
- Yellow: Treasury securities may “only be bought and sold in the open market.”
- Blue: doing otherwise might compromise the independence of the Fed.
- Purple: the Fed mostly buys “old” securities.
So according to the Fed: it’s independent, it follows the rules set forth in the Federal Reserve Act of 1913, and it mostly buys “old” Treasury paper that the market has already properly priced in a free and fair system.
But that’s not really what’s going on…
…click on the above link to read the rest of the article…
One Bank Finally Admits The Fed’s “NOT QE” Is Indeed QE… And Could Lead To Financial Collapse
One Bank Finally Admits The Fed’s “NOT QE” Is Indeed QE… And Could Lead To Financial Collapse
After a month of constant verbal gymnastics (and diarrhea from financial pundit sycophants who can’t think creatively or originally and merely parrot their echo chamber in hopes of likes/retweets) by the Fed that the recent launch of $60 billion in T-Bill purchases is anything but QE (whatever you do, don’t call it “QE 4”, just call it “NOT QE” please), one bank finally had the guts to say what was so obvious to anyone who isn’t challenged by simple logic: the Fed’s “NOT QE” is really “QE.”
In a note warning that the Fed’s latest purchase program – whether one calls it QE or NOT QE – will have big, potentially catastrophic costs, Bank of America’s Ralph Axel writes that in the aftermath of the Fed’s new program of T-bill purchases to increase the amount of reserves in the banking system, the Fed made an effort to repeatedly inform markets that this is not a new round of quantitative easing, and yet as the BofA strategist notes, “in important ways it is similar.”
But is it QE? Well, in his October FOMC press conference, Fed Chair Powell said “our T-bill purchases should not be confused with the large-scale asset purchase program that we deployed after the financial crisis. In contrast, purchasing Tbills should not materially affect demand and supply for longer-term securities or financial conditions more broadly.” Chair Powell gives a succinct definition of QE as having two basic elements: (1) supporting longer-term security prices, and (2) easing financial conditions.
Here’s the problem: as we have said since the beginning, and as Bank of America now writes, “the Fed’s T-bill purchase program delivers on both fronts and is therefore similar to QE,” with one exception – the element of forward guidance.
…click on the above link to read the rest of the article…
Fed’s Fourth Bill POMO Is Most Oversubscribed Yet Amid Liquidity Scramble
Fed’s Fourth Bill POMO Is Most Oversubscribed Yet Amid Liquidity Scramble
One day after the Fed unexpectedly saw a surge in demand for its term-repo operation, which was oversubscribed for the first time since the mid-September repo crisis erupted, the liquidity shortage in the funding market appears to be getting worse by the day, and in today’s just concluded 4th consecutive T-Bill POMO, which saw the Fed monetize another batch of Bills, Dealers submitted $44.2BN in bids for the maximum $7.5BN in Fed “Reserve Management” (note: not QE) purchases.
This means that today’s operation was 5.9x oversubscribed, the most of any operation since the launch of “Not QE4”, and clearly an increase from the first three POMOs, when operations were 4.3x, 4.8x and 5.5x oversubscribed.
The results confirm that demand for the Fed’s permanent liquidity injection is increasing with every operation – suggesting that not only was the September repo turmoil not a one-time liquidity event, but that that liquidity shortage is getting worse – even as usage of the Fed’s latest overnight repo saw a modest decline.
As such the question we have been asking for the past month – and one which Elizabeth Warren should also consider asking of Steven Mnuchin – remains: why are banks still so desperate for liquidity even though the Fed has now made clear that its balance sheet will expand to accommodate all reserve needs, and why do they so stubbornly refuse to approach the interbank market for their funding needs? In short, what do they know about the banking system that we don’t?
After Unveiling ‘NotQE’, Fed Eases Liquidity Rules For Foreign Banks (Rescues Deutsche)
After Unveiling ‘NotQE’, Fed Eases Liquidity Rules For Foreign Banks (Rescues Deutsche)
Having cracked down on Deutsche Bank in the past, The Fed appears to be playing good-regulator/bad-regulator as The FT reports thatDeutsche is expected to benefit most from an imminent change in The Fed’s liquidity rules.
Specifically, US banking regulators have dropped an idea to subject local branches of foreign banks to tough new liquidity rules(forcing US branches of foreign banks to hold a minimum level of liquid assets to protect them from a cash crunch).
As The FT further details, people familiar with his thinking say Randal Quarles, the vice-chair for banking supervision at the Fed, accepts the banks’ argument that any liquidity rules on bank branches should only be imposed in conjunction with foreign regulators.
“Without some international agreement, we could have the situation where each country is trying to grab whatever isn’t nailed down if there is another scare.”
And Deutsche Bank benefits most (or rescued from major liquidity needs) since it has by far the largest assets in US branches…
Why would The Fed do this?
Simple, it cannot afford another Lehman-like move (or even the fear of one)…
