Fed Chair Powell Announces QE4 (But Don’t Call It QE4)
Fed Chair Powell Announces QE4 (But Don’t Call It QE4) from ZeroHedge
Update: Fed Chair Powell appears to have announced QE4 (but do not call it QE4!):
Discussing the liquidity shortage and repo-calypse, Powell said:
While a range of factors may have contributed to these developments, it is clear that without a sufficient quantity of reserves in the banking system, even routine increases in funding pressures can lead to outsized movements in money market interest rates. This volatility can impede the effective implementation of monetary policy, and we are addressing it.
Indeed, my colleagues and I will soon announce measures to add to the supply of reserves over time.
Consistent with a decision we made in January, our goal is to provide an ample supply of reserves to ensure that control of the federal funds rate and other short-term interest rates is exercised primarily by setting our administered rates and not through frequent market interventions. Of course, we will not hesitate to conduct temporary operations if needed to foster trading in the federal funds market at rates within the target range.
“I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis.
Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy…”
Roughly translated: Don’t confuse balance sheet growth for “reserve management” with balance sheet growth for “stock market management”
Algos googling what “large-scale asset purchase programs” means
They are about to click on #2 pic.twitter.com/OoCBx6BGTm
— zerohedge (@zerohedge) October 8, 2019
None of this should come as a surprise as we warned in September that “The Fed Will Restart QE In November: This Is How It Will Do It.”
…In the chart below, Goldman summarizes its projections of the Fed’s future gross Treasury purchases. The blue bars show reinvestment of maturing UST, which occur via add-on Treasury auctions. The red bars show reinvestment of maturing MBS, which occur via the secondary market.
The grey bars are where things get fun as they show permanent OMOs to support trend growth of the Fed’s balance sheet, which will occur via intervention of the Fed’s markets desk in the secondary market.
Here, similar to Bank of America, Goldman assumes a roughly $15bn/month rate of permanent OMOs, enough to support trend growth of the balance sheet plus some additional padding over the first two years to increase the size of thebalance sheet by $150bn, restoring the reserve buffer and eliminating the current need for temporary OMOs.
That strategy would result in balance sheet growth of roughly $180bn/year and net UST purchases by the Fed (the sum of the red and grey bars) of roughly $375bn/year over the next couple of years.
And so, in just two months QE… pardon the Fed’s open market purchases of Treasurys, will return after a 5 years hiatus. Just don’t call it QE, whatever you do.