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 from ZeroHedge
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.
The upshot to this attempt to mislead the market what it is doing according to Bank of America, is that:
- the Fed is continuing to “ease” even though rate cuts are now on hold, which is supportive of growth, higher interest rates and higher equities, and
- the Fed is loosening financial conditions by increasing the availability of, and lowering the cost of, leverage, which broadly supports asset prices potentially at the cost of increasing systemic financial risk.
Putting the Fed’s “NOT QE” in context: so far the Fed has purchased $66bn of Tbills and may purchase $60bn per month through June 2020, which could result in an increase in the Fed’s Treasury holdings by about $500bn.