Yesterday we reported that Goldman now expects the Fed to restart Permanent Open Market Operations, i.e., bond purchases, i.e., QE some time in November. For those who missed it, 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 the balance sheet by $150bn”, in the process 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.
However, assuming Goldman is correct, there would be a little over a month before such POMO returned to permanently increase the size of the Fed’s balance sheet, potentially resulting in a continued liquidity shortage for the next 6 or so weeks.
Which probably explains why moments ago, the Fed surprised market watchers who were expecting the Fed to continue conducting only overnight repos, but announcing that not only would it conduct overnight $75 Billion repos every day from Monday until Thursday, October 10, but it would also introduce 2 week term repos with a total size of “at least $30 billion” for the first time since the financial crisis.