While the financial intelligentsia debates whether the Fed’s just announced plan to restart POMO with the purchase of T-bills at an initial pace of $60BN per month “at least into the second quarter of next year in order to maintain over time ample reserve balances at or above the level that prevailed in early September 2019”, is QE or is “Not A QE”, a key development was lost in the din surrounding the bigger picture.
As Rabobank’s Philip Marey writes, after hesitating at the September 17-18 meeting, the FOMC decided to announce balance sheet expansion well before the next meeting on October 29-30. This is earlier than the Committee anticipated at the previous meeting; it is also well ahead of the Wall Street consensus that had formed a balance sheet announcement would be made at the November FOMC: “After all, at the press conference on September 18, Powell indicated that ‘organic growth’ of the level of reserves would be high on the agenda of the October meeting.”
However, in his speech to the NABE last week (October 8) Powell was more explicit and said that the FOMC would “soon” announce measures to add to the supply of reserves over time.
It now turns out that “soon” meant a few days, and it was not a coincidence.
The reason for that is that as the Fed announced in a Q&A that was published alongside the POMO announcement, and which mostly flew under the radar amid the flurry of other news on Friday, the FOMC secretly held a video conference on October 4: “the first unscheduled (= emergency) meeting of this cutting cycle” as Rabobank puts it. From the Fed’s Q&A:
The FOMC met by videoconference on Friday, October 4 to discuss issues related to the recent pressures in money markets and monetary policy implementation. There was broad agreement following that discussion on appropriate technical operations to address these issues. Specific plans were developed for review by the Committee this week. As noted in the announcement, the final plans for these technical operations were approved by notation vote that was completed today.
That this took place after quarter-end, when the Fed had already announced a generous menu of repo unclogging operations, including a barrage of term repos in addition to the expanded, $100BN overnight repo, confirms just how seriously the Fed took the mid-September freeze of overnight funding markets (which sent G/C overnight repo rates to 9.25%), and is proof that – contrary to what many central bankers said last week – this was far more than a mere “plumbing” hiccup.
It also suggests that the bank which we pointed out on October 2 was the catalyst for the sudden and dramatic flare up in repo rates in September may have had one or more phone calls with Powell in hopes of boosting the amount of “excess” reserves in the interbank market (because clearly $1.4 trillion in reserves is no longer enough, and clearly expanding this amount of reserves to where they were at the peak of the Fed’s QE is “not QE” as so many so-called pundits will claim).
That bank, for those who missed the article, was JPMorgan.
Whether or not Powell indeed held a call with Jamie Dimon – who is “richer than you” for obvious reasons – will be revealed when the next set of the Fed Chair’s public schedules is released in a few weeks – the most recent one showed that Powell held phone calls with top Wall Street executives at the start of August, a day after the central bank cut interest rates for the first time since the global financial crisis. Specifically, Powell spoke with JPMorgan’s Jamie Dimon for seven minutes and Citigroup’s Michael Corbat for 15 minutes on the morning of August 1, according to his latest public schedule.
Incidentally, later that afternoon on August 1, markets tumbled after President Trump abruptly announced he would move forward with tariffs on an additional $300 billion worth of Chinese products (which he has since suspended). The Fed had a day earlier lowered its benchmark rate by a quarter percentage point but signaled it was not necessarily the start of an easing cycle. A little over two months later, the market is convinced that this, too, was a lie and the Fed will cut again in October and gives significant probability to yet another rate cut after, some time in November or December.
Meanwhile, going back to Rabobank, the bank which correctly predicted the Fed’s U-turn one year ago, now expected that the Fed will continue easing until the end of 2020, when the Fed Funds rate goes back to 0.00%
One final point: whereas we have made it quite clear that in our view, the Fed’s monthly purchase of $60BN in Bills, and up to $110BN in total TSY purchases, net of maturities and rollovers, is QE 4, even if we enjoy calling it “NOT A QE” to infuriate those Fed progressive pedants who for some bizarre reason find the urge to defend Powell’s actions, when it was the Fed’s monetary lunacy that caused the biggest wealth and income inequality and directly led to the ascent of Trump, the Fed defends its narrative of not calling the $60BN in indefinite T-Bill purchases a QE for the following reason:
the operations announced on October 11 are purely technical measures aimed at maintaining an appropriate level of reserves in the banking system and have no material implications for the stance of monetary policy. In particular, purchases of Treasury bills likely will have little if any effect on longer-term interest rates, broader financial conditions, or the overall stance of monetary policy. As a result, these purchases should not have any meaningful effects on household and business spending decisions and the overall level of economic activity.
There is just one problem with that cop out loophole: the Fed is saying it’s “not QE” because the Fed isn’t directly targeting long-term rates and “overall level of economic activity.” That is beyond disingenuous for one simple reason: while the Fed may not admit it, it is now scrambling to restore monetary conditions that were attained at the peak of QE. And while Powell may not claim that injecting up to $400BN in liquidity in the market is not aimed at monetary policy, it has a very clear, if unstated, motive: to further ease financial conditions, which is precisely what QE sought to do.
A very simple thought experiment: what would happen if the Fed had not pursued permanent balance sheet expansion: just how severe would the ensuing banking crisis be, which the Fed with its own actions confirmed was inevitable had it not intervened?