A new era of US QE starts with it being renamed Reserve Management

Last night saw something of an epoch making event as all eyes turned to Denver Colorado. This time it was not for the famous “hurry up offence” of John Elway in the NFL but instead there was a speech by Jerome Powell the Chair of the US Federal Reserve. In it he confirmed something I have been writing about on here for some time and the emphasis is mine.

Reserve balances are one among several items on the liability side of the Federal Reserve’s balance sheet, and demand for these liabilities—notably, currency in circulation—grows over time. Hence, increasing the supply of reserves or even maintaining a given level over time requires us to increase the size of our balance sheet. As we indicated in our March statement on balance sheet normalization, at some point, we will begin increasing our securities holdings to maintain an appropriate level of reserves. That time is now upon us.

This of course raises my QE ( Quantitative Easing) to infinity theme. I also note Chair Powell raises the issue of the balance sheet so let us look at that. It peaked at around US $4.5 trillion as we moved into 2015 and stayed there until October 2017 when the era of QT ( Quantitative Tightening) or reverse QE began and it began to shrink. Over the last year it shrank from US $4.17 trillion to US $3.76 trillion before the repo crisis struck.

In mid-September, an important channel in the transmission process—wholesale funding markets—exhibited unexpectedly intense volatility. Payments to meet corporate tax obligations and to purchase Treasury securities triggered notable liquidity pressures in money markets. Overnight interest rates spiked, and the effective federal funds rate briefly moved above the FOMC’s target range. To counter these pressures, we began conducting temporary open market operations. These operations have kept the federal funds rate in the target range and alleviated money market strains more generally.

What this misses out is that US Dollar liquidity has been singing along with Queen for some time.

Pressure: pushing down on me,
Pressing down on you, no man ask for.
Under pressure that burns a building down,
Splits a family in two,
Puts people on streets.

Here I am from the 25th of September last year.

The question to my mind going forwards is will we see a reversal in the QT or Quantitative Tightening era? The supply of US Dollars is now being reduced by it and we wait to see what the consequences are.

As you can see the phrase “unexpectedly intense volatility” is not true of anyone who is a follower of my work. One way of looking at this is that forwards pricing of the US Dollar has been in the wrong place for theory. This is one of the reasons why German bond yields have gone so negative ( as I type this the benchmark ten-year yield is -0.58%) because if you try to switch to US Treasury Bonds to gain the 1.54% or 2% higher yield you find that exchange rates take away the gain. To get a higher yield you have to take an exchange rate risk. Returning to the Chair Powell statement we see that it is more realistic to say we were hovering near an edge and then slipped over it.

If we return to the balance sheet we see that it has risen to US $3.95 trillion for a rise of the order of 190 billion in response to the repo crisis. The exact amount varies daily with the individual repo operations and also fortnightly as we now have those too. Just as an example the difference between the operations on Monday and yesterday was some US $9.55 billion lower. I point this out as some places have been claiming you add the repo operations up which is really rather odd when most so far only have the lifespan of a Mayfly.

Those who analyse events via the prism of bank reserves should be happy with this bit.

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.

An official denial

By now you should all know how to treat this.

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.

Indeed the next part is simply untrue or if you are less kind a lie.

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, to which I now turn.

One of the roles of a central bank is setting interest-rates as part of monetary policy. Those who follow my podcasts will know I defined it as there second role after the existence and provision of a currency, in this case the US Dollar. Briefly monetary policy was affected as overnight interest-rates went outside the official range as described below by the Financial Times.

the pressures that bubbled up in September and sent the cost of borrowing cash overnight via repurchase, or repo, agreements as high as 10 per cent.

That is not as large as you might think as the impact is only for each day but it was way outside the official range. Also there were times when the role of a central bank was in setting the interest-rate for overnight money in terms of its monetary policy. The credit crunch moved events along as that did not have the hoped for impact on the real economy ( and hence we got QE) but the underlying principle remains.

Comment

So we find that the new version of Quantitative Easing or what will no doubt be called QE4 had the champagne bottle smashed on it last night by Jerome Powell as it got ready to go down to the slipway. It remains for it to be fully fitted out as I do not believe it will stop here.

making the case instead for the Fed to buy anywhere from $200bn to more than $300bn of shorter-dated Treasury bills over the next six months. ( Financial Times)

As you can see the lower estimate pretty much coincides with the change in the balance sheet do far with the repo operations. The larger amount perhaps aims for some sort of margin.

The difference between this and the QE we have seen so far is the term of the assets purchased. Treasury Bills last for up to a year whereas Treasury Bonds are for longer periods of time with what is called the long bond being for thirty-years. Also bills do not pay interest as you pay less for them to allow for that.

So there are minor differences with past QE efforts but the direction of travel is the same. Let me put it another way with this from the US Federal Reserve,

Total assets of the Federal Reserve have increased significantly from $870 billion on August 8th, 2007

They have indeed as we wonder how long it will be before we get back to the previous peak of US $4.5 trillion and presumably beyond.

If QE really worked it would not need so many new names would it? Japan now calls it QQE and now the US calls it reserve management. Perhaps Governor Carney will call it climate-related QE.

 

 

 

19 thoughts on “A new era of US QE starts with it being renamed Reserve Management

  1. Isn’t it ironic that in a world literally drowning in money from bond bubbles, stockmarket bubbles and credit bubbles, companies borrowing billions of dollars to buy their shares back to give the illusion of increasing profitability, the short term repo market is short of dollars? But then again it isn’t, since the increasingly unstable financial markets are now requiring more and more intervention by central banks. It’s the repo market this time, what will it be next time?How big will it be?What will the knock on effects be as the contagion spreads, quite simply the Fed is now going to have to bail out the world and his wife as each crisis erupts, each one being bigger than the last.

    Powell can call this anything he likes, even deny this and the next version isn’t QE, but it will be, and each bailout will get exponentially bigger, leading to…yes you guessed it the collapse of the dollar, how long will it be before Carney comes out with his version?

    Just remember the words of Bernanke when he started QE ten years ago, he denied it was monetising the deficit and said it could be reversed in 15 minutes. The fiat money system and the worlds economies are collapsing before our eyes and those criminals are lying through their teeth denying it and telling you the thing you have most to fear is climate change!

    • Hi Kevin

      I remember Baron King of Lothbury saying the same at the Bank of England whereas we ended up with more QE and interest-rates have advanced all of 0.25% in a decade after being slashed. The central planner’s will end up having to intervene in ever more places as the word unexpectedly goes into overdrive.

  2. Great article as always Shaun.

    Now that the EU and USA are printing, no doubt the sheep at the BOE will be cranking up the presses. It would be great to see infrastructure spending like you suggested yesterday. But we both know it will go straight into the mortgage market. Property is wobbling, most of the indicies are going to go YoY negative in the next few months.

    The property market (and by extension the banks) must be protected at all costs.

    • the property market was wobbling here since May, I wonder if they were thinking its all just Brexit issues, or not .

      I think not , I see people with less money in their collective pockets.

      the trend would be then dis inflationary …….

      thus more stimulus is needed , and hey presto ! here we have the Fed giving the market some “assist” .

      And of course Carney is a laggard , to busy looking at the dessert trolley to notice ….

      ‘C’ new york times magazine

      Forbin

    • Hi Arthur

      If Brexit does not happen they are going to have to find a new scapegoat! But then I see Governor Carney giving speeches on climate change and feel that the poor old weather will take the brunt of it.

  3. Shaun,
    The FED has been switching out of Mortgage Backed Securities so what are they expecting?
    Collateral needed for Repo market as alternative to borrowing between banks – lack of trust between financial organizations?

  4. Great blog as usual, Shaun.
    When Trump didn’t re-appoint Janet Yellen as Fed Chair I think some pundit said it probably had less to do with interest rates than the balance sheet, and that it possibly pointed to a more aggressive shrinking in the Fed’s balance sheet. So it’s unnerving to hear that QT has already been replaced by QE whatever the number is by now.
    I thought one interesting sidenote in Powell’s paper was in the section “What Are the Consequences of a US Oil Spike?” Powell notes that “the U.S. Energy Information Administration projects that this month, for the first time in many decades, the United States will be a net exporter of oil” and that “setting aside the effects of geopolitical uncertainty that may accompany higher oil prices, we now judge that a price spike would likely have nearly offsetting effects on U.S. gross domestic product (GDP).” Given that rising oil prices undoubtedly played some role in the US financial crisis of 2008, this has got to be seen as a positive development for the US economy, making it less vulnerable to external shocks.

    • Hi Andrew

      Thank you for your reminder about the oil price section in the speech. As you say it provided plenty of food for thought. The US does not need to be especially worried about oil price spikes in a collective sense although there would be a transfer from consumers to producers. Also the world is less affected as the recent attacks on Aramco in Saudi Arabia showed.

      Mind you it all changes if the banks get affected…

  5. Hello Shaun,

    on a similar issue I see here in the UK that RPI is 2.6% and just seen my banks tell me I can borrow for 2.9% for £15k . As I can only get 1.2% interest I wonder what money the banks are making , 1.7% in a inflationary world of 2.6% ??………( CPI is 1.7% )

    fascinating

    Forbin

    • Hi Forbin

      Much of the banking model is broken as their opportunities to turn a profit have declined. The irony is that it is the interest-rate cuts to save them which have left them without a business model.All they can do is rip-off those running credit card balances and those on standard variable mortgage rates.

  6. anyone want to run a poll on what Carney will call the UK return to QE ?

    Reserve Easing ?

    Imaginative Asset Exploration ?

    😉

    Cry Havoc and let loose the printing presses of the Fed !

    Forbin

  7. Shaun, a grim day. One that has only fallen a couple or weeks after unknown effects on Repo… As if they have any idea. Anyway dont worry they have a hammer to fix all problems and we know it well. I is called fiat money printing.

    What they have not yet figured is that 10 years of financial repression have deflected markets away from price to quantity of money. Now they are only beginning th comprehend the sheer amount of liquidity to dampen down the counterparty risk concerns of a recession. It was easy in the old world… interest rates rose to squeeze out the fakers and financially stressed.

    Now the market demands …maybe not 2x hike in rate of interest but a 2x hike in liquidity and that is a lot or liquidity.

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