I have been warning for months that the Fed would need new QE to counter the impact of massive waves of Treasury supply. I thought that that would come later, rather than sooner. Sorry folks, wrong about that. The NY Fed announced another round of new TOMO (Temporary Open Market Operations) today.
In addition to the $75 billion in overnight repos that the Fed issued and has been rolling over since Tuesday, next week the Fed will issue another $90 billion. They’ll come in the form of three $30 billion, 14 day repos to be offered next week.
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That brings the new Fed QE to a total of $165 billion. Even in the worst days of the financial crisis, I can’t remember the Fed ballooning its balance sheet by $165 billion in less than 2 weeks. Things must really be bad out there. Much worse than we can imagine.
But is it bearish? Typically, massive money printing can only mean one thing for asset prices. Up, up and away.
Fed De Facto New QE Announcement
Here’s the NY Fed announcement covering this New Fed QE.
In accordance with the Federal Open Market Committee (FOMC) directive issued September 18, 2019, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York will conduct a series of overnight and term repurchase agreement (repo) operations to help maintain the federal funds rate within the target range.
The Desk will offer three 14-day term repo operations for an aggregate amount of at least $30 billion each, as indicated in the schedule below. The Desk also will offer daily overnight repo operations for an aggregate amount of at least $75 billion each, until Thursday, October 10, 2019. Awarded amounts may be less than the amount offered, depending on the total quantity of eligible propositions submitted. Securities eligible as collateral include Treasury, agency debt, and agency mortgage-backed securities. Additional details about the operations will be released each afternoon for the following day’s operation(s).
Here’s Where the NY Fed Tells Us that New QE is Permanent
After October 10, 2019, the Desk will conduct operations as necessary to help maintain the federal funds rate in the target range, the amounts and timing of which have not yet been determined.Schedule of Overnight and Term Repurchase Agreement Operations
OPERATION DATE OVERNIGHT 14-DAY TERM TERM MATURITY DATE Monday, 9/23/2019 $75 billion No term operation Tuesday, 9/24/2019 At least $75 billion At least $30 billion Tuesday, 10/08/2019 Wednesday, 9/25/2019 At least $75 billion No term operation Thursday, 9/26/2019 At least $75 billion At least $30 billion Thursday, 10/10/2019 Friday, 9/27/2019 At least $75 billion At least $30 billion Friday, 10/11/2019 Monday, 9/30/2019 – Thursday, 10/10/2019 At least $75 billion No term operations
For Monday, September 23, 2019, the Desk will conduct an overnight repo operation for an aggregate amount of up to $75 billion. The operation will be conducted from 8:15 AM ET to 8:30 AM ET. Primary Dealers will be permitted to submit up to two propositions per security type. There will be a limit of $10 billion per proposition submitted in this operation. Propositions will be awarded based on their attractiveness relative to a benchmark rate for each collateral type, and are subject to a minimum bid rate of 1.80 percent.
Here’s Why New Fed QE Will be Permanent
Now, you may be wondering why I’m calling this QE when they are, by name, “Temporary.”
No doubt the Temporary will become Permanent. Because it is just a matter of time before the Fed replaces these “Temporary” operations with POMO (Permanent Open Market Operations). POMO is a fancy way of saying that the Fed will purchase Treasuries directly from Primary Dealers. That’s old QE, and yes, it will, like the horror movie Zombies, will come back from the grave.
Meanwhile, these massive, unprecedentedly (is that a word?) YOOGE repo operations will go on and on. If the Fed wants to keep interest rates low, it will have no choice. It must finance the market’s ability to absorb wave after wave of new Treasury supply as far as the eye can see.
So, will the New QE have the same impact on inflating financial asset bubbles? Or is this time different. It could be! It’s a horror story whose final climax and denouement have yet to be known. But you can be the first to know, as this horror show unfolds. Stay tuned to Liquidity Trader for that story.
Meanwhile, check out these stories.