In today’s Fed Open Market Operations, the Fed bought $7.5 billion in T-bills. Maturities ranged from 5 weeks to 51 weeks. These outright purchases are Permanent Open Market Operations, or POMO. They’re part of what I call QE New.
The Fed has scheduled seven more similar operations between now and November 5. These POMO will bring the total purchased to the goal of $60 billion per month for starters. The Fed has promised to continue these operations for at least 6 months.
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The Fed did not say whether it would increase its monthly purchases as initial purchases begin to roll over. However, I believe that this will be absolutely necessary to keep the Fed Funds rate, and other money market rates, within the Fed’s desired range. That’s because the Treasury will constantly add to the supply of bills in the market month after month. The Fed will need to absorb that paper to keep interest rates in check.
In Temporary Open Market Operations, the Fed lent $75 billion to Primary Dealers. This was up from $67 billion on Monday. The total outstanding rose to $197 billion.
The combined operations continue to push T-bill rates lower.
The introduction of the POMO bill purchases should have reduced repo loan demand. Instead, we got the opposite today. The dealers needed to borrow even more money, not less. This suggests that systemic stresses aren’t improving despite the Fed adding over $200 billion in cash to the banking system over the past month. Those stresses seem to be worsening.
Tomorrow, October 17, the Fed will purchase $1.8 billion in Treasury coupons. This is part of the $20 billion in purchases scheduled this month to replace the Fed’s MBS holdings that are being paid down from its balance sheet in the usual course of business.
New Fed QE Open Market Operations Aren’t Working This Time
Both the bill purchases and coupon purchases are POMO- Permanent Open Market Operations, where the Fed conducts trades exclusively with Primary Dealers. It buys the bills, notes, and bonds directly from Primary Dealers.
The Fed pays for those purchases by waving its magic money wand and depositing the newly imagined money into the Primary Dealers’ checking accounts at the Fed. That cash is then available to the Primary Dealers to do with as they please.
The dealers are required to purchase more Treasuries to the extent necessary where demand from other buyers isn’t sufficient to absorb the paper. The dealers bid for that paper at the weekly Treasury auctions. They also trade in the secondary market, of course.
They also can and do use the cash to buy other securities, typically stocks. This is why the original QE worked so well to inflate stock prices. The dealers bought stocks. They lent to customers to buy stocks. They marked up the stocks they had in their inventories and sold it to their customers (mostly instititions and hedge funds). The customers bought, using the money the dealers just lent them.
This time, so far, it’s not working. The S&P 500 is no higher today than it was when it began Fed QE New in mid September.
To follow my in depth reporting, analysis, and forecasts on this story, including what to expect next, see Liquidity Trader.
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