The Fed bought $53 billion worth of Treasuries from Primary Dealers today. The Treasury sold $105 billion worth of T-bills. The Fed’s cash to dealers fell $52 billion short of providing enough cash to fully fund the Treasury purchases.
The Fed had pumped hundreds of billions of excess cash into dealer accounts over the past 3 weeks. This was money that was over and above the amount needed to absorb all new Treasury issuance. In other words, the Fed monetized all of the debt, and gave the dealers roughly $800 billion more to play with.
Today’s action effectively drains some of those funds from dealer accounts and from the financial markets.
Tomorrow will be more of the same. The Fed has announced $40 billion in purchases of Treasuries. The Treasury will sell $118 billion in net new paper. The Fed has folded its arms and will now sit back and watch how the market responds.
Today, the stock market gave it reassurance. The S&P gained 90 points to a key resistance level. The Treasury market sold off however. The yield on the 10 year rose 5 basis points.
The Fed can allow a little leeway on this, but not too much. The dealers can’t afford to take losses on their Treasury inventories.
But we have to wonder if the Fed is just a little concerned about monetizing all $2 trillion plus of the coming Treasury issuance this year, thereby triggering runaway inflation. The Fed had already been funding the entire structural deficit that was running at about $1 trillion per year.
What would happen if the Fed printed $3 trillion in one year?
The chart below, currnet through April 7, gives an overview of what the Fed has done versus Treasury issuance since it began “Not QE” in September, and transitioned to Pandemic Pandemonium Panic QE, in March. I post it a couple of times a week in Lee Adler’s Liquidity Trader.
Total Fed panic QE has exceeded net new Treasury issuance by roughly $800 billion. The excess cash in dealer accounts has been driving a strong stock market rebound. Notice that the stock market turned on the EXACT DAY, that the Fed’s Panic QE first exceeded net new Treasury issuance since September.
The question is how much the Fed will now throttle back that excess cash, and how much of a hit to the markets the Fed will accept as a result.
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