It’s QE4ever, Baby! The Fed’s latest move back into quantitative easing took a quantum leap in a single day with last week’s rush announcement of major permanent money injections to begin this Tuesday. Since the Fed adamantly denies it is doing what it is doing — going back to quantitative easing (because they legally have to deny it) — we could just call it the Fed’s new quantitative mechanics. If we must avoid the term quantitative easing, as some writers are insisting we should, I’ve come up with the new term from the definition of quantum mechanics in which …
objects have characteristics of both particles and waves …. and there are limits to the precision with which quantities can be measured (the uncertainty principle)…. Quantum mechanics gradually arose from theories to explain observations which could not be reconciled with classical physics.
Thus, quantitative mechanics, seems to fit the Fed’s latest move, though I think I’ll just stay with QE4ever since it follows QE3. The Fed certainly exhibits great uncertainty about about the principle size of its new quantitatively massive injections of money. You’ll see in all the quotes below how large each dose will be and how long these emergency operations that are not an emergency will continue. All of it put in terms that are hard to quantify because they are always preceded with “at least.”
The money that matters will be created out of nothing yet will, “at least,” match previous rounds of QE in size. Like things in quantum mechanics that can be in two places in the same time or seem to be two different kinds of things at the same time, the new QE that isn’t QE is also not an emergency response, even though it had to be decided on, announced and started before the next Fed meeting arrives later this month. Though the Fed says it not easing, I will lay out below how it is easing in every respect. In short, it looks exactly like the old quantitative easing and functions exactly like the the old QE, so it Q-uacks like a duck and is a duck. The Fed says it is not because it has a different motivation, as if I care what their motivation is.
The new bizarre black hole of QE4ever where things are no longer what they are
Don’t expect the Fed to remove any uncertainty in principle about any of this for you:
The Federal Reserve will buy Treasury bills, up to $60 billion per month, to maintain ample reserves in the banking system.
To start the QE argument, I’ll note that is more in US treasuries — starting this week (on October 15th) — than the Fed ever bought per month under the old quantitative easing regime. It is more per month than it ever got rid of under its recently ended quantitative tightening regime. While it bought $80 billion in securities during the old QE, fewer than $60 billion of those each month were US treasuries. So, size-wise, it certainly fits the quantitative by the Fed’s own standards, and who can believe such massive creation of new money will not ease the economy, just as it did in the past?
How is that even credible? I’ll show you how the Fed tries to make it credible and will note that many market commentators are running with the Fed’s argument (as those who want to believe in the Fed will do and who cannot think clearly).
The Fed said the actions were “purely technical measures to support the effective implementation” of the rate-setting committee’s policy “and do not represent a change in the stance of monetary policy…. In light of recent and expected increases in the Federal Reserve’s non-reserve liabilities, the Federal Reserve will purchase Treasury bills at least into the second quarter of next year.”
First, the Fed would like you to believe this is not a change in monetary policy, but how is half a year (minimum) of balance-sheet expansion equal in size to what was done under six months of QE3 not a change in policy from the tightening that just ended in the middle of last summer? How, in fact, is it not a total reversal of that policy? Maybe they mean it is not a change from the more recent sensation of tightening (the newer policy of holding where we are, which was supposed to be the natural balance sheet level). Still, how is moving from holding at neutral to a full acceleration into monetary expansion equal in scale and speed to past easing not a change in monetary policy?
The street calls it differently. The stock market immediately recognized the truth about our return to the golden and glorious years of QE. Upon hearing the announcement that massive cash infusions are officially set to return, the market burst upward like smoldering flames that just got a draft of oxygen. The market, in other words, responded exactly as one historically has come to expect it to respond when hit with QE … like an empirically repeatable experiment.
The Fed also argues that it is not QE because it is being done as a “purely technical measure” so that they can regain control over interest rates. Or as they put it (to make it sound less like they have lost control), “to support the effective implementation” of the rate-setting committee’s policy. What do I care what motivated them?
QE4ever is also just like the old QE in that we are told, as we were all of the previous times, that the Fed is not monetizing the government’s debt (which is illegal). In the past we were told QE was not monetizing the government debt because QE would end and eventually be reversed. Whose memory is short enough that they cannot now remember how well the last time ended and was reversed? Just like then, the new QE is set to end (but won’t); however, unlike last time, it is promised it will not ever reverse but will become the new norm.
So, the Fed has now dispensed with the entire argument that it is not monetizing the debt because its holding of treasuries is temporary. The Fed now appears to recognize it has no end game that will ever allow it to withdraw the new non-QE. By saying it is doing this “to maintain ample reserves in the banking system,” it is admitting it will hold these treasuries on its balance sheet for good as a the newly emergent necessity. In the new realm of things that are not what they are, the Fed will be buying government debt to hold it forever, but it is not monetizing the debt because it is doing it for technical reasons other than helping the government. (I will be eating this candy bar, but it is not fattening because I am doing it for reasons other than weight gain.)
The only thing more stunning than how blatantly the Fed will be monetizing the US debt is how readily so many financial publications are to accepting this new debt monetization without question. (It is not surprising, just shameless.) I will, on the other hand, immediately question the truthfulness of the Fed’s use of the word “maintain.” They must have meant “restore” since they are not doing this slowly over time to keep reserves at a level that is sufficient, but doing it massively and rapidly between now and “sometime in the second quarter of 2020” in order to replace most of what they already removed but couldn’t remove during their Great Recovery Rewind. Clearly, they are restoring a position they lost, not maintaining it. (We are not recovering ground we retreat from; we are just maintaining the ground we left.)
So, if you are replacing the former QE that you pretended you could roll off, tried to roll off and completely failed to roll off, then how is it not, in the very least, “replacement QE?” The Fed crashed the stock market in 2018 by promising its quantitative fighting would continue for some indefinite time “on autopilot.” It then quit tightening much sooner than it originally indicated, and now the tightness it created in such short time is causing the overnight loan market that is critical to banks to go into gyrations. So, how is undoing QT by replacing lost QE not more QE?
Some commentators are justifying their parroting of the Fed’s claim that this is not QE4ever by pointing out that the Fed will only be purchasing short-term government bills this time, and not longer-term bonds. So what? So, they are loosening the short end of finance, rather than the long; not all originally QE was originally aimed solely at the long-term end. They are merely constrained to do this because they would invert the yield curve even further if they bought longer-term bonds, and that is self-defeating. So, they are contained now to only tighten at the short end of the curve.
Some of these same commentators wrote a month ago that all of these sudden machinations by the Fed had nothing to do with a liquidity crisis that manifested in September’s repo madness. The Fed now contradicts them:
The U.S. central bank said Friday it will purchase $60 billion of short-term Treasury debt each month in an effort to ward off stress in overnight lending markets.
Yes, lack of liquidity is what the sudden emergency overnight repo operations were all about.
Put together the two reasons the Fed’s has given for this sudden move, and you have the fact that the Fed’s balance sheet was too small, causing stress in overnight lending markets, so that it was pressed to rapidly get the balance sheet re-inflated. How is restoring the Fed’s balance sheet back toward its formerly bloated size in a hurry to “ward off stress in overnight lending markets” not a liquidity crisis? Wasn’t maintaining bank liquidity the reason the Fed pumped up its balance sheet in the first place?
After stock market volatility hit a broad swath of investors in the final months of 2018, investors now see the Fed as far more willing to roll out deeper measures to keep credit flowing in the financial system during bouts of volatility.
Doing it to “keep credit flowing” sounds like a liquidity situation between banks to me. Investors recognize what this is. I’ll also note in passing the 2018 volatility happened when I said it would for the reason I said it would. So, consider that as you evaluate what I am saying about the Fed’s present move. Some people back then thought the stock market crash in the final months of 2018 had nothing to do with liquidity problems either.
As Powell was noted to have said when the Fed first responded to the repo crisis in September,
‘”While a range of factors may have contributed to these developments, it is clear that without a sufficient quantity of reserves in the banking system, even routine increases in funding pressures can lead to outsized movements in money market interest rates,” Powell said.
Powell argued then that reserves were insufficient to cover “routine increases in funding pressures.” Reserves were simply too low to function properly, so they had to be quickly raised for “purely technical reasons;” i.e., just to work. By Powell’s own admission, the tightness in bank reserves caused these recent outsized moves. So, how is this not loosening; i.e. “easing” the situation?
However, Powell also said,
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.
Well, it’s the same scale and same speed. If you find the Fed’s denial confusing, consider how much the Fed even knows about what it is doing based on actual evidence: The Fed told us its September injections were “temporary” (as in “overnight”) or “term” (where the term was set at fourteen days). However, those tens of billions (now totaling in aggregate somewhere around $220 billion) in temporary loans didn’t ‘t fix the problem as we were assured they would.
Consider, also, that I wrote last month those measures would most certainly have to become permanent in short order because, as temporary measures they would fix nothing because the problem was not the set of circumstance that hit but the fact that reserves were too low to handle any set of circumstances that might pile up as routinely happens in banking. Those who didn’t want to admit those endless repo measures were a new form of QE, claimed they were necessary solely to abnormal, end-of-quarter transactions, such as sudden US government bond issuance, but NOT a problem of depleted bank reserves. I said otherwise. Powell said otherwise. People believed what they wanted to believe.
I have been pointing out for many months how bank reserves were rapidly diminishing as the Fed continued quantitative tightening long past that first liquidity tremor at the end of December. That is why I called the new regime, “The Fed’s Great Recovery Rewind.” Powell didn’t see any of this coming. He is purely reacting to it after the fact, not in anticipation of troubles.
Now those overnight measures are being made permanent, just as I said a month ago would become the case. The Fed is clear that it has no intention of removing them overnight or in fourteen days … or ever. That is because the problem was not a temporary confluence of forces. The fix didn’t work. so the new fix will be “maintained” on the balance sheet indefinitely (or forever).
To create some illusion of the measures being temporary, the Fed says the new injections will only continue until “at least” the second quarter of 2020. That still leaves all injections between now and then as permanent. They are no longer just repurchase agreements where banks have to buy those government treasuries back on a promised schedule. The Fed will continue to refinance them forever. It’s not saying it will roll them off after April 2020 — just that it won’t add to its holdings after that. But even that isn’t the end of it.
“I think to start out, it’s enough,” said Debbie Cunningham, CIO of global liquidity markets at Federated Investors, of the Fed’s latest Treasury debt buying plan.
Sure, “to start out.” To start out, the injections of overnight cash were enough for … well, one night. Then the term injections were enough for … well the length of the term. Now we have monthly injections until, at least, April. Sure, those will be enough until … well … April! My point? Why would you trust the Fed when it says this will be short-term plan when the Fed was wrong about tightening being able to happen on autopilot, wrong about not having tightened too much, wrong about overnight repos solving a temporary problem caused by a few one-off issues hitting banks on the same night, and wrong about fourteen-day term repos being sufficient to handled the problem and, so, is suddenly rushing to permanent measures?
You have their word on it … just like you did all the last times — the word of an institution that is telling you in the same breath that it is not doing what it is doing. If you’re going to trust that, Lucy has a football for you, Charlie Brown.
“I think there is a high alert,” she said of the Fed.
I should say so, since this couldn’t wait until this month’s already-scheduled Fed meeting. The Fed has to be on high alert, as Cunningham says, because things have been falling apart as fast as the Fed comes up with fixes! When you cannot scramble fast enough to save the day, you have to remain on high alert.
That’s another thing I said here — that the Fed, when it jumps back into QE, will be so far behind the wave that everything it does will be too little, too late? Is that not what everything in the past month looks like now that the Fed is leaping tomorrow into far greater and longer massive injections of money? The Fed’s Great Recovery Rewind looks like a swirling black hole created at the Cern particle collider — something insidious that was too infinitesimal for the Fed to eve see it existed, at first, but is now sucking in the surrounding system faster than the Fed can respond to.
If you don’t believe me, how about a majority of fund managers just questioned by Bank of America:
Do you think it is going to get easier?
The last months of the year are notorious for being a challenge on the liquidity front as portfolio managers become far less willing to place bets that could backfire and derail a year of otherwise solid performance. John Vail, chief global strategist at Nikko Asset Management, said the final months of this year could get particularly tough.
That is said now knowing what the Fed’s plan is because. I’ve frequently noted that the Fed’s changes in interest and money supply take many months to start working through the economy. They work instantly in stock and bond markets, but work through much slower at all other levels, such as banking or cost of borrowing or impact on actual consumer purchases. We’re still in the stage where the Fed’s tightening since December is working through, and we won’t see the easing that is starting now work through for several months.
By the time we know how well it works, it may well be too little, too late … just like all of the last recent steps by the Fed. I am as certain of that as I was that September’s machinations would not work out. Like quantum mechanics, which deals with the realms of the infinitesimal and the seemingly infinite in terms that are always shifting so are hard to quantify, the QE that isn’t QE and is finitely set to end in six months will become QE4ever.
But don’t you worry your little October pumpkin heads about this, the Great Fed Pumpkin Head has everything under control, and the Fed says is going to start by inhaling short-term treasury bills (one year and less).
The Fed just triggered the biggest recession indicator there is
“To be sure, this isn’t as impactful as if the Fed were buying 10-year or 30-year bonds as it previously had done. But it does keep liquidity in the system and shows the Fed wants credit conditions to remain pretty fluid.”
Because the Fed’s new move is not as impactful as sucking all 10-year and 30-year government bonds into their gravity hole, I’m sure that will become the next necessary step in January. In the meantime, their focus exclusively on short-term treasuries pushed down the short end of the treasury interest curve in case you are wondering what likely caused the yield-curve for 10-year treasuries over 3-month bills to revert back to its normal positive relationship. But, remember, inversion cocks the gun, but reversion pulls the trigger. Recessions always start very near reversion, usually immediately upon full reversion and sometimes even before full reversion:
That’s further support for one of my other predictions, which was that we would enter recession this summer. I’ve already claimed the tremors of this liquidity crisis in the final weeks of summer marked the recession’s beginning. The Fed considers the inversion of 10s over 3s to be its most reliable recession indicator and one that come very close to the actual start. What it has never noticed or, at least not said (that I am aware of) is that the actual start of recessions happens upon or before reversion of this part of the curve. That came last week.
Recapping the predictability of the Fed’s actions and failures
So, let’s see: When the Fed said it would eventually unwind its balance sheet, I said that, as soon, as it did it would find it would suck its own recovery into a black hole created by the gravity of hundreds of billions of dollars the Fed was sucking out of the economy.
From there I promised that, as soon as the Fed figured out that its balance sheet unwind had becomes the Great Recovery Rewind, it would immediately go back to more quantitative easing. It did. You don’t get more immediate than this when the situation was deemed such an emergency that the decision had to be made before the Fed’s next meeting.
When the Fed said it would easily have this under control with its overnight and term plans, I said it would have to keep repeating and expanding those terms. It did.
So, you can decide which person you want to believe — Powell (and the former Fed heads) who have stated what they would do long in advance and how it would work and have been wrong about how it worked every time … or the person who has told you all along what they would really wind up doing and how the things they said they would do would fail.
This is crisis management
If you’re not sure this was an emergency, take a look at how abrupt and how steep the Fed’s quantitative mechanics trajectory (QE4ever) already is compared to the long, gradual slope of its unwind or even compared to the Fed’s last two rounds of emergency easing:
Certainly the Great Recovery was an emergency program, intended to save the world from a banking calamity. The latest path looks a lot more the direst of its emergency paths — the one the Fed took right at the start of the Great Recession (again with that comparison being the only one that fits) than it does like later rounds of QE (in terms of steepnesss), and that is without including all it promised to begin this week! The upturn in the above graph only shows the recent overnight and term repo action. I used that graph to provide historic context. Here is a closeup:
Looks like a steep path to me, and we have, at least, six months more to go at a slightly shallower rate. Without even going into the new permanent QE, the Fed has already restored (not “maintained”) a quarter of what it removed during tightening! We’re barely a full month past the onset of the repo crisis, so tell me this wasn’t crisis intervention? Do you think the Fed would dare even so much as hint if it was, given how market hang off every phoneme that falls from the Fed’s lips.
Others besides me believe the Fed is as wrong as it has ever been about how short the Fed’s timeframe for all of this will actually be. (Hence all of the “at leasts.”) Goldmans Sachs expected it will play out more like this:
That was a lower and slower graph that came out before the Fed made its announcement of a much more accelerated (emergency) pace. JPMorgan says the amount injected will be roughly equal to QE1 before it is done.
In fact, the Fed’s aim with the new permanent injections is to recover more than half of the money supply that was lost during its tightening regime (to get its balance sheet back up to about $4.3 trillion). That is far from being mere “maintenance.” By using that term, the Fed is just trying to avoid admitting they made a huge mistake with thinking they could tighten. What is really revealed now is that ALL of the Fed’s QE — not just the part they unwound but all that remained to be unwound and that they originally aid they planned to unwind — is permanent.
Their way of putting it [with my helpful interpretations in brackets]:
In light of recent and expected increases in the Federal Reserve’s non-reserve liabilities, [i.e, sudden need to inject massive amounts of money into the Federal Reserve System, which was only expected about a month beforehand, which drove us to run these injection weeks longer than we expected or told you would be necessary] the Federal Open Market Committee (FOMC) directed the Desk, effective October 15, 2019, to purchase Treasury bills at least into the second quarter [“at least” meaning we are already allowing that, just like our recent “overnight” and “term” injections, this may run much longer and higher than current expectations] of next year to maintain over time ample reserve balances at or above the level that prevailed in early September 2019 [meaning to permanently raise them to a level that we will eventually be able to maintain with only minor routine adjustments].
In terms of the Fed’s argument that this is not quantitative easing, it was Powell who defined the terms for quantitative tightening by saying QT was taking reserves out of the system. Well if QT is taking reserves out of the system, how is replacing those reserves at a faster rate in greater quantities to a level to be forever maintained not a return to quantitative easing? It is being done via purchases of government treasuries, just like QE. It is being done through permanent open market operations juts like QE.
Yet, that is not all:
In addition, the Federal Reserve will conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities.
[In other words, this new rapid $60-billion-per-month rate of balance-sheet expansion that starts this Tuesday is not expected to be rapid enough to avoid the kind of crisis we just experienced; so, until we get the balance sheet up to a level that can simple be “maintained,” we anticipate needing to continue emergency injections through the remainder of the year or longer!]
But what just happened over the past month was not a crisis! Sure it wasn’t! Who cannot see in all of these furiously upgraded machinations an expectation that a bigger crisis is expected for the end of the year when the largest bank and brokerage and bond dealer transactions take place to reconcile accounts or meet defined bond-stock balances? Massive repos are now something the Fed will have to keep doing for several months during peak bank transaction times until the Fed’s hyperinflation of money supply gets back up to a level it can just “maintain” … forever.
QE4ever is really about the need to monetize the government debt
We’re now going onto the Zimbabwe plan where you may someday find your wheelbarrow money is worthless because everyone in the world will lose respect for the dollar.
If the Fed’s goal is to expand its balance sheet so it can handle “routine operations,” why doesn’t it just snap all of the necessary fund restoration into place overnight? Could it be that it wants its rate of monetary expansion to synch up to the US treasury’s need, so that the Fed can apply its own need for more reserves toward soaking up US treasuries? It could, after all, buy other securities as it has in the past, such as mortgage-backed securities.
Bear in mind, as the Fed certainly does, that the Fed must always nurse its mother, or it risks losing its charter. Therefore, the Fed has instructed its overnight desk to continue repos as necessary to cover the foreseeable shortages that will occur during peak transaction periods, knowing one of the “contributing factors” of September’s shortage was the US government’s expanded issuance of treasuries. While government issues of debt are routine events, they are now perpetually colossal in size as a result of the Trump Tax Cuts and spending increases. The Fed appears to be dosing its Fed meds to provide assurance there will continue to be a buyer to sop up all that government debt.
Term repo operations will generally be conducted twice per week, initially in an offering amount of at least $35 billion per operation. Overnight repo operations will be conducted daily, initially in an offering amount of at least $75 billion per operation.
The combined firepower of the new permanent money creation along with the continuance of temporary repo money creation is over $100 billion a month adding up to, at least, $400 billion by early 2020, or probably half a trillion before this is over in April (at the earliest), which is where I said we’d quickly wind up. It is now, however, guaranteed to be permanent (hence the word “maintain”).
In summary, you might ask the following questions (and you would be right to do so):
- Why is the Fed rushing headlong into a whole new quantum realm of quantifiably huge easing to be forever maintained if the economy is as strong as the Fed keeps telling us?
- How is it that the Fed can be thought by anyone to have ever achieved a sustainable recovery when it had to reverse course so quickly after it claimed victory?
- How was Janet Yellen right when she said we would never see a crisis again in her lifetime when the Fed is already acting with measures it has used for past major crises?
- Why are we to believe this is not a crisis when the Fed is rushing to such a massive change before it even holds its official October meeting?
- How is it that this was not a liquidity crisis, as many tried to claim, when the Fed has to move into rebuilding liquidity much faster than it drained liquidity out and when the Fed says it is more about reserve shortages than other “contributing factors”?
- How is it that Donald Trump was wrong when he said the Fed needed to cut interest rates immediately and return now to QE when that is exactly what the Fed scrambled to do only two weeks after the Donald said it needed to do this?
- How is it that repos are temporary “overnight” funding if they are being repeated every business day through next January?
- Why should we believe any of the Fed’s “at leasts” won’t go much longer, given that the Fed has understated the severity of this problem at every juncture so far?
- How is the Fed not monetizing the government debt under QE4ever when the Fed’s original claim that earlier rounds of QE were not monetizing the debt was based on the argument that they were not being permanent. Now we know the Fed must keep all of its previous government bond-buying in place to “maintain” its balance sheet at a level sufficient to avoid banking stress. It’s even planning to roll over its mortgage backed securities into government securities.
While doing the new QE4ever, the Fed will still be continuing its daily issuance of up to $75 billion in overnight loans and $35-billion fortnight loans through January! The new program is above and beyond all of that.
Perhaps the biggest reason this will be QE4ever is that the Federal government no longer raises enough in taxes to even cover its low-rate interest payments. It has to be QE4ever because the federal government is now running trillion-dollar-plus annual deficits as far as the eye can see. The new 60-billion a month is also in addition to rolling over all existing treasuries the Fed holds and refinancing (“re-invessting”) all government interest payments by purchasing bonds in the full amount of the interest.
Where do we go when QE4ever fails?
Mind you, I don’t think hopping on the QE4ever train is by any means the right solution, but the right solutions were missed years ago and have been avoided ever since, and the only way to put off the train wreck that is inevitable after years of financial profligacy and bubble creation is to go back to rapidly reinflating all the hot air balloons that are now falling out of sky, exactly as I said would happen in the linked article. So, we are going that way to drown out our pain. It’s a one-way trip on the Drain Train.
The longer we avoid the pain of real solutions, the worse the inevitable becomes — something I’ve warned of since I started writing my blog many years ago. But we won’t take the right course now, just as I said we wouldn’t do the right things back then. We won’t because we are nowhere near being in agreement about the huge changes that need to happen and nowhere near willing to take on the pain of change or confront the greed that created the systems we now have.
Even though the Fed’s collapse into the black hole it created was completely predictable and even though its instant return to a plan that already failed was also completely predictable, I have another prediction I am loathe to make. I find it likely the Fed’s handmaids in media will regurgitate the swill the Fed has spewed about QE4ever not being QE at all, and the general populace (particularly investors) will gladly suck up what they want to believe and will allow the Fed to go further down this already reckless road.
That will take us to what has long been my next prediction in this series of unfortunate events: When the Fed returns to QE, it will find QE4ever is far less effective than QE was during the first series of QE1-3 because of the law of diminishing returns and because of diminishing credibility. If the Fed loses credibility because it has been wrong in almost all it has said — especially if we now are entering another recession the Fed fails to see — the Fed will find it has fewer willing players. That will make QE4ever less tenable and will make future unwinding of the Fed’s balance sheet even harder than it was during the last go around, assuring this is QE4ever.
When QE4ever fails, which I think it will do quickly, the Fed will need to do more than monetize the national debt forever. Fed failure at QE4ever will be a global catastrophe because the Fed manages the global currency. That will demand a global answer — a “great monetary reset,” which the Fed is already working on and now routinely talking about openly, as I will continue laying out in my Patron Posts.