{"id":17070,"date":"2024-01-18T21:21:18","date_gmt":"2024-01-18T19:21:18","guid":{"rendered":"https:\/\/www.liberalglobe.com\/?p=17070"},"modified":"2024-01-18T21:21:18","modified_gmt":"2024-01-18T19:21:18","slug":"fed-reopens-liquidity-floodgates-with-new-qe-in-april-2024-creates-problem-for-dollar","status":"publish","type":"post","link":"https:\/\/www.liberalglobe.com\/?p=17070","title":{"rendered":"FED reopens liquidity floodgates with new QE in April 2024 – creates problem for dollar"},"content":{"rendered":"\n

On December 13, the financial world was stunned when, just two weeks after Jerome Powell said it was “premature” to make assumptions about interest rate cuts, the Federal Reserve made a shocking U-turn, heralding the end of monetary tightening – even though inflation is at levels twice the 2% target.<\/p>\n\n\n\n

The Federal Reserve’s 180-degree U-turn came as a shock because no new US Treasury deals had taken place, and no lower repo volumes had taken place.” However, the shift was clearly “there”, ominously consistent “with the issue of cash and collateral in the system”, i.e. the growing scarcity of reserves.<\/p>\n\n\n\n

It is noted that there is a deterioration due to the increased reserves of traders and bilateral borrowing needs, which limits the surplus cash for backstops in repos. If the funding squeeze persists, the Fed will have to reassess the banking system’s reserves, which will result in the end of quantitative easing (QT).<\/p>\n\n\n\n

In any case, as far as an early restart of QT is concerned, it will all depend on how severe the funding shortfall will be. Thus, the Fed abruptly ended tight monetary policy, ushering in a new era of interest rate cuts. But the most important thing was this: it was Dallas Fed President Lorry Logan who said the Fed’s QT is essentially over because of the sudden, unexpected slide in systemic liquidity, which is a result of the rapid drain on the reverse repo facility, the which is now left with just $600 million and is set to be completely drained sometime in March and by extension, another round of QE is already around the corner!<\/p>\n\n\n

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While the Fed expects to cut short-term interest rates this year because inflation has eased, its rationale for reducing bond outflows is different: to prevent disruption in a dark but critical corner of financial markets.<\/p>\n\n\n\n

Recall that five years ago the reduction of the Fed’s balance sheet sparked turmoil, then caused a messy turn. Several Fed officials suggested they begin talks soon to communicate their plans well before any changes take effect, according to minutes of their meeting. According to American policymakers, no changes are imminent, while they themselves are focused on slowing down – not ending – the program.<\/p>\n\n\n\n

The reason for the Fed’s panic is that the central bank wants to avoid a deluge of the repo market, which has caused a liquidity drain in the past (in September 2019), as well as the violent burst in underlying transactions that triggered a domino crash in the market bonds in March 2020.<\/p>\n\n\n\n

In September 2019, a sharp, unexpected rise in the key overnight lending rate suggested that reserves had been depleted to the point that they would either deplete or be difficult to redistribute into the financial system. The Fed began buying Treasuries to add reserves to the system and avoid further volatility.<\/p>\n\n\n\n

In 2020, the Covid-19 pandemic created a huge dash for dollars. To prevent markets from “freezing up,” the Fed continued to buy massive amounts of securities. It stopped buying in March 2022. Three months later the process was reversed, shrinking its portfolio, which brings us to today, with the Fed doing the math and realizing that what if shrinking its balance sheet by $60 billion per month, when the reverse repo runs out, the market will crash.<\/p>\n\n\n\n

Several reasons for the FED to consider slowing Q<\/strong>E<\/p>\n\n\n\n

Policy makers have several reasons to consider QE slowing:<\/p>\n\n\n\n

1. <\/strong>The Fed is shrinking its holdings of US Treasuries by $60 billion a month – twice as fast as five years ago. This rate increases the risk that reserves will run out, causing money market rates to soar. It’s all about the accelerated rate of decline in the reverse repo facility. There are indications that the cash surplus in the money markets is declining rapidly.<\/p>\n\n\n\n

2.<\/strong> The Fed allows money market firms and others to park cash that would otherwise end up in reserves in an overnight reverse repos facility. That tool has shrunk by about $1 trillion since late August to about $680 billion. Lorry Logan approved the slowing of outflows when that facility was almost out of cash because, after that, the forecast of demand for bank reserves would be more uncertain. This “faster-than-expected decline” in overnight reverse repo balances is prompting the Fed to advance contingency plans on how to slow the outflow:<\/p>\n\n\n\n

3.<\/strong> There’s another reason why December’s SOFR hike spooked the Fed: while previously the central bank had repeatedly misjudged the level of reserves that would be considered “ample” by the market, this time, its officials FDRs will rely more on market signals to determine the correct level of reserves.<\/p>\n\n\n\n

And if Powell’s message that QT is ending wasn’t enough, markets are awaiting a clear outline from the FOMC, the Fed’s open market committee, for the end of QT. It is expected that this plan will be formally approved at the March meeting and will be implemented from April, when the monthly cap on the outflow of Treasuries will be reduced to $30 billion\/month, from $60 billion\/month.<\/p>\n\n\n\n

The Fed is opening the liquidity gate again after several years of tightening, not cutting interest rates, but cutting QT, sending the dollar into trouble.<\/p>\n","protected":false},"excerpt":{"rendered":"

On December 13, the financial world was stunned when, just two weeks after Jerome Powell said it was “premature” to make assumptions about interest…<\/p>\n","protected":false},"author":1,"featured_media":17073,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5,961],"tags":[239,61,877,710,5121,5119,5118,215,70],"class_list":["post-17070","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economic","category-financial-economics","tag-dollar","tag-fed","tag-interest-rates","tag-qe","tag-qt","tag-repo","tag-reserves","tag-us","tag-usa"],"_links":{"self":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/17070","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=17070"}],"version-history":[{"count":1,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/17070\/revisions"}],"predecessor-version":[{"id":17074,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/17070\/revisions\/17074"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/media\/17073"}],"wp:attachment":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=17070"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=17070"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=17070"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}