Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

The Fed's $4 trillion experiment is growing

The Fed's $4 trillion experiment is growing

The Federal Reserve is once again buying hundreds of billions of dollars in bonds to calm stress in financial markets. But this isn't a return to crisis-era efforts to save the economy. At least not yet.

Fed chief Jerome Powell announced this week the Fed will probably soon boost the size of its already-massive $4 trillion balance sheet.


Given the slowing American economy, the actions are reminiscent of the bond buying programs known as quantitative easing. The Fed resorted to QE, and eventually QE2 and QE3, to keep borrowing costs ultra-cheap once it ran out of room to cut interest rates in 2008.

Yet central bank officials and economists stress today's moves have an entirely different purpose. Rather than boosting sluggish growth, the Fed is buying bonds to fix significant problems that have emerged in the plumbing of the capital markets.


"This is not QE to induce animal spirits and pull people into risk-taking and borrowing," said Danielle DiMartino Booth, a former Fed official who is now CEO of Quill Intelligence.


Instead, the Fed just wants to make sure there is enough cash sloshing around the system -- because lately there hasn't been.


'Plumbing' problems emerge


Overnight lending rates spiked suddenly last month. The episode revealed a sudden cash crunch. Now the Fed is responding by pumping in more cash to get the plumbing flowing again.


"This is not about changing the stance of monetary policy. This is about making sure markets are functioning," Neel Kashkari, president of the Minneapolis Federal Reserve, said on Thursday at the Yahoo Finance All Markets Summit. "This is kind of just a plumbing issue."


But as many homeowners know, even plumbing problems can turn into bigger ones.


The Fed needs to fix the cash crunch before it erodes confidence or spills over into the real economy, which has already started to show serious cracks because of the US-China trade war and weak global growth.


"You don't want to have funding shocks add to the worsening outlook. We don't need this problem on top of our other problems," said Ralph Axel, senior US rates strategist at Bank of America Merrill Lynch.


'Intense volatility'


Normally, the overnight lending markets get very little attention. But that's not because they aren't important. These markets are critical. They allow banks, hedge funds and other financial institutions to quickly and cheaply borrow money for short periods of times.


Many were surprised when the rate on overnight repurchase, or repo, agreements surged in mid-September well above the target range for short-term borrowing set by the Fed.


Even Powell acknowledged that these markets experienced "unexpectedly intense volatility."

The Fed blamed the stress on two one-off factors: The withdrawal of cash by US companies to make quarterly tax payments to the Treasury Department and the settlement of a large amount of Treasury purchases.


Sustained pressure could lead investors to fear the Fed is no longer in control of short-term borrowing rates. That would be a problem because that's precisely how the Fed influences the economy.


"This volatility can impede the effective implementation of monetary policy, and we are addressing it," Powell said.


The initial response, led by the New York Fed, featured a series of emergency "overnight repo operations." These cash injections, which are promptly repaid, were aimed at getting borrowing costs back in line. The moves worked, driving rates back down.


However, the NY Fed's repo operations drew very strong demand, suggesting it couldn't just walk away.
The fact that there is still a clamor for cash signals there still isn't enough cash in the system. These aren't one-off events driven by tax payments or Treasury auctions.


'Winging it'


The Fed started to shrink its balance sheet in October 2017 because the economy was improving. Economists say the Fed underestimated how much cash the financial system needed to keep operating smoothly. The Fed seems to have sucked out too much cash when it reversed QE.


"It was a bridge too far," said DiMartino Booth.


There was always a risk that would happen. No one, not even the Fed, knows how much cash needs to be kept in the post-crisis system.


"They are winging it, absolutely," said Bank of America's Axel.


Powell signaled this week that the Fed will soon increase the size of its balance sheet. It's a return to what the Fed did prior to 2007, when the central bank's balance sheet regularly grew prior to the crisis in line with the growth of currency.

But Powell stressed that this "should in no way be confused" with the QE program launched after the financial crisis.


And to emphasize that point, Powell said the Fed is considering purchases of short-term government debt known as Treasury bills, or T-Bills. That's a major difference from QE, when the Fed gobbled up longer-duration Treasuries in a bid to keep borrowing costs cheap.


"They are specifically targeting T-Bills to try to help the messaging, which is difficult because of the simultaneous happenings of the slowdown and the Fed cuts," said Axel.


QE4 to fight the next recession


The Fed has already cut interest rates twice in response to the loss of momentum in the US economy. Those rate cuts, down to a range of 1.75% to 2%, have eroded the Fed's limited firepower to fight the next recession.


UBS has warned that US GDP growth will tumble to near-zero next year, forcing the Fed to slash interest rates by another percentage point between now and the first half of 2020.


"We've got a pretty massive slowdown in our forecasts," said Rob Martin, US economist at UBS.


Although UBS isn't calling for GDP growth to go negative, Martin said he's "not at all" confident the United States will avert a recession.


And Fed officials have already said that they would be comfortable relaunching QE if they have no room to cut rates in the next recession.


"When history is written, this will be looked at as the second step in the Fed's easing campaign headed into the coming downturn," said DiMartino Booth. "First we had rate cuts. Now we have relief in the overnight lending market. The third step is quantitative easing."

AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
Altman Says GPT-5 Already Outpaces Him, Warns AI Could Automate 40% of Work
Russian Research Vessel 'Yantar' Tracked Mapping Europe’s Subsea Cables, Raising Security Alarms
Global Cruise Industry Posts Dramatic Comeback with 34.6 Million Passengers in 2024
U.S. Demands Brussels Scrutinize Digital Rules to Prevent Bias Against American Tech
Private Equity’s Fundraising Surge Triggers Concern of European Market Shake-Out
Tokyo’s Jimbōchō Named World’s Coolest Neighbourhood for 2025
European Officials Fear Trump May Shift Blame for Ukraine War onto EU
The Personality Rights Challenge in India’s AI Era
Italy Considers Freezing Retirement Age at 67 to Avert Scheduled Hike
Italian City to Impose Tax on Visiting Dogs Starting in 2026
Study Finds No Safe Level of Alcohol for Dementia Risk
Trump Says Ukraine Can Fully Restore Borders with NATO Backing
Europe Signals Stronger Support for Taiwan at Major Taipei Defence Show
Germany Weighs Excluding France from Key European Fighter Jet Programme
Cyberattack Disrupts Check-in and Boarding Systems at Major European Airports
Björn Borg Breaks Silence: Memoir Reveals Addiction, Shame and Cancer Battle
When Extremism Hijacks Idealism: How the Baader-Meinhof Gang Emerged and Fell
JWST Data Brings TRAPPIST-1e Closer to Earth-Like Habitability
Trump Orders $100,000 Fee on H-1B Visas and Launches ‘Gold Card’ Immigration Pathway
France’s Looming Budget Crisis and Political Fracture Raise Fears of Becoming Europe’s “Sick Man”
Three Russian MiG-31 Jets Breach Estonian Airspace in ‘Unprecedentedly Brazen’ NATO Incident
European manufacturers against ban on polluting cars: "The industry may collapse"
Turkish car manufacturer Togg Enters German Market with 5-Star Electric Sedan and SUV to Challenge European EV Brands
Christian Brueckner Released from German Prison after Serving Unrelated Sentence
World’s Longest Direct Flight China Eastern to Launch 29-Hour Shanghai–Buenos Aires Direct Flight via Auckland in December
New OpenAI Study Finds Majority of ChatGPT Use Is Personal, Not Professional
The conservative right spreads westward: a huge achievement for 'Alternative for Germany' in local elections
Pope Leo Warns of Societal Crisis Over Mega-CEO Pay, Citing Tesla’s Proposed Trillion-Dollar Package
Poland Green-Lights NATO Deployment in Response to Major Russian Drone Incursion
U.S. and China Agree on Framework to Shift TikTok to American Ownership
Le Pen Tightens the Pressure on Macron as France Edges Toward Political Breakdown
Czech Republic signs €1.34 billion contract for Leopard 2A8 main battle tanks with delivery from 2028
Penske Media Sues Google Over “AI Overviews,” Claiming It Uses Journalism Without Consent and Destroys Traffic
Indian Student Engineers Propose “Project REBIRTH” to Protect Aircraft from Crashes Using AI, Airbags and Smart Materials
One in Three Europeans Now Uses TikTok, According to the Chinese Tech Giant
Could AI Nursing Robots Help Healthcare Staffing Shortages?
NATO Deploys ‘Eastern Sentry’ After Russian Drones Violate Polish Airspace
The New Life of Novak Djokovic
German police raid AfD lawmaker’s offices in inquiry over Chinese payments
Volkswagen launches aggressive strategy to fend off Chinese challenge in Europe’s EV market
France Erupts in Mass ‘Block Everything’ Protests on New PM’s First Day
Poland Shoots Down Russian Drones in Airspace Violation During Ukraine Attack
Apple Introduces Ultra-Thin iPhone Air, Enhanced 17 Series and New Health-Focused Wearables
Macron Appoints Sébastien Lecornu as Prime Minister Amid Budget Crisis and Political Turmoil
Vatican hosts first Catholic LGBTQ pilgrimage
Apple Unveils iPhone 17 Series, iPhone Air, Apple Watch 11 and More at 'Awe Dropping' Event
France joins Eurozone’s ‘periphery’ as turmoil deepens, say investors
France Faces New Political Crisis, again, as Prime Minister Bayrou Pushed Out
Nayib Bukele Points Out Belgian Hypocrisy as Brussels Considers Sending Army into the Streets
France, at an Impasse, Heads Toward Another Government Collapse
×