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
Trump Called Viktor Orbán: "Why Are You Using the Veto"
Horror in the Skies: Plane Engine Exploded, Passengers Sent Farewell Messages
AI in Policing: Draft One Helps Speed Up Reports but Raises Legal and Ethical Concerns
Shame in Norway: Crown Princess’s Son Accused of Four Rapes
Apple Begins Simultaneous iPhone 17 Production in India and China
A Robot to Give Birth: The Chinese Announcement That Shakes the World
Finnish MP Dies by Suicide in Parliament Building
Outrage in the Tennis World After Jannik Sinner’s Withdrawal Storm
Class Action Lawsuit Against Volkswagen: Steering Wheel Switches Cause Accidents
UK Government Tries to Sue 4chan for Breaching Online Safety Act
Dogfights in the Skies: Airbus on Track to Overtake Boeing and Claim Aviation Supremacy
Tim Cook Promises an AI Revolution at Apple: "One of the Most Significant Technologies of Our Generation"
Are AI Data Centres the Infrastructure of the Future or the Next Crisis?
Miles Worth Billions: How Airlines Generate Huge Profits
Cambridge Dictionary Adds 'Skibidi,' 'Delulu,' and 'Tradwife' Amid Surge of Online Slang
Zelenskyy Returns to White House Flanked by European Allies as Trump Pressures Land-Swap Deal with Putin
The CEO Who Replaced 80% of Employees for the AI Revolution: "I Would Do It Again"
"Every Centimeter of Your Body Is a Masterpiece": The Shocking Meta Document Revealed
Character.ai Bets on Future of AI Companionship
China Ramps Up Tax Crackdown on Overseas Investments
Japanese Office Furniture Maker Expands into Bomb Shelter Market
Intel Shares Surge on Possible U.S. Government Investment
Hurricane Erin Threatens U.S. East Coast with Dangerous Surf
EU Blocks Trade Statement Over Digital Rule Dispute
EU Sends Record Aid as Spain Battles Wildfires
Beijing is moving into gold and other assets, diversifying away from the dollar
China Requires Data Centres to Source Majority of AI Chips Locally, For Technological Sovereignty
Escalating Clashes in Serbia as Anti-Government Protests Spread Nationwide
Category 5 Hurricane in the Caribbean: 'Catastrophic Storm' with Winds of 255 km/h
Trump Backs Putin’s Land-for-Peace Proposal Amid Kyiv’s Rejection
Digital Humans Move Beyond Sci-Fi: From Virtual DJs to AI Customer Agents
YouTube will start using AI to guess your age. If it’s wrong, you’ll have to prove it
Jellyfish Swarm Triggers Shutdown at Gravelines Nuclear Power Station in Northern France
OpenAI’s ‘PhD-Level’ ChatGPT 5 Stumbles, Struggles to Even Label a Map
Zelenskyy to Visit Washington after Trump–Putin Summit Yields No Agreement
High-Stakes Trump-Putin Summit on Ukraine Underway in Alaska
The World Economic Forum has cleared Klaus Schwab of “material wrongdoing” after a law firm conducted a review into potential misconduct of the institution’s founder
A Computer That Listens, Sees, and Acts: What to Expect from Windows 12
Bitcoin hits $123,000
Southwest Airlines Apologizes After 'Accidentally Forgetting' Two Blind Passengers at New Orleans Airport and Faces Criticism Over Poor Service for Passengers with Disabilities
United States Sells Luxury Yacht Amadea, Valued at Approximately $325 Million, in First Sale of a Seized Russian Yacht Since the Invasion of Ukraine
Russian Forces Advance on Donetsk Front, Cutting Key Supply Routes Near Pokrovsk
It’s Not the Algorithm: New Study Claims Social Networks Are Fundamentally Broken
Sixty-Year-Old Claims: “My Biological Age Is Twenty-One.” Want the Same? Remember the Name Spermidine
Saudi Arabia accelerates renewables to curb domestic oil use
The Billion-Dollar Inheritance and the Death on the Railway Tracks: The Scandal Shaking Europe
World’s Cleanest Countries 2025 Ranked by Air, Water, Waste, and Hygiene Standards
Denmark Revives EU ‘Chat Control’ Proposal for Encrypted Message Scanning
Perplexity makes unsolicited $34.5 billion all-cash offer for Google’s Chrome browser
Cristiano Ronaldo and Georgina Rodríguez announce engagement
×