Fed Implements Stealth QE4

In the past, the Fed announced their clear intention to use quantitative easing to stimulate the economy. They even named QE2, operation twist. This time, it has been much more stealth in nature. While the Fed has signaled its intention to pause on interest rate cuts, they have reversed course in shrinking their balance sheet and may instead drive it to new highs in 2020. This is clearly a short-term positive for risk assets but leaves less ammo for the Fed if a recession does come in the year ahead.

In September, the repo market went haywire with rates spiking to 10% from about 2.25% amid an unexpected shortage of available cash in the financial system. People blamed corporate tax payments and a big swath of new Treasury debt settled into the marketplace.

This didn't make much sense, but whatever the cause, the Fed has injected massive liquidity back into the system with as much as $75 billion a day in temporary cash over four days to quell the funding crunch.

(Click on image to enlarge)

Fed balance sheet 2019

Now the Fed has reversed its quantitative tightening policy to full force QE. On August 28th, the Fed balance sheet stood at $3.750 trillion and that has ballooned to $4.048 trillion last week. This is a $288 billion injection in just 10 weeks!

The Fed intends to expand its balance sheet through the second quarter of 2020 by buying $60 billion per month in Treasuries, it would surpass its all-time high of $4.5 trillion in June.

Despite weak economic data in the US and abroad, this should put a floor under the market as the Fed is providing massive stimulus to the markets.

Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no ...

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Bill Johnson 3 weeks ago Member's comment

Good read.