Believe it or not, more QE is coming right up. But why?
 

NY Fed President Expects More QE Soon

The Wall Street Journal reports Fed’s Williams Expects Central Bank to Return to Asset Purchases Soon

New York Fed President John Williams said that the Federal Reserve could soon return to expanding its securities holdings, a week after the central bank said that it would wind down efforts to shrink its balance sheet on Dec. 1.  

The net bond purchases would be the next, long-planned phase of the Fed’s approach to matching the levels of cash-like assets available to banks to their needs—not a new effort to stimulate the economy.  

So far, the Fed’s efforts to rightsize its asset holdings have been going according to plan, Williams said, in a speech at a central-bank conference in Frankfurt delivered Friday morning local time. He added that recent volatility in repo markets shows that reserves—a highly liquid asset that banks trade among themselves—have been falling close to levels that match banks’ needs, a sign that a modest level of Fed bond purchases will soon be needed to keep overnight lending markets supplied at appropriate levels. 

The bond purchases are part of a plan that Fed officials have previously telegraphed, and will “in no way represent a change in the underlying stance of monetary policy,” Williams said, according to a published text of his remarks.  

Williams pointed to a stretch of increased pressure in repo rates as a sign that the overnight lending markets at the heart of the financial system are no longer awash in much excess cash. The effective fed-funds rate—the interest rate targeted by the Fed—has risen relative to the Fed’s targeted range, although it has stayed within that range. Some repo-rate benchmarks have swung higher than the Fed’s target, however, suggesting borrowers have been willing to pay a premium for relatively scarce cash.  

“Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves,” Williams said, referring to the trigger for the Fed to resume net purchases.  

Why Is There Such a Demand for Money?

There is a demand for money, pushing up overnight rates because the banks want more free money interest on reserves than the Fed is providing.

The banks also want to speculate in mid- to long-dated treasuries because they can get capital gains as interest rates decline.

These two things explain why $6.5 trillion in reserves is now barely adequate.

Bank Earning Calls

Net Interest Income (NII)

Note: A financial institution is “positioned for lower rates and higher NII (Net Interest Income)” if its balance sheet is liability-sensitive in the short term, meaning its funding costs (liabilities) are expected to decrease more quickly than its interest-earning asset yields when interest rates fall.

They are openly bragging about the bet.

Williams isn’t warning about “reserve scarcity”. He’s warning that the carry-trade monsters have eaten the entire monetary system, and if the Fed keeps draining reserves, the repo market will explode again, forcing emergency QE within months.

Bank Statements Translated

The $6.5 trillion Fed balance sheet is “barely adequate” only because the biggest banks turned QE into the funding source for the largest one-way duration bet in history.

They are speculating with:

• Your 0.01 % checking account
• Taxpayer-backed IORB on QE
• Williams’ promise of endless technical QE

And every time repo rates spike, it’s just the market screaming for more free money at the current rate.

Interest On Reserve Balances
 

Reserve Bank Credit
 

How Much Free Money to Banks?

The rough free money estimate is IORB * Reserve Balances. 3.9 percent of $6.543 trillion = $255 Billion at the current rate.

That does not include capital gains on long-dated treasuries as the Fed cuts rates.

In other words, banks turned QE into free funding for a duration gamble that pays them capital gains. The repo spikes that Williams sited means the market wants more QE than the Fed is providing.

Q: Isn’t this what destroyed Silicon Valley Bank?
A: Yes.

Is the Fed Aware of What It’s Doing?

Repo spikes aren’t scarcity of reserves. They’re extortion.

What’s the Cure?

The Fed should drain all this QE. It serves no purpose other than give free money to banks in interest. Worse yet, banks speculate on long-dated treasuries which creates duration mismatches.

In the current scheme, money that should be available on demand isn’t. This has the potential to create bank runs as we saw with Silicon Valley Bank.

Legalized Fraud

Silicon Valley Bank, Signature Bank, and First Republic Bank failed due to classic runs on the bank. The banks took customer deposits and speculated on long-term interest rates. When the Fed hiked rates more than expected, bank losses mounted, the banks became insolvent, and customers pulled deposits.

This is a classic example of a duration mismatch scheme that I consider legalized fraud. Money that was supposed to be available on demand was not available on demand.

One cannot legally lease an apartment to two different parties at the same time. Anyone who tried would be quickly arrested. This is in essence what these banks did by investing for years money supposedly available on demand.

We Don’t Need to Fix FDIC, We Need a Genuinely Safe Bank

I discussed the cure on December 15, 2023 in We Don’t Need to Fix FDIC, We Need a Genuinely Safe Bank

There should be no FDIC at all. Instead, what we need is a safekeeping bank.

Need for a Genuine Safekeeping Bank

A genuine safekeeping bank is one that takes deposits and parks the entire amount in short-term treasuries. It make no loans and there is never any risk.

Deposits would earn a fluctuating interest rate that is the Fed’s overnight rate minus a safekeeping fee that allows the safe bank to pay its bills.

There is no need for FDIC because there is no risk. Under this proposal, banks cannot borrow short and lend long. Nor can they speculate on future interest rates.

Discussion and 10 Details

For discussion and 10 specific details on what I propose, please see Dear FDIC and Fed, We Need a Genuine Safekeeping Bank, Not Band-Aids

Of the above, one key rule would have solved the mess at SVB: Banks should not speculate on interest rates.

To counter the claim that lending would cease, deposits don’t fund lending. Rather, lending creates deposits.

100 Percent Reserves

Irving Fisher proposed a “100% money” system, also known as the Chicago Plan during the Great Depression, which would separate the functions of money and credit. In this system, banks would only be able to lend out money that they had borrowed or from time deposits, while their checking deposits, used for payments, would need to be 100% backed by a cash reserve held by the bank or government. Fisher argued this would prevent bank runs, better control the business cycle, and reduce both private and public debt. 

Thus, my proposal is neither new nor radical.

Q: Why Don’t We Have a Safekeeping Bank?
A: That’s easy. The Fed doesn’t want one.

Peter Schiff created one and the Fed forced Schiff out. Caitlin Long, CEO and founder of Custodia Bank, wants to create one and the Fed said no.

Mish for Fed Chair

On July 9, I posted I Officially Announce my Availability to Become the Next Fed Chair

Trump considers naming the next Fed Chair early. I have a fifteen-point plan.

Mish’s 15-Point Fed Plan

1. Explain to the nation why we don’t need a Fed and how independent central banks have created boom-bust cycles of increasing amplitude over time. The main corollary is history shows the one thing worse than independent central banks is a central bank run by politicians, frequently ending in hyperinflation.
2. Surround myself with qualified insiders who understand the Fed but also believe in the mission to end the Fed.
3. Stop paying interest on reserves, phased in over 18 months.
4. Wind down the Fed’s balance sheet totally in 2-3 years.
5. Require that assets available on demand such as checking and savings accounts are truly available on demand. That means demand deposits are parked in overnight US treasuries. This would be phased in over two years. As a result, we would have genuine safekeeping banks. … ….

Note that my plan eliminates the need for FDIC. All demand deposits would be parked at the Fed. Runs on the banks would not occur from duration mismatches.

Please click on the above link for the remaining details. I am still waiting for the call from Trump. Somehow it appears I am not on the short list.

Meanwhile, the Fed is sucking taxpayers while sponsoring more duration mismatch schemes that the banks are openly bragging about.

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