Federal Reserve Will Officially Start QE4 to Prevent Bank Meltdown: Analyst

In September, rates spiked in the repo market. The Fed is still conducting liquidity operations. Year-end may force the Fed to start QE4.



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The Fed has already begun QE4 in practice. One analyst thinks it may be time to make it official. | Image: AP Photo/Steven Senne, File
  • The repo market was front and center in September when rates spiked well beyond the Federal Reserve’s target range.
  • The Fed has been conducting liquidity operations to reduce the stress, though analysts believe that the overnight lending market will face more issues into the year-end.
  • The enormous stress faced by the repo market could drive the Fed to officially start QE4.

The repo market has been relatively quiet since September when rates suddenly surged. The obscure yet vital aspect of America’s financial system grabbed headlines after interest rates spiked to 8%. The Federal Reserve was alarmed because the overnight repo rates stood at 2% a week before.

Repo rates surged in September with very little warning
Repo rates surged in September with very little warning | Source: Reuters

Since then, the Federal Reserve has been in crisis mode, pumping billions into the overnight lending market on a daily basis. What was supposed to be a temporary measure has now become a long-term solution.

In October, the Fed announced it will continue to conduct overnight repo operations to the tune of $120 billion a day. On top of that, the Fed also revealed that it will resume purchasing Treasury bills amounting to $60 billion per month until the second quarter of 2020 at the very least. The Fed is doing a lot of heavy lifting to keep the financial market from going haywire. Two renowned analysts believe that the Fed will have to do a lot more in the coming weeks.

Travis Kling: Stress in the Overnight Repo Markets ‘Likely to Become Even More Acute’

The end of 2019 is coming fast. Investors are worried that rates in the overnight lending markets will skyrocket just like they did in September. December 31 is a time when liquidity in the repo market has historically dissipated. Travis Kling is expecting the funding scarcity to worsen as we get closer to year’s end.

Travis Kling on the Federal Reserve
The Fed is flooding the repo market with liquidity to keep it under control. | Source: Twitter

There are numerous factors that may contribute to liquidity drying up towards the end of the year.

Bloomberg reported that quarterly tax payments plus the issuance of fresh U.S. debt will likely suck money out of the system. In addition, dealer banks or those that lend money will pull back capital from the repo market. They’ll do it in order to prepare for year-end regulatory requirements.

Is the Federal Reserve ready to ease the year-end funding market stress? One analyst doesn’t think so.

Zoltan Pozsar: ‘Reserves Are Still Insufficient’

Even with the $60 billion per month purchase of T-bills, the Fed insists it’s not running a fourth quantitative easing (QE4). It appears that optics are important for the central bank, but that will likely change in the coming weeks as the repo market faces more pressure.

Zoltan Pozsar, managing director of investment strategy and research at Credit Suisse, is known for understanding how repo markets work better than anyone else in the world. In a note to investors, he wrote,

The Fed’s liquidity operations have not been sufficient to relax the constraints banks will face in the upcoming year-end turn.

The analyst also noted that while the repo market has been calm since September, it doesn’t mean that overnight repo operations will remain effective heading into the end of the year. According to Pozsar, the absence of true excess reserves along with trouble in the foreign exchange swap market would force the hand of the Fed. Pozsar also wrote,

If we’re right about funding stresses, the Fed will be doing QE4 by year-end.

It seems that an out of control repo market would make the Fed forget about optics. If both Travis Kling and Zoltan Pozsar are correct, we can expect the central bank to print more money in the coming months to keep the economy stable. It makes one wonder how long can they keep it up.

Sam Bourgi edited this article for CCN - Capital & Celeb News. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

Kiril is a CFA Charterholder and financial professional with 6+ years of experience in financial writing, analysis, and product ownership. He has a bachelor's degree with a specialty in finance and lives in Canada. Kiril’s current focus is on finance and cryptocurrencies. He owns Bitcoin, Ethereum, and other cryptocurrencies. He holds investment positions in the coins but does not engage in short-term or day-trading. Get in touch with Kiril: Email, Follow on Twitter

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