By Sven Henrich
The Federal Reserve has gone into full intervention mode.
Actually, accelerated intervention mode. Not just a “mid-cycle adjustment,” as Fed Chairman Jerome Powell said in July, but interventions to the tune of tens of billions of dollars every day.
What’s the crisis, you ask? After all, we live in an age of trillion-dollar market-cap companies and unemployment at 50-year lows. Yet the Fed is acting like the doomsday clock has melted as a result of a nuclear attack.
Think I’m in hyperbole mode? Far from it.
Unless you think the biggest repurchase (repo) efforts ever — surpassing the 2008 financial-crisis actions — are hyperbole:
What, indeed, is the Fed not telling us?
Something’s off. See, it all started as a temporary fix in September when, suddenly, the overnight target rate jumped sky high and the Fed had to intervene to keep the wheels from coming off. Short-term liquidity issues, the Fed said. Those have become rather permanent:
And liquidity injections are massive and accelerating. On Tuesday, the Fed injected $99.9 billion in temporary liquidity into the financial system and $7.5 billion in permanent reserves as part of a program to buy $60 billion a month in Treasury bills. The $99.9 billion comes from $64.9 billion in overnight repurchase agreements and $35 billion in repo operations.
But market demand for overnight repo operations has far exceeded even the $75 billion the Fed has allocated, suggesting a lot more liquidity demand. Hence, on Wednesday the Fed suddenly announced a $45 billion increase on top of the $75 billion repo facility for a daily total of $120 billion . Here’s the Federal Reserve Bank of New York, the branch involved in such actions:
“Consistent with the most recent FOMC [Federal Open Market Committee] directive, to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation, the amount offered in overnight repo operations will increase to at least $120 billion starting Thursday, Oct. 24, 2019.”
And, consequently, on Oct. 24 the Fed injected $134 billion in temporary liquidity .
These actions are surprising. What stable financial system requires over $100 billion in overnight liquidity injections? The Fed did not see the need for these actions coming. It is reacting to a market that suddenly requires it.
“ Funding issues ,” Chairman Powell called it in October. The Fed was totally caught off guard when the overnight financing rate suddenly jumped to over 5%, and it’s been reacting ever since.
What started as a slow walk in policy reversion from last year’s rate-hike cycle and balance-sheet roll-off (aka quantitative tightening, or QT) on autopilot has now turned into ongoing interest-rate cuts and balance-sheet expansion:
To be clear: This is not a temporary rise in the balance sheet; this is the beginning of something big. The Fed’s balance sheet looks like it will expand to record highs once again.
I keep questioning the efficacy of all this, and I have to question the honesty of the Fed. After all, the central bank keeps chasing events, and its policy actions are turning ever more aggressive while it insists that everything is fine. The bank’s actions are saying things are not fine. Far from it. Otherwise, the Fed wouldn’t be forced into all these policy actions. But would the Fed cop to things not being fine? To do so would be to sap confidence — can’t have that.