The Fed has officially rolled out “QE-Lite” and it will begin next week.
In keeping with the notion that policymakers want to return to an “ample” reserves regime with a “buffer” as quickly as possible following September’s repo chaos, the Fed will initially purchase T-bills at a rate of $60 billion/month starting on October 15.
That figure is consistent with what some desks had projected on the heels of Jerome Powell’s speech in Denver on Tuesday.
Read more: Here’s How Much The Fed Will Buy During The First Four Months Of ‘QE-Lite’
“In light of recent and expected increases in the Federal Reserve’s non-reserve liabilities, the Federal Reserve will purchase Treasury bills at least into the second quarter of next year in order to maintain over time ample reserve balances at or above the level that prevailed in early September 2019”, the Fed said, in a statement announcing “organic” balance sheet growth.
In a concurrent post, the New York Fed delivered the specifics. To wit:
In accordance with this directive, the Desk plans to purchase Treasury bills at an initial pace of approximately $60 billion per month, starting with the period from mid-October to mid-November. These reserve management purchases of Treasury bills will be in addition to the Desk’s ongoing purchases of Treasury securities related to the reinvestment of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities.
The following chart is from Goldman, and it gives you a rough approximation of what this will look like, although the Fed doesn’t appear to have pre-committed to any specific monthly figures for purchases (in addition to the reinvestment of MBS paydowns) beyond saying that the mid-October-mid-November amount will be $60 billion.
(Goldman)
In addition, the Fed will continue to conduct overnight and term repos “at least through January of next year 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”.
In other words, the Fed is taking no chances into the expected year-end funding squeeze. They do not want to see a repeat of September and running the TOMOs through January effectively gives them more time to iron out the details of a standing repo facility.
Here’s a snapshot of the TOMO topography (if you will) after nearly a month of operations:
(BofA)
This is probably going to a be a curve steepneer initially, and, as documented extensively in the linked post above, the fact that the Fed is going “big” out of the gate means the chances of market participants re-engaging in “classic” QE trades are high.
How the Fed communicates between now and the October meeting will be crucial.
“Communications may be further complicated by the fact that the market now largely expects the FOMC to lower the fed funds target range by 25 bps at the October FOMC meeting”, BofA’s Mark Cabana wrote this week, adding that “announcing permanent balance sheet growth while lowering interest rates risks being confused by some market participants as QE”.
Initial schedule (which shows purchases out to 1-year maturities)
From the Board of Governors
October 11, 2019
Statement Regarding Monetary Policy Implementation
For release at 11:00 a.m. EDT
Consistent with its January 2019 Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization, the Committee reaffirms its intention to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve’s administered rates, and in which active management of the supply of reserves is not required. To ensure that the supply of reserves remains ample, the Committee approved by notation vote completed on October 11, 2019 the following steps:
- In light of recent and expected increases in the Federal Reserve’s non-reserve liabilities, the Federal Reserve will purchase Treasury bills at least into the second quarter of next year in order to maintain over time ample reserve balances at or above the level that prevailed in early September 2019.
- In addition, the Federal Reserve will conduct term and overnight repurchase agreement operations at least through January of next year 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.
These actions are purely technical measures to support the effective implementation of the FOMC’s monetary policy, and do not represent a change in the stance of monetary policy. The Committee will continue to monitor money market developments as it assesses the level of reserves most consistent with efficient and effective policy implementation. The Committee stands ready to adjust the details of these plans as necessary to foster efficient and effective implementation of monetary policy.
In connection with these plans, the Federal Open Market Committee voted unanimously to authorize and direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:”Effective October 15, 2019, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-3/4 to 2 percent. In light of recent and expected increases in the Federal Reserve’s non-reserve liabilities, the Committee directs the Desk to purchase Treasury bills at least into the second quarter of next year to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to conduct term and overnight repurchase agreement operations at least through January of next year 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. In addition, the Committee directs the Desk to conduct overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.70 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.The Committee directs the Desk to continue rolling over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable.The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”
From the New York Fed
OPERATING POLICY
Statement Regarding Treasury Bill Purchases and Repurchase Operations
October 11, 2019
In light of recent and expected increases in the Federal Reserve’s non-reserve liabilities, the Federal Open Market Committee (FOMC) directed the Desk, effective October 15, 2019, to purchase Treasury bills at least into the second quarter of next year to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directed the Desk to conduct term and overnight repurchase agreement operations (repos) at least through January of next year 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.
In accordance with this directive, the Desk plans to purchase Treasury bills at an initial pace of approximately $60 billion per month, starting with the period from mid-October to mid-November. These reserve management purchases of Treasury bills will be in addition to the Desk’s ongoing purchases of Treasury securities related to the reinvestment of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities. Detailed information on the schedule for reserve management purchases of Treasury bills will be announced on or around the 9th business day of each month on the Treasury Securities Operational Details site.
Consistent with this directive, the Desk will roll over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities. As Treasury bill holdings mature, the principal payments will be rolled into new Treasury bill securities.
In addition, at least through January of next year, the Desk will conduct overnight and term repo operations to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures. Term repo operations will generally be conducted twice per week, initially in an offering amount of at least $35 billion per operation. Overnight repo operations will be conducted daily, initially in an offering amount of at least $75 billion per operation. Detailed information on the schedule of term and overnight repurchase agreement operations will be announced on or around the 9th business day of each month on the Repurchase Agreement Operational Details site.
The Desk will adjust the timing and amounts of reserve management Treasury bill purchases and repo operations as necessary to maintain an ample supply of reserve balances over time and based on money market conditions, consistent with the directive from the FOMC.
if this new QE is designed to drive down short term rates, so the Fed funds effective rate can catch down to 90-day tbills, this will/may resteepened the yield curve. on an up market day that will be said to be bullish for econ growth. the last couple times the yield curve resteepened after being inverted, we went right into recession at about .33% ‘normalized’.
.25bps cut and some bond buying might just do it before year end.
Can you explain the difference between “Federal Reserve’s non-reserve liabilities” and “Federal Reserve’s reserve liabilities”?
Not that it matters, but here’s an FYI from deep inside the Fed’s intestine, i.e., another layer of slime related to collateral and the moving target of repo valuation. This apparently is a weird issue which makes repo more attractive outside the U.S, e.g., foreign banks. Basically just a peek inside the sausage making factory and one of the rooms involved with Basil lll’s Statutory Liquidity Ratio & Cash Reserve Ratio and the confusion between cash and illiquid treasury garbage ,,,
Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies
A bank holding company whose measure of systemic importance exceeds a defined threshold would be identified as a global systemically important bank holding company and would be subject to a risk-based capital surcharge (GSIB surcharge). The GSIB surcharge is phased in beginning on January 1, 2016, through year-end 2018, and becomes fully effective on January 1, 2019.
The proposal aligned the definition of “secured funding transaction” with the definition of that term in the LCR rule. As such, it included repurchase transactions, securities lending transactions, secured funding from a Federal Reserve Bank or a foreign central bank, Federal Home Loan Bank advances, secured deposits, loans of collateral to effect customer short positions, and other secured wholesale funding arrangements. These funding sources were treated as short-term wholesale funding, provided that they have a remaining maturity of less than one year, because counterparties are more likely to abruptly remove or cease to roll-over secured funding transactions as compared to longer-term funding. This behavior gives rise to cash outflows during periods of stress.
… banking organizations view capital as a relatively costly source of funding. If it is, then a firm with elevated capital requirements also has a concomitantly higher cost of funding than a firm with just the generally applicable capital requirements. And this increased cost of funding could, if calibrated correctly, offset any cost-of-funding advantage derived from the too-big-to-fail subsidy.
https://www.federalregister.gov/documents/2015/08/14/2015-18702/regulatory-capital-rules-implementation-of-risk-based-capital-surcharges-for-global-systemically
Pretty weird that the above reg was just written about by Jeff Snider today. Hmmm … maybe this has to do with keeping liquidity flowing and making sure that operational costs don’t eat too deeply into arbitrage margins????
Yesterday, the Financial Times reported that the Federal Reserve has agreed to set aside rules it was contemplating which would have imposed strict liquidity requirements on domestic branches of foreign banks.
The Federal Reserve will announce on Thursday that it has decided against forcing US branches of foreign banks to hold a minimum level of liquid assets to protect them from a cash crunch, according to people familiar with the decision.
https://www.alhambrapartners.com/2019/10/11/benign-neglect-check/