The Fed said Friday it will cut Treasury purchases to “just” $10 billion a day next week, in a further sign market conditions are normalizing following last month’s dramatics.
The reduction is in keeping with recent precedent. The Fed has trimmed its daily buying regularly since the introduction of unlimited QE in March. Last week, they cut purchases in half, from $30 billion per day to $15 billion.
The latest update shows the balance sheet is up to almost $6.6 trillion. The expansion since early March is around $2.4 trillion.
For those wondering about the breakdown of liquidity provision and funding via the various emergency facilities rolled out over the course of the coronavirus crisis, borrowing through the Commercial Paper Funding Facility rose to $2.73 billion last week, while the Fed had backed some $8 billion of loans via the Paycheck Protection Program Liquidity Facility as of Wednesday.
Liquidity swaps with foreign central banks rose to $409.7 billion in the latest weekly update, while loans through the Money Market Mutual Fund Liquidity Facility dropped to $48.8 billion from $50.7 billion the previous week. Lending through the Primary Dealer Credit Facility fell to $31.5 billion from $33.4 billion.
Amid the near constant derision aimed at some of the Fed’s more controversial steps, it’s important to keep in mind that these facilities are useful. And they appear to be working.
For example, combined borrowing in the money market mutual fund liquidity facility and the primary dealer liquidity facility (two vehicles rolled out to help unfreeze critical markets last month), fell $3.7 billion in the week through Wednesday.
“[It] is unqualified good news that these things haven’t been used a ton”, one former Fed economist told Bloomberg. “The Fed’s reaction has been quick and wide-reaching, and it’s given confidence to investors to provide liquidity in various corners of the market”.
Remember, there’s a lot of nuance in this discussion. As Zoltan Pozsar wrote last week, “money is hierarchical” and not all markets are being treated the same in terms of the cost of funding in these facilities.
Even as Pozsar may indeed be correct to suggest the Fed is using the pricing of the facilities to send a message to markets (see the last linked post above), all of these measures were taken with an eye towards preventing the public health crisis from morphing into a financial crisis.
Powell seems to have succeeded in that regard. For now, anyway.
H-Man, it all works well until the US is not a reserve currency. If we lose that status, we become a banana republic. My concern at this juncture is whether the inflation genie is still in the bottle.
And what currency replaces the dollar?
I think the only threat to USD as reserve currency is if Europe ( or just Germany- we will see how EU progresses) forms an even stronger international pact with China, Russia and EM and they agree to trade in contracts denominated in Euros ( or Deutsche Marks)
What currency replaces the dollar? A question as a defense of the dollar, assumes we can see into the future.
Thank you for aggregating and summarizing. Very helpful
If inflation became a problem, the Fed would get down on their hands and knees and thank their lucky stars! Then all they would have to do is freeze the balance sheet and raise short term rates. That would be like hitting the staples that was easy button. I always get a kick out of folks worrying about inflation in this type of environment. Meat prices may go up, but it is a general increase in price level that matters. Trust me- compensation and commodity prices are not going to drive an increase in the price level. Even if the Fed’s balance sheet goes up and money supply increases, velocity is in the process of dropping through the floor. You think banks are going to lend a lot of money other than Fed/Treasury programs?
100 percent.
Meat price doubling is nothing (for inflation) compared to incomes at zero (or unemployment only covering a third of the previous salary and little prospect of re-hire at the same level), especially as rents (just like mortgages) or other fixed repayments will not be forgiven (mostly just deferred).
I thought inflation was when there was high demand AND bidding up to higher prices (usually in combination of velocity of money), so it does not seem likely that people without money will bid anything up.
Therefore I agree the Fed is safe (especially in the herd of every other world banking/financial institution) printing to stave off The Great Depression 2.