Fed’s Repo Operations Are a Transition to QE4

Sept. 24, 2019 (EIRNS)—The financial media are noting that the U.S. repo crisis which exploded at the beginning of last week is not a small matter. For example, Fortune wrote: “The repo market is looking a lot like it did on the precipice of the 2007 housing market crash.... The repo market seized up last week.... The Fed is back where it was roughly a decade ago, effectively buying U.S. Treasuries from banks on an indefinite basis.” The Fortune wire then quoted a Bank of America research note: “For all intents and purposes, this will be equivalent to QE, with scheduled purchases of securities.”

Yahoo! noted that the repo market is “the oft-overlooked underpinnings of the U.S. financial system.... The repo market is considered to be the ‘plumbing’ of the financial system since it provides overnight financing for the banks and broker-dealers at the center of the economy.” The article continued:

“The Fed is now weighing other tools to ensure that interest rates are under control, such as resuming ‘organic’ balance sheet growth to increase bank reserves in the system. Policymakers are also exploring a ‘standing repo facility’ that would allow banks to convert Treasuries to reserves on demand (instead of at pre-set times each day, as is currently the case). Fed Chairman Jerome Powell said Sept. 18 that the central bank is well-equipped to deal with future episodes. ‘If we experience another episode of pressures in money markets, we have the tools to address those pressures,’ Powell said. ‘We will not hesitate to use them’.”

That sounds an awful lot like ECB President Mario Draghi’s infamous promise of unending QE: The ECB will do “whatever it takes.”