Year-End Bank Liquidity Crisis Forecast, as Fed Claims ‘It’s Contained’

Dec. 11, 2019 (EIRNS)—Foreign exchange “FX swaps could end up as the orphaned asset class, and that may force banks in some parts of the world to the edge of the proverbial abyss”—three weeks from now. That is one of the more dramatic observations in a bank analyst’s forecast put out on Dec. 9, and reported by financial media whose reporters attended Federal Reserve Chairman Jerome Powell’s press conference this afternoon. The analyst, Zoltan Pozsar of Credit Suisse in New York, also opined that the Federal Reserve will be compelled to start full QE by the end of the year; meaning, a securities-buying scheme that takes longer-maturity U.S. Treasury notes and bonds onto the Fed balance sheet, not just short-term bills.

This extends the Dec. 7 Bank for International Settlements report warning on the “repo” crisis—that it shows the near-term possibility of a 2008-type banking crisis.

Pozsar was a mid-level official at the Treasury and then at the New York Federal Reserve Bank for years; he is given some credit for having developed the repo market, and left people he had trained in charge of monitoring it. He forecast on Aug. 13, that the Fed would soon face a liquidity shortage in the repurchase-interbank lending market, which broke out Sept. 16. CNBC’s headline on this was, “Credit Suisse Shocking Call: Fed Will Launch QE4 Before Year-End To Stem Street Cash Crunch.”

Pozsar’s analysis is extraordinarily complex; suffice to say he anticipates a very serious year-end shortage of repo liquidity needed by both banks and hedge funds for foreign exchange (FX) transactions—which are largely derivatives transactions (FX swaps). Along the way he confirms, as EIR has reported before, that the past three months of Fed “operations to add bank excess reserves” have so far not added any excess bank reserves. The nearly $350 billion injection, measured by the increase in the Fed’s balance sheet since August, has gone down a speculative hole or holes.

Powell’s press statement after the Federal Open Market Committee (FOMC) meeting today held that the economy and labor market are strong (it did not comment on suppressed wages). Bloomberg brought up the BIS report and the Pozsar analysis. Powell’s response was fateful: “These are important operational matters, but not likely to have a macroeconomic effect.... Our plan is working.” In other words, the “repo” liquidity crisis is contained and will not spread. “Upward [interest] rate pressures are not unusual at year-end. These are manageable.... We don’t know when overnight and term repo levels can decline.... If it does become necessary to purchase [long-term] ‘coupon’ securities, we’ll adjust.”

Recall that the current “not-QE” purchases were started, with absolutely no prior indication, by an Oct. 4 emergency teleconference meeting of the FOMC.