Likely action: outright purchase of T-bills in 2ndary market to reduce the O/N & Term Repo balance for a few months.
Goal: maintaining overall bank reserve near current 1.48Bn level.
2/10
Goal: maintaining overall bank reserve near current 1.48Bn level.
2/10
Difference from LSAP QE (QE1-3):
1. bank reserve *expanded* at $50-80Bn/month then.
2. Basell III was not in place then, and banks were free to lend reserves to increase leverage in various derivative markets (futures, swaps, options).
3/10
1. bank reserve *expanded* at $50-80Bn/month then.
2. Basell III was not in place then, and banks were free to lend reserves to increase leverage in various derivative markets (futures, swaps, options).
3/10
Equity market: To FOMO or not?
Two main transmission pathways for QE -> stock rally
1. credit market: more corporate bond issuance -> more buybacks.
2. leverage via repo market: Hedge fund posting UST/SPX as collateral to finance their stock position at 2x-3x of capital.
4/10
Two main transmission pathways for QE -> stock rally
1. credit market: more corporate bond issuance -> more buybacks.
2. leverage via repo market: Hedge fund posting UST/SPX as collateral to finance their stock position at 2x-3x of capital.
4/10
Two main components for both pathways
1. borrowing cost (rate)
2. dealer/GSIB balance sheet capacity
lower rate + bigger balance sheet capacity --> cheaper borrowing cost for HF/corporate --> more potential for higher P/E ratios.
6/10
1. borrowing cost (rate)
2. dealer/GSIB balance sheet capacity
lower rate + bigger balance sheet capacity --> cheaper borrowing cost for HF/corporate --> more potential for higher P/E ratios.
6/10
Powell's speech suggests bank reserve will be kept nearly constant (or grow at the rate of GDP growth, i.e. 3-4Bn a month)
It means
1. less aggressive rate cuts: Aggressive rate cut (25 bps at each FOMC until FFR = 0%) was only needed if Fed did not address B/S issue.
7/10
It means
1. less aggressive rate cuts: Aggressive rate cut (25 bps at each FOMC until FFR = 0%) was only needed if Fed did not address B/S issue.
7/10
Fed can now take a more wait-n-see approach to cut rate --> borrowing cost will not drop to 0 as quickly as the equity market currently is hoping for.
2. balance sheet capacity not going to expand more than a few % a year. also SPX will have to compete w/ UST/MBS
8/10
2. balance sheet capacity not going to expand more than a few % a year. also SPX will have to compete w/ UST/MBS
8/10
We have to wait until Oct or Dec FOMC to have a more precise picture on forward paths of (1) borrowing cost and (2) balance sheet capacity.
Everyone is just guessing at the moment, including me.
9/10
Everyone is just guessing at the moment, including me.
9/10
Bashing the Fed for QT last year and (somewhat imaginary) QE right now is clearly fashionable.
Life is short, and I have no interest in engaging in that kind of convo in this thread.
10/10
Life is short, and I have no interest in engaging in that kind of convo in this thread.
10/10
