Fed Takes $31 Billion Securities In Overnight Repo As "Not A QE" Looms

The NY Fed announced that it accepted $30.8BN in securities ($26.25BN in TSYs and $4.550BN in MBS) in its latest overnight repo operation, shortly after the latest overnight G/C repo rate printed at an “unstressed” 1.90% this morning.

This was down from Tuesday’s $37.5BN and was the lowest repo allotment since Sept 27.

Of course, after Tuesday’s speech in which Powell preannounced the return of POMOs, confirming that these “temporary” operations are about to become permanent as the Fed grows permanently grows its balance sheet by purchases of Treasurys, reportedly Bills at first, the overnight POMO has now become just a placeholder until November when the new “not a QE” is set to begin and expand the Fed’s balance sheet by about $20BN in 10 Year equivalents every month.

As such, predictably the stress in the repo market is gone and the only question is what the final structure of the new POMO will look like, and specifically what the Fed will announce on how many Treasuries the Fed will have to buy.

But wait, didn’t Powell say not to confuse what is coming with QE? Alas, as we first explained and then as Capital Economics confirmed, the Federal Reserve “will struggle to convince markets that a resumption of Treasury purchases to avoid future money-market turmoil is not another round of quantitative easing” according to Capital Economics chief U.S. economist Paul Ashworth: “Hard to communicate that effectively when the Fed’s organic balance sheet growth will be half the size of the ECB’s newly unveiled QE,” Ashworth wrote in note Tuesday

According to CapEcon, the Fed will need to buy $120b of additional Treasury securities per year to prevent any further decline in reserve balances. On top of that, Fed could also buy another $100b-$300b of Treasury securities in first year, to avoid mismatch of demand/supply in repo market like mid-September’s.

So yes, just as we first had “not a flamethrower” which was, for all intents and purposes, a flamethrower, we now have “not a QE”, which is, for all intents and purposes, QE.

Alas, in this “brave new world” where one is no longer allowed to call a spade a spade (especially if it risks jeopardizing Chinese investments, right NBA?), what one has to remember is that the return of QE is anything but. No matter what one calls it however, the Fed’s overnight repo no longer matters as the turmoil in the funding market has been stabilized for now, and certainly until POMO returns. The bigger problem is if we still have repo turmoil after “not a QE” is back. In that case, all bets will officially be off as the Fed loses its last shred of credibility.

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