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Macroeconomic & Geopolitical

The Federal Reserve Doesn't Want You To Call It QE

11 October 2019 - 4 min read

The three things you need to know this week: the Fed's balance sheet is set to grow, FOMC participants are split on the forward path and keep an eye out on parameters for ECB purchases next.

Overview

Just Don’t Call it QE: The Federal Reserve will resume buying U.S. Treasury bills to offset recent turmoil in money markets. Fed Chairman Jerome Powell stressed that "growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis." Money market volatility spiked last month as corporate tax payments and settlement for Treasury security purchases created a scarcity of liquidity that sent short rates surging. The Fed announced last week it will extend operations for overnight repurchase agreements through November 4 to improve liquidity for funding markets.

FOMC Minutes: Minutes of the September meeting show most participants supported the rate cut but are divided on the path for monetary policy. There seemed to be a focus on inflation during the discussions, which has elevated the odds of another rate cut in October, as recent inflation data has been soft. All were more concerned about the escalation of the trade war with China and Brexit uncertainty slowing global growth, but the impact on the U.S. economy was less certain. Participants also discussed developments in money markets and the appropriate level of balance sheet reserves, as well as the merits of a standing repurchase agreement facility.

ECB Minutes: The September meeting minutes show that although there was a clear majority in favor of restarting QE, several members were not convinced the case was strong enough. Some participants preferred a larger rate cut instead of new asset purchases. The next big debate will likely center on limits to the asset purchase program, which was approved on an open-ended basis. The discussion will focus on the size, length and mix of QE.

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