{"id":1202494,"date":"2023-03-19T14:10:08","date_gmt":"2023-03-19T18:10:08","guid":{"rendered":"https:\/\/bugaluu.com\/news\/not-qe-as-fed-trapped-between-a-rock-and-a-hard-place\/1202494\/"},"modified":"2023-03-19T14:10:08","modified_gmt":"2023-03-19T18:10:08","slug":"not-qe-as-fed-trapped-between-a-rock-and-a-hard-place","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/not-qe-as-fed-trapped-between-a-rock-and-a-hard-place\/1202494\/","title":{"rendered":"‘Not QE’ As Fed Trapped Between A ‘Rock And A Hard Place’"},"content":{"rendered":"
\"\"<\/a><\/div>\n

‘Not QE’ As Fed Trapped Between A ‘Rock And A Hard Place’<\/span><\/p>\n

\n

Authored by Lance Roberts via The Epoch Times,<\/em><\/a><\/p>\n

\u201cQE\u201d or Quantitative Easing has been the bull\u2019s siren song<\/strong> for the last decade, but will \u201cNot QE\u201d be the same?<\/strong><\/p>\n<\/p>\n

Last week, amid a rash of bank insolvencies, government agencies took action to stem a potential banking crisis. The Federal Deposit Insurance Corporation (FDIC), the Treasury, and the Fed issued a Bank Term Lending Program with a $25 billion loan backstop to protect uninsured depositors from the Silicon Valley Bank failure. An orchestrated $30 billion uninsured deposit by 11 major banks into First Republic Bank followed. Those deposits would not occur without Federal Reserve and Treasury assurances.<\/p>\n

The details of the Bank Term Funding Program were described in the\u00a0Federal Reserve\u00a0press release<\/a>.<\/p>\n

\n

\u201cThe additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution\u2019s need to quickly sell those securities in times of stress.<\/p>\n

\u201cWith approval of the Treasury Secretary, the Department of the Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP. The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds.\u201d<\/em><\/p>\n<\/blockquote>\n

Banks quickly tapped the program, as shown by a $152 billion surge in borrowings from the Federal Reserve. It is the most significant borrowing in one week since the depths of the Financial Crisis.<\/p>\n

<\/a><\/p>\n

(Refinitiv Chart: RealInvestmentAdvice.com, Data: St. Louis Federal Reserve)<\/em><\/p>\n

The importance of this program is that it will inject up to $2 Trillion into the financial system, Bloomberg\u00a0reported<\/a>.<\/p>\n

\n

\u201c\u2018The usage of the Fed\u2019s Bank Term Funding Program is likely to be big,\u2019 strategists led by Nikolaos Panigirtzoglou in London wrote in a client note Wednesday. While the largest banks are unlikely to tap the program, the maximum usage envisaged for the facility is close to $2 trillion, which is the par amount of bonds held by US banks outside the five biggest, they said.\u201d<\/em><\/p>\n<\/blockquote>\n

As Bloomberg notes, major banks like JP Morgan likely will not tap the Feds lending program due to the stigma often attached to such usage. Moreover, there are roughly $3 Trillion in reserves in the U.S. banking system, of which the top five major banks hold a significant portion. However, as I noted last week in \u201cBank Runs<\/a>:\u201d<\/p>\n

The Fed caused this problem by aggressively hiking rates which dropped collateral values. Such has left some banks which didn\u2019t hedge their loan\/bond portfolios with insufficient collateral to cover the deposits during a\u00a0\u2018bank run.\u2019<\/p>\n

As shown, the rapid increase in rates by the Fed drained bank reserves.<\/p>\n

\"\"<\/a><\/p>\n

(Refinitiv Chart: RealInvestmentAdvice.com, Data: St. Louis Federal Reserve)<\/em><\/p>\n

The demand by banks for liquidity has now put the Federal Reserve between a rock and a hard place. While the Fed remains adamant in its inflation fight, the BTFP may be the next QE program disguised as Not QE.<\/p>\n

Investor Conditioning<\/h2>\n

Classical conditioning\u00a0(also known as\u00a0Pavlovian\u00a0or\u00a0respondent conditioning)\u00a0refers to a learning procedure in which a potent stimulus\u00a0(e.g.,\u00a0food) becomes paired with a previously neutral stimulus (e.g.,\u00a0a bell).\u00a0Pavlov discovered that when he introduced the neutral stimulus, the dogs would begin to salivate in anticipation of the potent stimulus, even though it was not yet present. This learning process resulted from the psychological\u00a0\u201cpairing\u201d\u00a0of the stimuli.<\/p>\n

Such conditioning has happened to investors over the last decade.<\/p>\n

In 2010, then Fed Chairman Ben Bernanke\u00a0introduced the\u00a0\u201cneutral stimulus\u201d\u00a0to the financial markets by adding a\u00a0\u201cthird mandate\u201d\u00a0to the Fed\u2019s responsibilities\u2014the creation of the\u00a0\u201cwealth effect.\u201d<\/p>\n

\n

\u201cThis approach eased financial conditions in the past and, so far, looks to be effective again.\u00a0Stock prices rose, and long-term interest rates fell when investors began to anticipate this additional action.\u00a0Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment.\u00a0And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion,\u201d\u00a0Ben Bernanke said in a Washington Post Op-Ed in November 2010.<\/em><\/p>\n<\/blockquote>\n

Importantly, for conditioning to work, when the\u00a0\u201cneutral stimulus\u201d\u00a0is introduced, it must be followed by the\u00a0\u201cpotent stimulus\u201d\u00a0for the\u00a0\u201cpairing\u201d\u00a0to complete.\u00a0For investors, as the Fed introduced each round of\u00a0\u201cQuantitative Easing,\u201d that is, the\u00a0\u201cneutral stimulus,\u201d\u00a0the stock market rose, that is, the\u00a0\u201cpotent stimulus.\u201d<\/p>\n

As shown, asset prices rose as the Fed expanded its balance sheet.<\/p>\n

\"\"<\/a><\/p>\n

(Refinitiv Chart: RealInvestmentAdvice.com, Data: St. Louis Federal Reserve)<\/em><\/p>\n

While many suggest that the Fed\u2019s QE programs have no impact on the financial market, the near 87 percent correlation between balance sheet changes and the market would imply otherwise.<\/p>\n

\"\"<\/a><\/p>\n

(Refinitiv Chart: RealInvestmentAdvice.com, Data: St. Louis Federal Reserve)<\/em><\/p>\n

This is why investors cling to each Fed meeting in anticipation of the\u00a0\u201cringing of the bell.\u201d<\/strong><\/p>\n

In Pavlovian terms, the \u201cpairing is complete.\u201d<\/p>\n

BTFP Is Not QE<\/h2>\n

While the BTFP facility is technically Not QE, it does reverse the Fed\u2019s efforts to reduce financial liquidity. <\/strong>The chart below shows that the Fed\u2019s balance sheet has surged since last week, reversing more than six months of previous tightening.<\/p>\n

\"\"<\/a><\/p>\n

(Refinitiv Chart: RealInvestmentAdvice.com, Data: St. Louis Federal Reserve)<\/em><\/p>\n

This reversal of liquidity is not surprising given the recent rout in the banking sector. J.P. Morgan noted on Friday that U.S. banks lost nearly $550 billion in deposits last week. Panicked investors were transferring funds to major banks from regional banks, which put further stress on already discounted collateral due to the Fed\u2019s rate-hiking campaign.<\/p>\n

\n

\u201cThe big picture from the H.4.1 release is\u00a0that the U.S. banking system induced the Fed to expand its balance sheet and inject $440 billion of reserves in just one week. That large liquidity injection reverses a third of the previous $1.3 trillion of reserve tightening since the end of 2021. Given such a backdrop of elevated banking system liquidity or reserve needs, this naturally raises the question of whether the Fed can continue QT [Quantitative Tightening], similar to 2018\/2019.\u201d<\/em><\/p>\n<\/blockquote>\n

As we have repeatedly discussed, it was only a matter of time before the Fed \u201cbroke something.\u201d<\/p>\n

\u201cThe economy and the markets\u00a0(due to the current momentum)\u00a0can DEFY\u00a0the laws of financial gravity\u00a0as interest rates rise.\u00a0However, as interest rates increase, they act as a\u00a0\u201cbrake\u201d\u00a0on economic activity.\u00a0Such is because higher rates NEGATIVELY impact a highly levered economy.\u201d<\/p>\n

\"\"<\/a><\/p>\n

(Refinitiv Chart: RealInvestmentAdvice.com, Data: St. Louis Federal Reserve)<\/em><\/p>\n

History is clear about the outcome of rate hiking campaigns.<\/strong><\/p>\n

The question is whether the Fed\u2019s Not QE can fix the problem.<\/p>\n

The Fed Created This<\/h2>\n

As noted in this past weekend\u2019s\u00a0newsletter<\/a>, the Fed must choose between fighting \u201cinflation\u201d or again bailing out the financial system in the name of \u201cfinancial stability.\u201d<\/p>\n

Of course, this entire situation is entirely due to the Federal Reserve.<\/p>\n

In October 2020, I wrote an\u00a0article<\/a>\u00a0arguing that Neel Kashkari was wrong and the Fed was indeed creating a \u201cmoral hazard\u201d by injecting massive stimulus into the economy following the pandemic. The Oxford Languages definition of moral hazard is:\u00a0\u201cThe lack of incentive to guard against risk where one is protected from its consequences,\u00a0e.g., by insurance.\u201d<\/p>\n

Unsurprisingly, zero interest rates, $5 trillion in fiscal policy to households, and $120 billion in monthly QE removed all \u201crisk\u201d from owning risk assets. The spike in inflation and speculative risk-taking was the result.<\/p>\n

The \u201clack of incentive to guard against risk\u201d becomes problematic when monetary, fiscal, and zero-interest-rate policies are reversed.<\/p>\n

Yes, this is all the Fed\u2019s doing.<\/strong><\/p>\n

However, since the turn of the century, the Fed has been able to repeatedly support financial markets by dropping interest rates and providing monetary accommodation. This was because inflation remained at low levels as deflationary pressures presided.<\/p>\n

\"\"<\/a><\/p>\n

(Refinitiv Chart: RealInvestmentAdvice.com, Data: St. Louis Federal Reserve)<\/em><\/p>\n

With inflation running at the highest levels since the 80s, the Fed risks creating another inflationary and interest rate spike if they focus on financial stability. However, if they focus on inflation and continue hiking rates, the risk of a further crack in financial stability increases.<\/p>\n

I don\u2019t know which path the Fed will choose, but the markets have little upside. The moral hazard the Fed created in the first place has now come home to roost.<\/strong><\/p>\n<\/div>\n

Tyler Durden<\/a><\/span>
\nSun, 03\/19\/2023 – 16:30<\/span><\/p>\n

From:Zerohedge<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

‘Not QE’ As Fed Trapped Between A ‘Rock And A Hard Place’ Authored by Lance Roberts via The Epoch Times, \u201cQE\u201d or Quantitative Easing has…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1202494","post","type-post","status-publish","format-standard","hentry","category-news","wpcat-1-id"],"_links":{"self":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts\/1202494","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/comments?post=1202494"}],"version-history":[{"count":0,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts\/1202494\/revisions"}],"wp:attachment":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/media?parent=1202494"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/categories?post=1202494"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/tags?post=1202494"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}