Is Powell Playing Fed Games?

The Federal Reserve will be adding assets to its balance sheet again, but Powell insists its not “quantitative easing”

Apparently, the “repo market” purchases by the Federal Reserve we discussed earlier this week —which dont count as quantitative easing (QE)—were just the beginning of the new, non-quantitative easing but money printing period.

Fed “repos,” you may recall, are now necessary to boost weak overnight liquidity reserves of the big banks and dont permanently expand the Feds balance sheet, unless they go on forever, in which case they would be QE. Now they are more of a short-term bail-out.

Its Time for “Non-Quantitative Easing”

But in his Tuesday speech, Federal Reserve Chairman Jerome Powell explained that for the first time in five years, the “time is now upon us” for the Fed to resume buying U.S Treasury bills and bonds. That means that come November, the American economy will officially enter into another period of quantitative easing, you know, the Fed buying assets to expand its balance sheet.

Or not.

Typically, when the Federal Reserve buys Treasury assets, its because of weakness, either in the economy or in the financial system. A weakness that needs to be papered over by money printing, expanding the Feds balance sheet and bank reserves. Or the Fed buys other assets that nobody wants to buy at a decent price, like the purchases of mortgage backed securities (MBS) it conducted after the financial crisis.

Not so fast, says Powell. He insisted that there are perfectly good reasons, aside from weaknesses in the financial system, for the Federal Reserve to start printing again. And, he noted, even insisted, what the Federal Reserve will soon begin doing again is NOT quantitative easing.

For example, Powell said that the next round of asset purchases wont really be the same as prior rounds because the rationale this time is to help maintain an appropriate level of reserves in the financial system. In other words, its more than just overnight liquidity that needs propping up. The whole financial system is running low on liquidity.

Almost as telling as the restart of the “non-quantitative easing” program is the way Powell engaged in semantic gymnastics to minimize and avoid using the term, or even evoke comparisons of the same. One would hope he did so for more than just the sake of ambiguity.

This Is QE

Just to clarify to our readers, this is what he is (not) talking about.

The Fed has the power to literally print money, either in paper or electronic form. Both currency in circulation (paper) and reserves held at the Fed (bits and bytes) count as “base money,” of which banks need to hold a certain amount to satisfy regulatory requirements. They hold this either in their vaults (paper) or at the Fed (bits and bytes.) Since the Fed is the source of both paper and electronic money, it is counted as a liability on the Feds balance sheet.

But the Fed cant just print that paper or bytes and give them to the banks without making another entry on the asset side of its balance sheet, which backs the currency the Fed prints. This is where the concept of asset purchases comes in because banks usually sell Treasury bonds (assets) to the Fed in exchange for the newly printed money. But its not just that, the Fed also has bought MBS before, as explained above, or holds other assets on its balance sheet, like gold, which it could also buy, but doesnt want to

This is what the last round of QE looked like. Banks bought Treasuries from the Federal Government and the flipped it to the Fed in exchange for newly printed mostly electronic reserves. The Treasuries stayed on the Fed balance sheet permanently, hence the name permanent open market operations, and the whole balance sheet ballooned to around $4.5 trillion, whereas it was a few hundred billion before the crisis.

So anytime the Fed either directly or indirectly buys assets and holds them for longer period of time, this is money printing. Actually already the old QE term was already an obfuscation to lead people away from thinking the Fed is just printing money plain and simple.

In addition, this process also monetizes federal government debt, another no-no in orthodox monetary theory.

Only Good Economic News?

To bolster his point, Powell went on to note that although the short-term yield curve needs to be closely watched, vulnerabilities in the financial system remain moderate overall. He also said that continued economic expansion, a strong labor market and inflation near the Feds two percent target is the most likely outlook for the economy. In short, Powell sees no reason why economic expansion cant continue.

But what about those weak reserve levels? What does that really mean for the health of the banking system and the overall health of the economy?

Powell reiterated that asset purchases for reserve building purposes should not be confused with quantitative easing, although quantitative easing does exactly that: build bank reserves and monetize government debt.

It is totally irrelevant as to why the Fed would think the banking system needs more reserves, or why it would think it needs to print more money. Money printing is money printing it doesnt matter why you do it.

Getting Beyond the Word Games

But perhaps we should get beyond the word games.

Powell rightly pointed out that while the U.S. trade war with China, political unrest in the far East and political gridlock in the West as well as an overall cooling of the global economy are all relatively bad news. But overall U.S. economic figures are relatively strong. Thats true. The U.S. economy looks better than most in the world.

Powell also pointed out that new aspects of the economy, specifically in the digital economy, are not always accurately measured or understood as clearly as they need to be and thus could be providing “goodRead More – Source

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