The Federal Reserve is set to begin what a MarketWatch article called a “massive” bond-buying program.
Jerome Powell announced the program last Tuesday and the central bank released more details about the plan on Friday. The Federal Reserve will buy $60 billion in short-term Treasury bills each month. According to a statement, the purchases will continue, “at least into the second quarter of next year.” That would amount to around $400 billion worth of Treasurys added to the Fed’s balance sheet.
But the balance sheet will likely expand more than that. The Fed also plans to use interest it earns off its portfolio to buy more Treasurys. And as they mature, it will take that money and buy more bonds, thus pumping up the balance sheet.
Powell insists this is not quantitative easing. During his speech last week, Powell said, “This is not QE. In no sense is this QE.” But as Peter Schiff said, this is precisely QE – no matter what you call it.
“Of course, don’t confuse this with quantitative easing when the Fed was buying $85 billion a month of Treasuries, because this is no way quantitative easing except, of course, that’s exactly what it is.”
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Peter isn’t the only person calling this QE. An analyst quoted by MarketWatch said, “In a very quiet and sneaky way, the Federal Reserve announced the start of a massive bond-buying program.” He went on to say, “The Fed does not wish for us to refer to it as quantitative easing or QE4. Yet, this is exactly what the Fed is doing but due to the timing and enormity of the program.” He also referred to the program as “debt monetization.”
Even Bloomberg confessed that the bond-buying program looks a lot like QE.
“No matter how technical, this measure could prompt an indirect attempt to influence market risk-taking and the spillover to the broader economy. Taking advantage of the new demand for bills from the Fed, the Treasury could shift more of its issuance there, which, with an unchanged funding schedule, would lower the supply of longer-dated bonds, thereby increasing their price and lowering yields – just like QE2 and later QE3. In sum, it may not be a full-scale QE but it could be thought of as, pick your term, a lite/stealth/mini/shadow variant of it.”
The Fed’s move is in response to the recent meltdown in the overnight repurchase market. The Fed began repo operations a couple of weeks ago and then upped the ante last week in an attempt to inject cash into the banking system. According to the Fed, it will conduct longer-term repo operations two times per week at $35 billion each. The Fed will also continue overnight repo operations of at least $75 billion each.
Powell said the reason for balance sheet expansion is to maintain an “adequate supply of reserves.” As Peter explained, in simple terms, the central bank is trying to keep interest rates artificially suppressed.
“Which is really code for, ‘We want to keep interest rates low.’ I mean, that’s what they’re trying to do. They need an adequate amount of reserves to artificially suppress interest rates. Well, that’s exactly what quantitative easing was. That was the policy goal. It was to artificially suppress interest rates, to have an interest rate that was lower than what the rate would be without the Fed intervening, without them doing quantitative easing.”
The US economy is built on debt and it cannot function in a high-interest rate environment. Peter said this is why the central bank is desperate to keep interest rates low.
“They’re trying to artificially manipulate interest rates so that they’re lower than they would otherwise be. The goal is to keep the cost of servicing all this debt low and to prop up asset prices — prop up stocks and prop up real estate. So, they’re basically doing exactly what they did under QE for the exact reasons they did it when they were doing QE, except they’re not calling it QE. And the reason they’re not calling it QE is because they don’t want to admit that they’re having to rescue the economy again. Because the success of quantitative easing was predicated on the fact that it was temporary. It was predicated on the Fed being able to reverse course.”
It’s clear now that temporary was not the reality. It was not temporary. And Peter has said before the scheme isn’t going to work again.
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