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Credit Suisse: Fed May Launch QE4 Before Year-End to Ease Market Stress

Credit Suisse: Fed May Launch QE4 Before Year-End to Ease Market Stress

By    |   Tuesday, 10 December 2019 12:41 PM

Credit Susse analyst Zoltan Pozsar predicts that a fourth round of quantitative easing will be needed before year’s end to ease mounting pressure in the short-term lending markets.

Pozsar, who has worked for the Treasury and the Federal Reserve, said the so-called QE4 would help rebuild bank reserves, which have dropped as the Fed has shrunk its balance sheet.

The quantitative easing — commonly called “money-printing” for the way the Fed uses digitally created money to buy bonds from big financial institutions — would be needed by year’s end to bridge a funding gap as banks scramble for scarce reserves, CNBC cited Pozsar, Credit Suisse’s managing director for investment strategy and research, as saying in a note to clients.

“If we’re right about funding stresses, the Fed will be doing ‘QE4’ by year-end,” Pozsar wrote in the note. “Treasury yields can spike into year-end, and the Fed will have to shift from buying bills to buying what’s on sale – coupons.”

The Fed is in the midst of a buying T-bills in a process that it has insisted is not QE but instead an effort to keep its benchmark overnight funds rate within the 1.5%-1.75% target range, CNBC explained. In addition to the outright purchases, the Fed is conducting daily repurchase operations to stabilize the market, CNBC said.

All of those efforts stem from mid-September tumult in the repo market, the place where banks go to get overnight funding critical to their operations. A Sept. 17 spike in rates amplified funding issues that Pozsar said are not going away, CNBC said.

“The Fed’s liquidity operations have not been sufficient to relax the constraints banks will face in the upcoming year-end turn,” he said.

"Year-end in the [currency] swap market is thus shaping up to be the worst in recent memory, and the markets are not pricing any of this," he wrote. "The apparent lack of concern may come from last year's benign experience and that repo rates have been trading normally since the September blowout. But these facts are less relevant than they seem," he wrote.

The U.S. Federal Reserve’s 2018 regime of rate hikes fueled sharp equity declines last December. But this year brought a pause and then an about-face, with three rate cuts in July, September and October, Reuters explained.

Fed officials began a two-day policy meeting on Tuesday. The central bank isn't expected to cut interest rates on Wednesday against the backdrop of relatively upbeat economic data, including a sharp narrowing in the trade deficit in October, a rebound in orders for big-ticket items and a surge in job growth in November.

The Fed in October signaled a pause in the easing cycle that started in July when it reduced borrowing costs for the first time since 2008.

In October, the Fed also said it would start buying some $60 billion a month in Treasury bills. It has characterized these purchases as distinct from quantitative easing, or QE, its bond purchases to keep interest rates near zero during and after the financial crisis a decade ago. But some analysts say they have similarly boosted financial markets.

“No matter what the Fed wants to call it, it is QE,” said Robert Phipps, director at Per Stirling Capital Management in Austin, Texas. “It’s quite supportive for equity prices going forward.”

With the steep climb in Treasury prices this year, the S&P 500 dividend yield has outpaced the benchmark 10-year U.S. Treasury yield. That has made stocks indispensable for investors in search of steady income from their holdings, even though earnings multiples for stocks are higher than their long-term average.

“We think this speaks to the relative attractiveness of equities,” John Linehan, a portfolio manager at T. Rowe Price, said at the firm’s global market outlook briefing last week. “The reality is for investors, given where fixed income is, there really are no real attractive alternatives to equities.”

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Credit Susse analyst Zoltan Pozsar predicts that a fourth round of quantitative easing will be needed before year’s end to ease mounting pressure in the short-term lending markets.
credit, suisse, fed, qe4, quantitative, easing
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2019-41-10
Tuesday, 10 December 2019 12:41 PM
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