The Feds repurchase effort, arguably unprecedented in history, has also raised questions among market participants about whether the Fed is putting so much money into the market in just a few days, which means that the Fed is returning to quantitative easing.
Some foreign media interpreted the Feds repurchase last week in conjunction with Powells speech. At last weeks press conference, Powell said that we certainly might need to restore organic balance sheet growth earlier than expected. Some interpret it as the imminent arrival of an endless quantitative easing policy.
In fact, the Feds recent repo is just a normal open market operation and has nothing to do with QEs half gross. Although both results in the Federal Reserve putting more money into the market, they are quite different.
Open market operations are designed to cope with increased demand for Fed debt. Ferroli estimates that demand for the dollar has been growing at a rate of $100 billion a year recently. Simply put, if the market needs $200 billion, the Fed will put in so much money instead of too much money. The Fed is likely to offset rising demand by increasing assets, but that does not mean quantitative easing.
Quantitative easing is the Federal Reserves investment in the market to stimulate the economy, which exceeds the normal demand of the market. Quantitative easing is usually a policy tool used when interest rates are close to zero or fall to zero, more like the helpless action to stimulate the economy when interest rates can not be reduced.
Although the Feds repurchase is only an open market operation, Bank of America strategists expect the Fed to be more aggressive. They estimate that the Fed will need to buy about $150 billion in assets annually because of market demand for Fed debt. Most importantly, in order to avoid a repeat of recent financial pressures and restore adequate reserves, they think the Fed may need to buy another $250 billion.
This is not Wall Streets attempt to play down the importance of the Feds resumption of balance sheet growth. The Federal Reserve has also made it clear that it needs open market operations to cope with debt growth.
So what would happen if the public saw the Feds open market operations as QE? Analysts believe risky assets may rise more than expected, and Treasury yields and gold prices will rise as inflation intensifies. If the market misinterprets bond purchases as quantitative easing, it may give the Fed a short breathing space.
Source: Jinshi Data Responsible Editor: Yang Bin_NF4368