Beware the QE Trojan Horse
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“What’s in a name? That which we call a rose,
By any other name would smell as sweet.”
Juliet Capulet in Romeo and Juliet by William Shakespeare
The turmoil from the mid-September crisis in the repo funding market has not subsided. Indeed, some are calling for aggressive policy actions to prevent a recurrence. Regardless of what those policies are called, they are nothing more than thinly disguised quantitative easing (QE).
The mid-September repo crisis continues to weigh on market participants. The Federal Reserve quickly addressed soaring overnight funding costs through a special repo financing facility not used since the great financial crisis (GFC). The re-introduction of repo facilities has, thus far, resolved the matter. It remains interesting that so many articles are being written about the problem, including my own.
The on-going concern stems from the fact that the world’s most powerful central bank briefly lost control over the one rate they must control.
The Fed’s measures to calm funding markets, although superficially effective, may not address bigger underlying issues. Indeed, the on-going media attention to such a banal and technical topic is indicative of deeper problems. The Fed has applied a tourniquet and gauze to a serious wound, but permanent medical attention is still desperately needed.
The Fed is in a difficult position. As I discussed in Understanding the Great Repo Fiasco, they are using temporary tools that require daily and increasingly larger efforts to assuage the problem. Taking more drastic and permanent steps requires aggressive easing of monetary policy at a time when the U.S. economy is relatively strong and stable. Such policy is not warranted and could incite the most underrated of all threats, inflationary pressures.