Eyes on the Fed

This week, I want to keep talking about the most important thing that’s been happening since mid-September of 2019: the way the Fed has had to step and combat the repo crisis, which came in directly from the Fed selling their own bonds in 2018, which drained reserves and caused banks to stop lending to each other practically overnight.

The initial thought when it happened was that it was really no big deal. Just $60 billion to start, a temporary crisis. But three-and-a-half months later, by the end of December, that figure had jumped up to $380 billion, twice the pace of peak quantitative easing in 2014.

The Fed’s been trying to taper these markets off the crack they’ve been feeding on for years now, but the markets keep saying, “No! We need this crack!”

I’ve been monitoring this weekly with my senior research analyst Dave Okenquist. What we’ve seen is that the Fed’s saying one thing, but it’s what they actually do that counts. And what they’ve done is taper off a bit. Repos have slowed down since the recent peak, a sign that there’s less of a movement to inject money into thin air.

And what has the stock market done as a result? Well, for a little while, it went straight up. Now it’s pausing, while the Fed injections actually down from the $424 billion peak to $396 billion.

So repos have gone down a bit, that’s good. But the Fed’s still going straight up on the Treasury bills, claiming it’s not really “QE.”

That’s something we’ll need to continue to watch. Short-term, stocks may back off a bit, but if repos start to accelerate or the Fed comes through with commitments, markets will go back to going straight up.

As always, we’ll keep you updated.

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