In late March, early April, the Federal Reserve bought more than its Treasury issuance in an aggressive restart of its Quantitative Easing program. However in the weeks and months ahead, the issuance will increase to such a pace that will exceed the Fed’s original assets purchase program. So what does it mean for the USD?
Quantitative Easing – A Small Part of the Fed’s Easing
The last couple of months investors had the chance to hear from Fed’s Powell more than usual. After the initial reaction to slash the interest rate level to zero, the Fed did not waste any time and announced a number of other measures to provide liquidity to the US markets and the rest of the world.
The QE program stands as one of the largest in the world and the effects on the USD start to emerge already – GBPUSD is up a thousand pips points from the March low, as well as the AUDUSD or the NZDUSD.
Only since April 1st, the Fed has bought securities worth $733 billion. This was because in the period ahead, it will not be able to buy all the issuance, the question arises if the private investors can swallow the difference?
If not, the risk is that the USD liquidity conditions will deteriorate once again. If inflation continues to decline in Q2 2020, as it is forecast, a stronger USD coupled with disinflation (i.e., declining inflation but still above the zero level) may be the trigger for a discussion surrounding negative interest rates in the United States.
Fed’s Powell so far denied the Fed is looking at negative rates, but economic conditions can force it to go when it was not before. Precedents exist.
Part of the new measures announced in response to the coronavirus crisis, the Fed bought municipal bonds – it never did that up to this point. Moreover, last week it began buying ETFs (Exchange Trading Funds).
For those questioning the potential maximum size of what the Fed can buy to create money, the answer is quite simple – it can buy a lot. From commercial and residential real estate to IG corporate bonds or equities, the size of US asset markets exceeds a hundred trillion dollars.
Over the last weekend, Fed’s Powell explained in the “60 Minutes” show in the United States how the Fed is creating money – digitally. It buys assets and credits accounts with numbers.
So far, it flooded the economy with USD. But it may just not be enough.