Submitted by Taps Coogan on the 16th of March 2020 to The Sounding Line.
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As the Global Financial Crisis reached a crescendo from September through November of 2008, the Fed slashed its benchmark Fed Funds interest rate from 2% to a range of 0% to 0.25%, having already cut it from 5.25% in August of 2007. Simultaneously, the Fed introduced Quantitative Easing (QE) for the first time in the US, surging its balance sheet from roughly $935 billion at the start of September to $2.25 trillion by early December, a $1.325 trillion jump in just barely three months. Together, the rate cutting and money printing (QE) spree during the Financial Crisis represented the biggest policy accommodation that the Fed had ever delivered, by far.
The reason for the historic stimulus was that a bad recession, already a year long, was cascading into the biggest systemic financial crisis since the Great Depression. Excessive debt, over-financialization, and reckless risk management had come home to roost. Lehman Brothers failed in October and, to prevent other failures, taxpayer bailouts were doled out to all of the largest banks and financial institutions in the US.
The Fed’s balance sheet would remain at or below $2.25 billion for the balance of the Financial Crisis and recession, only resuming growth via QE2 and QE3 after the US economy was already in recovery.
Fast Forward to Today
In just the last week, the Fed has cut its benchmark rate from roughly 2.25% to a range of 0% to 0.25%. It has also announced a dizzying expansion of its balance sheet. Beyond the $60 billion-a-month ‘Not-QE’ program that the Fed has been running since mid September, which has already swelled the Fed’s balance sheet by roughly $360 billion, the Fed has formally launched ‘QE5.’ Through this new QE5 program, the Fed will buy “at least” $500 billion of Treasuries and “at least” $200 billion of Mortgage Backed Securities (MBS) over “the coming months.”
In addition to the “at least” $175 billion overnight repo facility and the “at least” $45 billion two-week repo facility that the Fed has had on offer since since mid September, the Fed offered a $500 billion three-month repo facility on March 13th. It also announced an additional $500 billion three-month repo and $500 billion one-month repo offering every week for a month. That equates to a theoretical maximum $4.5 trillion expansion of the Fed’s balance sheet over the coming month via just these new repo facilities. So far, only $119.5 billion of the offered repos have been taken, but that number will rise as the month progresses. Keep in mind that two weeks ago, the Fed’s entire balance sheet was ‘just’ $4.1 trillion.
Time will tell how much of the Fed’s repo offerings get filled and exactly how fast its balance sheet will grow. However, between its new $700 billion QE program and these repo offerings, it is a safe bet that the pace of money printing will be substantially faster than the $1.325 trillion response to the imminent failure of all of America’s major financial institutions back in 2008.
The actions taken by the Fed during the Global Financial Crisis were taken a year into a deep recession and during the collapse of the entire global financial system. Today’s actions are being taking within weeks of all-time highs in stocks based on the premise that the current outbreak will get worse and that it may cause a financial crisis. While that is entirely possible, perhaps even probable, the Fed has now expended all of its conventional policy tools before we even get into a recession and, at the time of writing, markets are unimpressed. Both the Dow and S&P 500 futures markets are limited down at -5%.
Too bad central banks like the Fed never got around to meaningfully restocking their policy tool chests during the last decade’s record long expansion.
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