Zoltan! Underpriced Repo Risks May Push Fed Toward QE4, Zoltan Says


(Bloomberg) Funding markets are underpricing the risk of renewed turmoil at year-end and the Federal Reserve may be forced to embark on a fresh round of quantitative easing to relax constraints.

That’s the view of Credit Suisse analyst Zoltan Pozsar, who said in a note Monday that the upcoming year-end is “shaping up to be the worst in recent memory.”

The Fed has been conducting repurchase-agreement operations and Treasury-bill purchases in a bid to keep control of short-term interest rates and bolster bank reserves into the system. And while that has calmed markets since the September spike that took overnight repo rates as high as 10%, concerns about the year-end period remain and participants have been flocking to Fed term offerings that will carry them through to January.

If the Fed loses control of overnight rates in the weeks leading into year end, Pozsar said the central bank’s options could include a fourth round of QE, which would involve switching from bill buying to purchases of coupon-bearing debt. It could also encourage foreign central banks to use foreign-exchange swap lines, he said.

The repo market, which relies heavily on just four big U.S. banks for funding, was upended in part because those firms now hold more of their liquid assets in Treasuries relative to what they park at the Federal Reserve, officials at the Basel-based institution concluded in a report released Sunday. That meant “their ability to supply funding at short notice in repo markets was diminished.”

Here is CB excess reserves and all CB holdings of Treasuries and Agency Securities.


Will The Fed force commercial banks to reduce excess reserves? 

Or let “Greenspan’s ghost” haunt the financial market?


Thanks to Jesse of Cafe American for his great imagination!

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