Holy moly, what a mess. But here is our hilarious cartoon of Jerome Powell tearing out his hair. Gotta keep you sense of humor.
Sunday at 5 p.m., the frazzled Fed announced in a statement that it slashed its policy interest rate by a full percentage point, to a target range between 0% and 0.25% for the federal funds rate and that it “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
It also slashed by a full percentage point to 0.25% the interest rate at its discount window, where banks can borrow from the Fed directly.
It also slashed the Interest on Excess Reserves that it pays the banks for parking their cash at the Fed to 0.10% effective Monday. In 2019, the Fed paid the banks $34 billion in interest on reserves – which is pure income for the banks. This income for the banks is now near zero going forward.
In the press conference following the announcement, Fed Chair Jerome Powel said for the umpteenth time that the Fed doesn’t see negative interest rates as appropriate – and that’s a good thing for the banks, because bank stocks have collapsed to multi-decade lows in negative-interest-rate Europe.
And while he was at it, Powell said that the FOMC meeting that was supposed to take place this Tuesday and Wednesday had been cancelled.
The also Fed announced $700 billion in QE-4 or QE-5 or whatever, promising to increase “over coming months” its holdings of Treasury securities by “at least” $500 billion and its holdings of mortgage-backed securities (MBS) by “at least” $200 billion. In the Implementation Notes, it specified that the Desk “conduct these purchases at a pace appropriate to support the smooth functioning of markets for Treasury securities and agency MBS.”
And that Treasury market had gone haywire. The 10-year Treasury prices fell all last week, with yields tripling in five days, from a historic low of 0.32% Monday morning to 0.98% late Friday, having briefly hit 1.02%. And for the Fed that’s scary.
Upon the panicked Sunday afternoon announcement by the Fed, S&P 500 futures plunged 5% to hit limit down, and for now remained stuck at the limit down, which might make for, let’s say, an interesting Monday morning:
The whole Sunday afternoon maneuver, on top of the mega shock-and-awe maneuvers last week reek of sheer and outright panic – and they’re the opposite of being confidence inspiring. That stock futures plunged after the Fed had effectively put its biggest tools to work shows how obvious this panic is.
Here is Fed Chair Jerome Powell, upon seeing with his own eyes the plunge in the stock futures, as envisioned by cartoonist Marco Ricolli, exclusively for WOLF STREET:
The Sunday afternoon surprise announcement comes on top of the mother of all money-printing repo-market and Everything-Bubble surprise shock-and-awe bailouts that it had announced and kicked off on Thursday during afternoon trading hours: A series of $500-billion term repos at least through April 13, amounting to $4.0 trillion in new money over the four-week period. Of this, it offered $500 on Thursday, and two $500 billion repo operations on Friday, for a total offer of $1.5 trillion. But hardly anyone showed up to get this repo cash.
On Thursday, of that $500 billion three-month repo cash offered, only $78.4 billion were taken. On Friday, of the $500 billion in three-month repo cash, only $17 billion were taken; and of the $500 billion in one-month repo cash, only $24.1 billion were taken. In total, of the $1.5 trillion in cash offered through these three term repo operations, only $119.5 billion were taken – just 8% of the total the Fed had offered.
In addition to this fizzled $1.5 trillion in repos offered on Thursday and Friday, the Fed will also offer $500-billion in one-month repos and $500 billion in three-month repos per week through April 13, as announced on Thursday. But, given what happened on Thursday and Friday, it seems unlikely there will be enough demand for this cash.
These mega programs are on top of the smaller repo operations, the overnight repos that unwind the next day of up to $175 billion, and the $50-billion one-month repo on Thursday, and the twice-a-week $45 billion two-week repos, and the $60 billion a month in QE, now including Treasuries of all kinds and maturities.
These unprecedented measures show just how panicked the Fed has become about liquidity in the market, about the banks, about the Treasury market, about the repo market, and generally about the Everything Bubble that it had spent a decade inflation so assiduously.
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