Powell Vs Poszar: Here Is What The Fed Chair Said About A Possible Repo Doomsday
While Powell’s remarks were generally in line with expectations, accentuating the slack in the labor market as a reason why the Fed will not be hiking rates any time soon while observing the general stabilization in the US and global economy and confirming monetary policy is generally on “autopilot” into 2021 while being flexible to respond to downside risks, what markets were mostly interested in were Powell’s comments on the repo market in the aftermath of the Zoltan Poszar repo “doomsday” blockbuster. In fact, there was a question in the Q&A in which a reporter specifically asked what if anything the Fed is thinking about the speculation that the shortage of reserves could spark a QE4 in the next few days.
Not surprisingly, Powell was quite subdued – as the alternative would be to spark even more concerns that the Fed is worried about repo – and said that while the Fed is open to Coupon purchases, it is more focused on the bill purchases, the year-end, and the review of supervisory and regulatory issues.
As an aside, Powell’s veiled hint that the Fed may shift to Coupon purchases, effectively transforming NOT QE into QE 4 is what sparked a buying spree across the curve, also sending the dollar to session lows.
And while Powell said that the repo market have been contained in recent months, he added cryptically that the “purpose is not to eliminate all volatility in the repo market”, which is odd considering it is the Fed’s purpose to eliminate all volatility in the equity, bond and FX markets.
Commenting on the Fed Chair’s response, Bloomberg rates strategist Ira Powell said “Powell acknowledged that the Fed is open to looking at tweaks to help ease repo funding markets. The Fed is going to keep using current operations until after year end.”
What we found more interesting is what Curvature’s repo expert, Scott Skyrm said about Powell’s commentary on repo, which we present below:
Here is what I heard it when Chairman Powell was asked about the “Repo event” and year-end:
- According to the Chairman, the Fed has the tools to accomplish their goals and they will use them. They stand ready to keep fed funds within the target range and they are prepared to adjust operations as appropriate.
- The Chairman stressed that there is a plan is in place and the “repo markets are functioning well.” Temporary upward pressure is not unusual and the pressure is manageable.
- Those are all the positive statements at the press conference in reference to year-end and Repo.
- These are a little less positive: Powell stated that the “goal is not to eliminate all volatility from the Repo market.” and there will be a “time for overnight and term repo to gradually decline.”
In other words, Powell echoed the general market consensus that just because nothing bad has happened to the repo market since September, that things are under control and there is nothing to be concerned about, and certainly no need to intervene proactively. Which means that Pozsar’s worst case scenario is effectively greenlighted, one in which the Fed will have to react to turmoil in the market if and when the reserve shortage strikes in the coming days. As for whether the Credit Suisse strategist is correct, earlier we laid out the two key things to watch into year end to see if the doomsday prediction is coming true.
So who will be right: Powell or Poszar? The answer will be revealed in the coming days.
Wed, 12/11/2019 – 15:59