- Powell Vs Poszar: Here Is What The Fed Chair Said About A Possible Repo Doomsday
by Tyler Durden, https://www.zerohedge.com/
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 any time soon, if ever, while observing the stabilization in the US and global economy and confirming monetary policy is on “autopilot”, so to speak, into 2021 while being flexible to respond to downside risks (i.e., it will cut rates as soon as markets drop), what traders were most 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 suggestion that the shortage of reserves could spark a QE4 in the next few days.
Not surprisingly, Powell was subdued – as the alternative would be to spark even more concerns that the Fed is worried about repo – and said that repo operations have “gone well so far” and “pressures in money-markets in recent weeks have been subdued.”
The Fed chair surprised markets saying that the Fed is also open to Coupon purchases, although for now it is more focused on the bill purchases as the current regime of bill purchases is going well and according to expectations.
“We’re not at this place, but if it does become appropriate for us to purchase other short-term coupon securities, then we would be prepared to do that if the need arises,” he said at his post-decision news conference Wednesday. The Fed is “willing to adapt” its strategy on bill purchases.
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.
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.