CNBC: The Fed Will Be Growing Its Balance Sheet Again, But Don't Call It 'QE4'

Article by Jeff Cox in CNBC financial

In the days, weeks, months and probably years ahead, the Federal Reserve will be conducting operations that look and sound a lot like what it did to pull the economy out of the financial crisis.

However, the process this time around will be different in the details.

Where the Fed under the quantitative easing of a decade ago was buying assets to pull the economy out of the Great Recession, this time it will be looking to meet demand for cash as it tries to calibrate the proper level of reserves that banks need.

It’s an important distinction as markets recover from a recent liquidity crunch that was reminiscent of those dark days more than a decade ago. 

Last week, overnight repurchase, or repo, markets froze up and sent short-term yields soaring, a move that included the benchmark funds rate trading out of the range that the Fed’s trading desk targets.

The Fed is in the process now of conducting overnight repurchase, or repo, operations to make sure that funding for overnight loans stays constant and the funds rate trades within its targeted range of 1.75%-2%. In announcing the program, officials noted that the last time such a process happened was 11 years ago, amid the dark days of the crisis when liquidity dried up and caused a panic on Wall Street.

The similarity has not gone unnoticed.

“Anytime you have anything juxtaposed to 2008, it tends to cause anxiety. What it did was suggest that the Fed doesn’t have a handle on this,” said Quincy Krosby, chief market strategist at Prudential Financial. “They weren’t able to foresee this. That said, if they could come up with a facility for this, the issue will dissipate as a source of concern.”

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