Jan 10, 2020

The Fed plans to keep pumping cash

Dion Rabouin, author of Markets

Illustration: Aïda Amer/Axios

The New York Fed added $83.1 billion in temporary liquidity to financial markets Thursday, and the U.S. central bank looks primed to keep pumping cash for at least the next few months.

Why it matters: The stock market's 30% gain in 2019 was in no small part backed by the Fed's decision to cut U.S. interest rates three times and inject more than $1 trillion of temporary financing into the repo market. It also added more than $400 billion to its balance sheet in the fourth quarter.

What we're hearing: Fed vice chair Richard Clarida told an audience assembled at the Council on Foreign Relations Thursday that the Fed was prepared to continue adding to its balance sheet and providing liquidity to the repo market "at least through April."

  • Clarida told me after the event he was not concerned markets could be taking advantage of the so-called "Powell put" — the belief that the Fed and chair Jerome Powell are using the cash to stimulate the economy or that they will cut rates to juice the stock market if prices fall significantly.
  • "We realize that sometimes we’ll be criticized for it, but it’s not a factor driving our decisions," he said. "We have a very clear mandate, and are focused on what we need to do."

What they're saying: Clarida's speech was "music to the ears of traders and investors who have profitably ridden a liquidity-driven rally that has allowed them to quickly overcome a set of shocks, including the latest one, the sudden escalation of the U.S.-Iran conflict," Mohamed A. El-Erian, chief economic adviser at Allianz SE, wrote in an opinion piece for Bloomberg.

What's next: While Clarida pointed to April because of Tax Day, analysts who watch the market closely expect the Fed to keep delivering cash for even longer.

  • Priya Misra, head of global rates strategy at TD Securities, a primary dealer that does business directly with the Fed, told Axios she expects the central bank to add $100 billion–$200 billion more in reserves and continue its Treasury bill buying through July to about $500 billion.
  • In a note to clients, she added that she expects the Fed's balance sheet to move above $4.4 trillion this year, near its all-time high.

Go deeper: The market will need the Fed again in 2020

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