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QE: the Fed’s $3 trillion headache

The US Federal Reserve has been clear that its policy of quantitative easing will only change when the data on unemployment and inflation changes. Meanwhile pressure from this policy is building in the banking sector, as well as the treasury and repo markets. As bank chief executives prepare to make their case to the Senate banking committee, is it time for Fed chair Jerome Powell to think again?

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US Federal Reserve chairman Jerome Powell. Photo: Reuters

The problem with QE infinity is that it goes on for rather a long time. As a result, large US banks now face an existential crisis due to the volume of bank reserves the US Federal Reserve is creating as part of its monetary policy response to the Covid-19 crisis.

The chief executives of JPMorgan, Goldman Sachs, Citi and Morgan Stanley are now busy preparing for this week’s hearings of the Senate banking committee on Wednesday and the House financial services committee on Thursday. They will be struggling to adequately convey the stress being put upon their institutions by the more than $3 trillion of bank reserves created by the Fed in 2020.

As the intense pace – $120 billion a month – continues, Fed chairman Jerome Powell maintains it is still too early to even talk about tapering.

This wall of deposited liquidity means that the banks must issue billions in bonds and preferred equity to try to stay within their supplementary leverage ratios (SLRs).

This has been made much harder by the expiration in March 2021 of the exemption on including US securities and deposits held at Federal Reserve banks in banks’ total leverage exposure.


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Rob Dwyer is Latin America Editor. He has been a financial journalist since 1997 and has worked in London, New York and Sao Paulo, Brazil, where he is now based.
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