Saturday, October 12, 2019

News Note: Federal Reserve to Scrub the System with SOAP

At the end of September the Federal Reserve started new operations with Repos in response to an apparent liquidity shortage. At that time, these operations were described as "temporary" and we ran this news note about it here.

Dr. Judy Shelton has tracked the progression of this situation on her Twitter feed by noting new announcements about the extension of this policy further and further. As these new operations expanded and the time frame was extended, people began describing this as a new QE (Quantitative Easing) policy emerging from the Fed. It seems that Fed Chairman Jerome Powell did not like that kind of talk so he made it clear that in no way should we view these new operations as a new QE program. Jim Rickards posted this on his Twitter feed indicating that despite his protest to the contrary, the Fed is engaging in QE in his view. 

Now we have this latest article by Jeff Cox appearing on CNBC to describe how this new Fed policy to "expand its balance sheet" will work. Since the Fed does not want anyone calling this new policy QE, the article quotes George Selgin of the Cato Institute as coining a new term for it. He is calling this new policy "Supplementary Organic Asset Purchases" or SOAP for short. So please keep in mind, the Fed is absolutely not implementing QE, but will instead be using "SOAP" to clean things up in the messy overnight lending markets. Below is an excerpt from the CNBC article. 


"Ultimately, what the operation is called will matter less than how it is executed and communicated.

“In some sense it doesn’t matter why they’re doing it or what they call it. What matters is that they are creating base money and expanding their balance sheet, and those repercussions aren’t going to depend on what they call it,” George Selgin, senior fellow and director of Cato’s Center for Monetary and Financial Alternatives, said in an interview.

“There is an important issue of public perception here,” he continued. “I suppose calling it QE would give people the impression that the Fed is fighting a recession again, or thinks it is fighting a recession again, and trying to create a positive stimulus for the economy. Neither of these things is true. Their concern is trying to avoid the cash shortages that are causing rates to rise above their target.”

. . . . 

"Selgin, in fact, coined his own term for what is ahead: “Supplementary Organic Asset Purchases,” or SOAP. Fed officials have stressed the “organic” nature of balance sheet growth as opposed to QE."

. . . .

“The Fed is learning that it’s not so easy as they thought to keep the banking system as a whole flush with reserves,” Selgin said. “We may end up seeing SOAP 1, SOAP 2 or SOAP 3.”

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