JPMorgan Capitulates: “One Could Perhaps Pedantically Argue That This Is QE”

We were right again.

On Jan 24, we wrote an article titled “The Debate Is Over: In Two Months “Not QE” Officially Becomes QE 4,” in which we wrote that by the March 18 FOMC meeting, “the Fed will need to reduce its “demand burden” on the bill market, i.e., there won’t be enough Bills available for the Fed to monetize without it distorting the market, and will extend the purchase program to include short coupons in the process officially ending any debate whether the Fed’s manipulation of the market under the guise of saving repo, is “Not QE”, because it is limited to Bills and thus no duration is taken out of the market, or is “QE 4″, in which the Fed purchases at least some coupon securities in addition to Bills.”

Not only were we right, but the transformation from Not QE to QE-4 (or QE-5, depending on how one counts), took place one week ahead of the FOMC meeting, when today as part of its massive, $1.5 trillion (with a maximum capacity of $5 trillion per month) bazooka in response to the bizarro moves in the Treasury market, the Fed announced that it would – as we predicted – expand its POMO from just Bills to all securities across the fixed income spectrum, including Treasury Inflation-Protected Securities, Floating Rate Notes and, you guessed it, nominal coupons.

And just like that Not QE has become QE-4, as even JPMorgan – which for the longest time was arguing to anyone who bothered to listen that Not QE is not QE 4 and would not become QE 4 – was forced to admit today.

Here is JPM’s Michael Feroli admitting “since today’s announcement moves those purchases further out the curve one could perhaps pedantically argue that this is QE.” Those damn pedants.

This afternoon the Fed took two liquidity measures to support financial market functioning. The first was to redistribute its current $60 billion a month reserve management purchases of T-bills across the curve (including TIPS and FRNs) over the next month. The second was to conduct three $500 billion tranches of term repos (two for 3-months, one for 1-month) today and tomorrow. These actions were taken to address dislocations in funding markets that were impairing Treasury market functioning.

These actions are not designed to provide further economic stimulus. If the Fed wanted to provide such stimulus then it would have lowered the federal funds rate from its current 1.0%-1.25% target range. Whereas the Fed’s bill purchases were clearly not QE, since today’s announcement moves those purchases further out the curve one could perhaps pedantically argue that this is QE. Even if one bought this argument, the total size of purchases—$60 billion—is trivial compared to each of the Fed’s large-scale asset purchases.

Moreover, it would be inaccurate to describe the $1.5 trillion in repo operations as “money pumped into the system” as it is a temporary swap of reserves for government securities which will be unwound in one or three months’ time. We may well be approaching the point when the Fed turns to genuine QE (or large-scale asset purchases), but that won’t happen until the Fed sets the funds rate to zero, which should be next Wednesday at the latest.

Transaltion – the head JPM economist was wrong again, but we will give him some credit: Feroli – whose firm was pushing his clients into stocks as recently as two days ago – is right about one thing: genuine QE, or whatever the “non-pedants” want to call it, is coming as soon as next week, and if Yellen has her way and she will, – it will also include stocks and ETFs.