The US Federal Reserve’s quantitative easing programme will end in December without causing major market disruption, analysts at Barclays said in a recent note.
As they point out, this is in stark contrast to the abrupt end of quantitative easing in 2019, which caused a financing shock. The analysis released by Barclays highlights the measures the Fed has implemented to avoid repeating previous mistakes and ensure a smooth transition.
Barclays noted that “the Fed continued its quantitative easing policy for too long in 2019. It did not have a good sense of banks’ preferred levels of precautionary liquidity, and focused too closely on developments in the federal funds market.”
This time, the Fed is taking a more cautious approach. The central bank has expanded its monitoring of funding conditions and begun to taper its quantitative easing program, with reserves remaining above $3.4 trillion. Moreover, central clearing and the permanent repo facility provide additional safeguards against a funding shock similar to the one that occurred in 2019.
Many of the indicators that pointed to market stress in 2018-19 are now up. Hedge funds have similar levels of long positions in leveraged Treasuries, and traders’ balance sheets are packed with record levels of Treasury holdings.
Now, Barclays believes that the Fed’s preparations and proactive measures will ensure a smooth end to the QE crisis.
“We believe there are two factors that point to a cleaner end to QT this year,” the analysts wrote.
“First, the Fed appears to be paying more attention to markets and conditions outside the federal funds market,” analysts say.
The second factor that has contributed to Barclays’ confidence is the expansion of supported repo activity and central clearing since 2020. These measures have significantly increased the capacity of merchants’ balance sheets through clearing.
“Supported repos – and central clearing in general – are expanding merchants’ balance sheet capacity through clearing. Sponsored repos (long and short) exceed $1 trillion and have more than doubled since 2019,” the report asserts.
In short, Barclays expects the Fed to end the QT period in December “without a whimper” and “well before signs of stress appear in the federal funds or repo market.”
