‘Repo icon’ admits Fed's failure
Zoltan Pozsar calls for urgent action to avert dollar crisis
Zoltan Pozsar, one of the most trusted commentators on central bank policy in the world, has admitted in his most recent “Global Money Note” for Credit Suisse that: “The Fed’s liquidity injections appear not to be working.”
The US financial system has experienced liquidity problems since Autumn 2019, which the Federal Reserve Bank of New York tried to fix by injecting hundreds of billions of dollars (USD) in repo operations.
There was uncertainty at the start of 2020 as to whether the crisis had been averted or simply delayed. With the novel coronavirus outbreak wreaking havoc on global markets, compounding pre-existing liquidity issues, it now appears to be the latter.
In his previous note a fortnight ago, Pozsar argued the Fed should “combine rate cuts with open liquidity lines that include a pledge to use the swap lines, an uncapped repo facility and QE if necessary.”
All three recommendations have since become a reality, but did little to restore market confidence or stability. On Monday US markets suffered their third worst day on record, followed by strong Tuesday gains.
With the Federal Reserve Bank of New York injecting a further $1tn in overnight repos on Monday and Tuesday, on top of last week’s $1.5tn injection, the liquidity crisis appears to be intensifying and the primacy of the dollar increasingly threatened.
JPMorgan for one, has discussed the possibility of a major dollar margin call, owing to a short of the global reserve currency around the world, which has doubled since 2008 and now stands at $12tn, or 60 per cent of US GDP.
To fix or at least limit the ongoing issues and potential margin call meltdown, Pozsar argues that the Fed should grant access to every global entity that needs dollars.
“The Fed needs to broaden access to the swap lines to other jurisdictions as dollar funding needs are large in Scandinavia, Southeast Asia, Australia and South America, not just in the G-7. The dollar funding needs of both banks and non-banks is what’s at risk and the assets that are being funded are US assets – Treasuries, MBS and credit – so the Fed has a vested interest.”
Stressing the gravity of the situation, the former NY Fed staffer, observed: “It's now time for the Fed to do the same globally with other central banks and for those central banks to lend broadly – after all what is at stake here is the funding of US assets.”
With the Federal Reserve seeming to have followed Pozsar's previous suggestions, such a dramatic intervention is by no means off the cards.
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