Nordea Markets analysts suggest that stress in the US repo markets since mid-September tells the Fed that the balance sheet normalisation or Quantitative Tightening (QT) has gone too far, prompting Fed Chair Jerome Powell to announce that excess reserves will be returned to near the early September level and kept there as a new normal after which the Fed’s balance sheet will grow organically. Key Quotes “What the repo stress is telling the Fed The Fed lost control of short-term interest rates in mid-September and thus effectively lost its ability to implement monetary policy. Temporary factors play a role, but a more structural question needs to be answered at the October FOMC meeting: What is the appropriate level of excess reserves?” “The “new normal” The Fed has moved from QE to QT to a constant balance sheet, but a new normal for excess reserves has not been established. Changes to the Fed’s bond holdings have received much more attention than the consequent implications for liquidity, and keeping bond holdings constant is not enough to prevent liquidity shrinkage. This is important to understanding the Fed’s October decisions.” “Important decisions ahead The Fed will address the excess reserve issue at the October FOMC meeting. We expect liquidity injections in November, after which excess reserves should be held constant and the balance sheet should grow “organically”. A standing repo facility might be the best long-term solution, but the Fed will likely wait to implement it.” “Market implications So far, the Fed looks too reactive on USD liquidity for us to really consider this liquidity addition as a big game changer for our pretty bearish market view. The Fed may dance to another liquidity tune, however, if and when the outlook worsens more in Q1 2020.” FX Street FX Street FXStreet is the leading independent portal dedicated to the Foreign Exchange (Forex) market. It was launched in 2000 and the portal has always been proud of their unyielding commitment to provide objective and unbiased information, to enable their users to take better and more confident decisions. View All Post By FX Street Forex News Today: Daily Trading News share Read Next The cryptocurrency market resumed the decline again – a pause before another bull’s assault? FX Street 4 years Nordea Markets analysts suggest that stress in the US repo markets since mid-September tells the Fed that the balance sheet normalisation or Quantitative Tightening (QT) has gone too far, prompting Fed Chair Jerome Powell to announce that excess reserves will be returned to near the early September level and kept there as a new normal after which the Fed's balance sheet will grow organically. Key Quotes "What the repo stress is telling the Fed The Fed lost control of short-term interest rates in mid-September and thus effectively lost its ability to implement monetary policy. Temporary factors play a role, but… Regulated Forex Brokers All Brokers Sponsored Brokers Broker Benefits Min Deposit Score Visit Broker 1 $100T&Cs Apply 0% Commission and No stamp DutyRegulated by US,UK & International StockCopy Successfull Traders 9.8 Visit Site FreeBets Reviews$100Your capital is at risk. 2 T&Cs Apply 9.8 Visit Site FreeBets Reviews$100Your capital is at risk. 3 Recommended Broker $100T&Cs Apply No deposit or withdrawal feesTrade major forex pairs such as EUR/USD with leverage up to 30:1 and tight spreads of 0.9 pips Low $100 minimum deposit to open a trading account 9 Visit Site FreeBets ReviewsYour capital is at risk. 4 T&Cs Apply Visit Site FreeBets ReviewsYour capital is at risk. 5 Recommended Broker $0T&Cs Apply Trade gold, silver, and platinum directly against major currenciesUp to 1:500 leverage for forex trading24/5 customer service by phone and email 9 Visit Site FreeBets ReviewsYour capital is at risk.