One Year Later, the Fed Is 12 Million Jobs Short
(Antti Aimo-Koivisto/Lehtikuva via AP)
One Year Later, the Fed Is 12 Million Jobs Short
(Antti Aimo-Koivisto/Lehtikuva via AP)
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It was a Sunday, but no ordinary end to that particular weekend. There was much to be done before the workweek could begin the following morning. At 5 pm in the Eastern time zone of the US, on March 15, 2020, the Federal Reserve finally issued its statement. The central bank’s policymaking body, the Federal Open Market Committee, or FOMC, had decided it couldn’t wait any longer and that drastic action needed to happen – even on a late Sunday afternoon.

The dry policy statement issued meant very little; the usual boring nonsense about how staff models are looking at inflation and the labor market. The real stuff, supposedly, came in the accompanying implementation note released concurrently. Encouraging banks to use Primary Credit (what used to be called the Discount Window). Cut in price on overseas dollar swaps. Massive new QE, at least $500 billion in Treasury purchases in addition to $200 billion MBS.

The big “bazooka” of monetary shock and awe.

In anticipation, the S&P 500 big cap stock index had surged the Friday before, March 13. Late on that particular afternoon buyers suddenly emerged from their bear market goring on whispers of big things in DC driving the index up from around 2540 late in trading to a close well above 2700. Even Wall Street believed Jay was late to the massacre – better than never, equity buyers reasoned.

Yet, on Monday morning, March 16, bloodbath. The big bazooka wasn’t just a dud, it had turned out to be another dud in a whole series of them. As the stock market selloff got bigger (and it wasn’t just stocks, that’s just the market the public has been told to pay attention to), so, too, had the “rescues” from Washington.  

The S&P 500 opened at just above 2400, rising somewhat during the day and at the final bell eventually less than its open. Close to close, the loss was 11.98%; the worst single day since the Crash of ’87.

While shares bounced on March 17, there was still another collapse waiting on Wednesday, March 18 – this one more than 5% and yet another entry on the thin list of Wall Street’s worst sessions. Where was the QE-love?

What made the first three weeks of March 2020 so absurdly ridiculous wasn’t the COVID-driven shock behind everything, rather it was what Federal Reserve Chairman Jay Powell said two months later. In trying to resurrect the tattered Greenspan put, Powell donned his best Bernanke act and attempted to rewrite history; recent history.

On May 13, Powell sat down for an interview with 60 Minutes correspondent Scott Pelley (the segment aired on Sunday, May 17). Asked specifically about the wild, turbulent, and destructive weeks of earlier March, Pelley at least framed his question properly given the actual circumstances. Yet, Powell teed it up anyway:

“PELLEY: But I’m curious about that moment for you personally. When you were sitting in your office, through that door over there, and you were watching your Bloomberg Terminal and the world was coming apart, what did you say to Jay Powell?

“POWELL: Well, what’d I say to me? You know it didn’t happen. It wasn’t a light switch being flipped. So we saw it coming. And we had been thinking about what we would do.” [emphasis added]


Since before the first global dollar shortage, or GFC, in 2008, what the Federal Reserve had done for its monetary policy was summed up by the movement of a single money market rate target: federal funds. This had proved wildly ineffective during that first run a dozen years before, policymakers thinking lowering the target (a lot) would equate to powerful stimulus enough so as to undo the drastic damage then being done.

The fact that it never once did meant, on a policy level, interest rate targets nowadays take a back seat; lowering the fed funds range (it’s now a range because there was quite a lot exposed back then about what the central bank doesn’t understand) becomes an afterthought, loaded into the bazooka with the QE’s, overseas swaps and such, the far less awesome and shocking part of the intended effect.

Yet, revealing nonetheless because rate cuts though secondary are completely reflexive. Somehow, it wasn’t until March 15, on that Sunday, the FOMC finally got around to bringing back ZIRP.

And it wasn’t like authorities had executed a whole series of rate cuts beforehand. In fact, there would end up being just two which together dropped the target range a collective 150 bps down to the zero lower bound. The first one happened on March 4, the fed funds lower limit set at 1% throughout most the crisis the FOMC had been anticipating?

Of course, stocks greeted the first cut (50 bps) with a resounding cheer; the S&P 500 index gaining an impressive 4.2% the day it was announced; only to give back 3.4% on March 5, another 1.7% on March 6, and then 7.6% on March 9.

During those earlier liquidations and fire sales, the Fed had been busy with other things besides the one 50 bps rate cut. On March 9, policymakers announced they would raise the ceiling for their “repo” operations (remember those?) to $150 billion – even though, by then, the banking system wasn’t even bidding much for them.

On March 12, Powell offered even more repo ops! Short-term operations were extended, while not one, not two, but three longer-term auctions would be conducted starting the following day for a total of half a trillion. And, just to puff it all up a little more, the Fed admitted that its not-QE (remember that?) – which, like the original repo operations, had been ongoing since the prior October therefore in effect and raising the level of bank reserves the entire time purchasing exclusively T-bills – would have to start buying coupons, too.

The S&P 500 finished trading on March 12 down a stunning 9.5%, even after it had declined nearly 5% the day before, March 11.

Only by March 15, the following weekend, did ZIRP and the big bazooka show up – and neither of them ended the fire sales.

“It wasn’t a light switch being flipped. So we saw it coming. And we had been thinking about what we would do.”

The more the Fed did, the less effect it seemed to have because, again, it wasn’t just stocks that were being forced into liquidation. What did the Fed actually do?

What it always does; like 2008, it raised the level of bank reserves. All of the programs and transactions listed above relate to the central bank’s only policy lever, which is either the short-term money rate or the quantity of bank reserves. And while that may sound like two different things, at least, they are functionally equivalent (by lowering the target to zero, for example, the Fed is actually pledging to create and maintain whatever level of bank reserves necessary to achieve it).

In fact, the reported level of systemic bank reserves had increased by $269 billion in the three weeks between February 26 (reporting date) and March 18; a whopping 16.5% addition that rivaled the same sort of increase undertaken in September and October 2008 (notice how, now twice, during the worst monetary crises of the last near century the level of bank reserves rises precipitously anyway to no avail).

At the same days – at the very same times – that stocks were being pummeled, Treasury bill yields would likewise plummet. Not, obviously, due to fire sales, these were buying panics springing up especially during early morning hours which would have nothing to do with “abundant” or “too many” reserves.

For example, on March 12, with the RRP still matched to the fed funds lower limit then pegged at an even 1%, the 3-month Treasury bill equivalent yield collapsed during Asian trading hours. It had been 36 bps to close the day before, March 11, already a ridiculous 64 bps below the so-called RRP floor, but by opening in New York with stocks in freefall the yield began the regular session all the way down to nearly 20 bps.

Like the first time this had happened a dozen years before, it was pretty obvious then that policymakers didn’t see it coming nor were they equipped to handle whatever ultimately had really happened. Bank reserves, sure, but like experience in repo during 2019 what good did they do? Once again, under scrutiny, it had been plainly obvious something, and something big, remains missing from the policy (and global market) agenda.

To draw attention away from the fact, Jay lied on 60 Minutes for what he’d say was the best, most virtuous of reasons: to restore calm by attempting to rewrite history such that it might restore faith in the regime we are all taught from the very beginning of Econ 101. That Greenspan put thing-y.

Some have come to believe just that anyway – after all, central bankers have said, despite all that turmoil in stocks and whatnot there hadn’t been a single failure big nor small. Claiming this as a standard for performance, the lack of Lehman as evidence, purportedly, of effective rescue.

And with stocks breezing to limits, new record highs, seemingly easily in its aftermath, who is to argue? Jay the Money Printing Hero!

How about banks, for one?

To begin the following month, on April 1, 2020, the Federal Reserve announced another crisis measure, this time exempting large bank holding companies from the full weight of the Supplementary Leverage Ratio (SLR). This metric’s purpose is to incorporate the sum total of all balance sheet mechanics in a way its predecessor capital ratios had been unable.

But with the Treasury Department about to auction ungodly bogs of T-bills (and then notes and bonds) because of the CARES Act, and the Fed’s QE-on-steroids increasing bank reserves even more, both of those assets (for banks) were granted temporary exclusion from the SLR calculation for a period of one year.

In practice, the SLR, essentially, makes balance sheets more expensive to operate (from the bank’s point of view). I won’t get into its details here except to note that it imposes increased costs in terms of holding capital, liquid assets, while encumbering both depending upon balance sheet size and other dimensions.

In the wake of March 2020, absorbing both bank reserves and UST’s being sold meant, for the system as a whole, a sizable increase in leverage therefore SLR – even if that leverage was being taken on using the safest, most liquid forms of assets available.

The SLR exemption, as I’ve explained recently, is scheduled to expire in about two weeks. That means, in the mainstream explanation, how bank balance sheets “bloated” with bank reserves and T-bills, maybe even notes and bonds, are scheduled to become relatively more expensive – unless the Fed extends the exemption.

This SLR “cliff”, however, doesn’t really mean what it’s said to mean; what I mean is that if it is real, and there is recent evidence that it is, the way the banking system is behaving drawing closer and closer can only be taken as a sign of what really happened last March during the crisis (the opposite, then, of we saw it coming).

Stocks may have made a full recovery, but banks like the economy (especially the labor market) have not. For that to happen outside of just Wall Street requires – at minimum – money therefore balance sheet expansion meaning risk taking.

What the SLR cliff is exposing is the extreme reluctance of the banking system to do that very thing; they are indicating that they won’t even hold Treasuries and bank reserves, the safest most liquid assets, at these higher balance sheet costs! Because doing so, in two weeks, would raise their SLR and likely above regulatory thresholds, the banking system is rejecting those costs because why?

The returns aren’t worth the effort. Normally, and what central bankers ideally want to see, is that if low returns on safe and liquid assets aren’t enough for given balance sheet budgets then the banking system should seek out better, more profitable opportunities elsewhere (portfolio effects).

Except, banks do so on a risk-adjusted basis.

When UST’s are “too much” for slightly elevated balance sheet costs, in several forms (including, again, encumbering those same assets, removing them from repledging chains and collateral pools), such obvious risk aversion sticks out far more than attributed selling in long end US Treasury notes and bonds recently.

An unappreciated legacy of what really happened last year.

If the overall US and global economy failed to recover in the wake of the first GFC experience, March 2020 worked out to another really unneeded reminder as to the flaws which remain in the system – beginning with the vast difference in usefulness between bank reserves and T-bills, for one. The lack of labor market recovery, rather than strictly COVID protocols is another key signal for deflationary illiquidity in that system.

Finally, this raises the question as to just how we are supposed to judge all these things; central bank efficacy. The fact that there hadn’t been another Lehman or AIG, does that really mean monetary policy was successful? As stocks suggest, highly successful?

After all, when justifying its initial SLR exemption on April 1 last year, the Fed said this was behind it:

“The regulatory restrictions that accompany this balance sheet growth may constrain the firms' ability to continue to serve as financial intermediaries and to provide credit to households and businesses.”

That plus the QE’s as well as “we saw it coming” was supposed to have tremendously eased (easing, after all) the strains from the monetary disruption so as to unlock the flow of finance to Joe Sixpack as well as Mom and Pop. How’d that work out? While every large corporation in the world can access an ocean of bond-fueled credit by issuing liquid debt instruments, what’s lending look like even without that next Lehman?

The SLR exposes how banks don’t even want to lend to the feds (or the Fed) at slightly elevated balance sheet charges. That’s not the corona.

Right here is instead the hidden deflationary forces Jay Powell, like his 1930’s counterparts, as well as Ben Bernanke, would rather strike from the record if possible. And it can only happen by rewriting March 2020 into the same sort of existing subprime mortgage lore: the Fed finds itself, for the second time, simultaneously helpless in containing the monetary-driven fire sales yet incredibly effective in, supposedly, saving the entire planet before it really got out of hand.  

One year later, twelve million jobs short. 

Jeffrey Snider is the Head of Global Research at Alhambra Partners. 

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