The Federal Reserve could be launching another round of money-printing in the next few weeks as problems in the overnight lending markets reemerge and force the central bank into more aggressive action, according to a Credit Suisse analysis. A fourth version of quantitative easing — often referred to as "money-printing" for the way the Fed uses digitally created money to buy bonds from big financial institutions — would be needed by year's end to bridge a funding gap as banks scramble for scarce reserves, Zoltan Pozsar, Credit Suisse's managing director for investment strategy and research, said in a note to clients. "If we're right about funding stresses, the Fed will be doing 'QE4' by year-end," Pozsar wrote. "Treasury yields can spike into year-end, and the Fed will have to shift from buying bills to buying what's on sale – coupons."

That would mean a shift from purchasing short-term Treasury debt and expanding into longer duration and more aggressive balance sheet expansion. The Fed is in the midst of a buying T-bills in a process that it has insisted is not QE but instead an effort to keep its benchmark overnight funds rate within the 1.5%-1.75% target range. In addition to the outright purchases, the central bank is conducting daily repurchase operations to stabilize the market. All of those efforts stem from mid-September tumult in the repo market, the place where banks go to get overnight funding critical to their operations. A Sept. 17 spike in rates amplified funding issues that Pozsar said are not going away. "The Fed's liquidity operations have not been sufficient to relax the constraints banks will face in the upcoming year-end turn," he said, adding that investors have become complacent after an initial flare-up in 2018 turned out to be "benign" and as "repo rates have been trading normally since the September blowout" and amid the Fed's efforts to keep reserves plenty. "But these facts are less relevant than they seem," Pozsar said. In fact, he warned of even potentially more dire consequences should market dislocations and another spike in rates upset the carry trades institutions employ, where lower-yielding currencies are used to buy those with higher yields, with investors pocketing the difference. "If carry makes the world go 'round, and reserves make carry possible … the day we run out of reserves would be the day when the world would stop spinning." Pozsar said. "No, this is not an overstatement."

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