The Fed’s reverse repurchase agreements reached $ 503 billion. Cash drain canceled over 4 months of QE
Williams of the New York Fed is preparing markets for “technical adjustments” to the Fed’s “administered interest rates” to bring this phenomenon under control.
By Wolf Richter for WOLF STREET.
This morning, the Fed sold a record $ 503 billion in Treasury securities via overnight reverse repurchase agreements (RRP) to 59 counterparties, and thus received $ 503 billion in cash from the counterparties. These night RRPs will mature and take place tomorrow. Yesterday’s record of $ 497 billion in overnight RRP expired this morning and was replaced by this new, even bigger flood.
“Reverse rests” are the opposite of “rest.” They drain liquidity from the market and are liabilities on the Fed’s balance sheet – money the Fed owes counterparties.
A similar phenomenon, but on a smaller scale, occurred from 2014, when the US financial system was inundated with liquidity after years of QE. And at the end of the quarter, especially at the end of the year, RRP balances skyrocketed. The phenomenon abated as the Fed began to dispose of its assets from late 2017 to 2019. But this time, RRPs overnight surpassed those levels in the middle of the quarter – with June 30 ahead:
By draining $ 503 billion in market liquidity through these overnight reverse repurchases, the Fed canceled out the 4.2-month liquidity effect of QE, which continues at a rate of around $ 120 billion. dollars per month.
The upcoming “technical adjustments” to interest rates administered by the Fed.
The Fed’s current offer rate for overnight reverse repurchases is 0%, which means that counterparties turn over their liquidity to the Fed and get T-bills as collateral, for a 0% return. . The bid rate is decided by the FOMC. The Fed is proposing these reverse repurchase agreements to keep reverse repo rates from going negative as the liquidity tsunami must find a place to go.
The Fed could control this liquidity phenomenon by reducing its asset purchases and ultimately by reducing its balance sheet. This is how the phenomenon was resolved the last time.
This reverse repo bid rate now lines up for what the Fed calls a “technical adjustment,” which is an increase of around 10 basis points, either at the next FOMC meeting or at the next FOMC meeting. ‘an intermediate Zoom meeting before this date.
Interest on Excess Reserves (IOER) could also be subject to this type of “technical adjustment”. The Fed currently pays banks 0.1% interest on the cash they deposit with the Fed. These “reserves,” as the money on deposit with the Fed is called, now stands at $ 3.8 trillion.
The FOMC could also raise the IOER by a few basis points. This would help raise the floor on the effective fed funds rate until it is trading closer to the middle of the Fed’s target range (0.00% to 0.25%). The effective federal funds rate was around 0.06% when it is expected to be around 0.12%.
For example, New York Fed Chairman John Williams, whose team manages the Fed’s trading activities, prepared the markets for this type of “technical adjustment” to the reverse repo bid rate. the Fed and the IOER in a interview with Yahoo Finance last week.
He has repeatedly pointed out that the reverse repurchase agreement “is working very well” and “exactly as expected”, that there is “really, no concern about it”. And it also shed light on the origin of this liquidity tsunami that the Fed has absorbed: the “banking system”.
So he explained, “When we thought and implemented this [the reverse repo facility] Long ago, we wanted to make sure, in a situation where we are making asset purchases for our monetary policy goals, that the corresponding increase in liabilities would be distributed efficiently and well in the financial system. And much of it shows up in the banking system as reserves, but some can also show up through the overnight reverse repurchase facility. “
“And we’ve seen that getting used to a bit recently. We expected this to happen. It works exactly as expected. Really, no worries about it. It’s a system that was put in place so that we don’t have any problems [INAUDIBLE], and we don’t have them, ”he said.
“So for me it works very well, and the fact that funds are flowing between the banking system and the day-to-day reverse repo is kind of what we would expect in those kinds of circumstances,” he said. he declared.
“And in fact, going back to the days before, we’ve made some adjustments, some technical adjustments to these administered tariffs and these programs, specifically to make sure they’re working well. And for me, meeting the FOMC’s goal of having the fed funds rate well within the target range, ”he said.
“So we have the flexibility to adjust the parameters of our administered rates or other parts of our program so that they really work well and keep interest rates where we want. So we can do it if necessary, ”he said.
“We have the flexibility to change it, if you want, to make sure it achieves exactly what the FOMC is looking for in terms of short-term interest rates,” he said.
Thus, these administered rates could be subject to some upward “technical adjustments” before or before the next FOMC meeting. And this would be underlined by certain conical speeches. And meanwhile, the Fed is starting to sell off its holdings of corporate bonds and ETFs of corporate bonds.
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