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NY Fed rescues overnight lending market with $53B

338 points by aazaa 7y ago

rolltiide 7y ago
Just a couple of underestimations, it did its job expediently.
Gravityloss 7y ago
Loud autoplaying video.
mrosett 7y ago
Matt Levine's explanation of what happened is considerably less sensationalized. Take a look at the second item of his column today [0]. It's too long to quote and doesn't lend itself to an easy excerpt, but here are the facts that he quotes, from Bloomberg [1]: > A sudden surge in the overnight rate on Treasury repurchase agreements that began on Monday continued Tuesday -- with the rate opening at 7%, according to ICAP. … > What happened was an unfortunate coincidence -- just as companies were withdrawing cash from money markets to pay corporate tax, a glut of new bonds appeared on the market as the U.S. government sold some $78 billion of 10- and 30-year debt last week. > With just $24 billion of bonds maturing in the period, this became one of three occasions this year when the imbalance between debt redemption and cash needed to buy new Treasuries exceeded $50 billion. Again, if those paragraphs don't obviously relate to the overnight lending market, read his column for context. [0]: https://www.bloomberg.com/opinion/articles/2019-09-17/wework-s-ipo-doesn-t-work-yet https://www.bloomberg.com/opinion/articles/2019-09-17/wework... [1]: https://www.bloomberg.com/news/articles/2019-09-17/it-starts-as-a-repo-squeeze-before-spilling-into-funding-markets https://www.bloomberg.com/news/articles/2019-09-17/it-starts...
- nickles 7y ago
  > considerably less sensationalized To be clear, a GC repo at 7% to 9% is outrageously high. Lack of short term financing can have severe repercussions that ripple throughout the financial system.
  - whatok 7y ago
    Agreed. This happened under a relatively calm market. People get closed out and this gets way worse when markets are more volatile.
  - SilasX 7y ago
    Well, I guess it would be high on a typical loan. On an overnight loan, the difference between 9% APR and 1% APR is the difference between paying 0.0236% in interest for the loan and paying and 0.00273% [1]. Why do banks need special assistance in that situation? If you depend on your input prices not going up by that much for a short period, you're hosed anyway... [1] 1.09^(1/365) - 1 vs 1.01^(1/365) - 1
    - whatok 7y ago
      No one is saying that paying more for a short period of time is going to destroy the financial system. However, if this does continue for a longer period of time, many cannot afford to finance at these rates and it also shows that the Fed has lost control of things.
    - teej 7y ago
      Very few things can survive a 10x increase in costs.
    - JackFr 7y ago
      They're financing on the order of a trillion dollars. It makes a difference.
    - ivalm 7y ago
      because with ~1e12 in financing this ends up being a cool $209.7M.
      - SilasX 7y ago
        Distributed over numerous billion-dollar businesses will annual profits in billions.
    - 7y ago
- mywittyname 7y ago
  It does suggest that the Fed's goal of lowering rates may introduce some unintended consequences.
  - zenmaster10665 7y ago
    How so? This is the result of a glut in treasuries and a lack of dollars in money market funds.
- throwaway5752 7y ago
  I don't know, maybe it's undersensationalized. World doesn't want to finance US deficits any more. The combination of nationalistic policies, aggressive and unilateral cancellation of treaties, grossly antagonizing one of our largest debt buyers, and removing any pretense of lowering the structural deficit - those are a pretty bad combination of behaviors to exhibit. If I were the world, I wouldn't want to finance the US's budget any more, either. edit: downvotes, please explain: "The rate spike may also be a symptom of the sharp increase in Treasury bonds being issued to fund the federal government. The federal deficit has spiked to $1 trillion this fiscal year because of the tax cuts and surge in government spending. Banks typically buy Treasuries by borrowing in the overnight market. The jump in Treasury issuance caused a large increase in demand for short-term financing." this is via the overnight market, but that is part of the aggregate treasuries demand. Further, changes in the mix of top treasury purchases is well documented. You will note, "No one knows why this is happening," Jim Bianco CEO of Bianco Research, said on Twitter. "If it persists more than another day or two, it will be a problem." in the article. There has been much speculation if any large treasury holder were to selectively start selling. One can speculate how evidence of that would emerge in the markets.
  - lkrubner 7y ago
    The Fed can always buy the debt, unless it wanted to raise interest rates, which it doesn't.
    - throwaway5752 7y ago
      Seems like a pretty bad idea in an ostensibly good economy. QE was considered dangerous and hypothetical until 10 years ago and that was an actual crisis. Do you see some danger in normalizing QE (even in more niche markets like overnight)?
      - dv_dt 7y ago
        I don't know if its a good idea to continue either, but Japan has been actively doing something similar for a while now. It hasn't caused catastrophe, but it hasn't pulled them into high growth either - but it could be argued that there are other factors affecting the overall economy there (the graying and shrinking of their population for one).
- bsanr2 7y ago
  I just think it's funny that rich people can get billions of dollars to stay solvent in a sudden crisis, and I can't get a dime when I can't pay for lunch. Am I reading this wrong? Is this a bad analogy? Is it not exemplary of how creditworthiness seems to rise at a higher rate than the means used to justify that creditworthiness? I'm a layman, but I'd like to know more.
  - anoncareer0212 7y ago
    Bad analogy - the banking system doesn't fall apart if you miss lunch
    - pjmorris 7y ago
      Actually, that's exactly how banking systems fall apart, if you push it too far.
      - anoncareer0212 7y ago
        Actually, that takes such a broad view of the analogy that it has no semblance to the analogy, only the idea of completely ceasing all spending
    - excitom 7y ago
      You basically proved his point. The analogy is correct but no one cares if a little guy can't buy lunch. Same problem, different scale.
      - anoncareer0212 7y ago
        HN comments tend to have more charity than other places online – it's unlikely I "proved his point" by answering his query regarding if it's a bad analogy :) Its not that "no one cares" about "a little guy", it's that even though I didn't eat lunch today, my colleagues did. If me skipping lunch meant my colleagues didn't have any food, someone would step in to avoid my colleagues dying
  - deleted 7y ago
- PKop 7y ago
  >a glut of new bonds appeared on the market as the U.S. government sold some $78 billion of 10- and 30-year debt last week. But this isn't slowing down any time soon, so the problem will keep recurring. Deficit's are rising, and foreign purchases of treasury debt has plateaued the past few years. This, some say, is the real problem: banks are forced to purchase this debt and so the funding needs of the US government are crowding out domestic banking sector. If continues, this means the Fed will effectively be monetizing US deficits. Luke Gromen has covered this in various podcast interviews[0] and on twitter: @LukeGromen. [0] https://www.macrovoices.com/podcasts-collection/macrovoices-all-stars-podcasts/673-all-stars-51-luke-gromen-usd-faces-day-of-reckoning-when-it-becomes-clear-fed-will-have-to-monetize-gov-t-deficits https://www.macrovoices.com/podcasts-collection/macrovoices-...
  - BurningFrog 7y ago
    > If continues, this means the Fed will effectively be monetizing US deficits. You seem informed, and I want to be upset by this, but... What does "monetizing US deficits" mean here?
    - colechristensen 7y ago
      That the US deficit is not going to be paid for by selling debt to people around the world, it is going to be paid for by the federal reserve creating money and giving it to the treasury.
      - ilaksh 7y ago
        Why would the global community tolerate this, especially when the United States consumes much more than most countries? Seems like a recipe for WWIII.
        Mountain_Skies 7y ago
        Incrementalism. As long as the U.S. does it on a relatively small scale (emphasis on relatively), no one will want to pay the costs involved in fighting against it, even if over longer periods of time it adds up.
- 1980phipsi 7y ago
  Matt Levine is also a lawyer by training...
- blazespin 7y ago
  Given that these sorts of things can shock the economy, we usually have significant more wiggle room at all times to deal with coincidences like this. The fact that we're running out of wiggle room is the sensational problem. It's not like these coincidences haven't been happening since 2008..
H8crilA 7y ago
Isn't this working as intended? Where else does the FED actually "enforce" its short term fed funds rate? I mean how else the current 2.00-2.25% rate is forced onto the financial system? Why else would anyone even care about what the FED funds rate is? In my home country the central bank rate is enforced by providing central bank deposits and central bank loans, available in unlimited quantity for commercial banks. When the market gets cash congested (like here) banks just start tapping the infinite central bank credit line, at central bank rate. Similarly if the market gets flush with cash banks just deposit it at the central bank. Ergo the market interbank lending rate is always between the central bank deposit and credit rates. The fact that it doesn't normally happen is like when most purchased options are not exercised but sold back. Yeah, sure, but if there was no possibility of exercising them then options would have no value. So it has to be there, then we can safely almost never use it.
- rory096 7y ago
  If you look at the trading desk logs, most recent operations have been reverse repos rather than repo operations. In other words, this week the Fed lent cash & borrowed treasuries to inject cash into the market, while in the recent past it's mostly borrowed cash & lent treasuries to remove cash from the market. That's consistent with the recent shift from a tightening (rising rates) environment to a softening environment. I agree it's not particularly newsworthy. https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWMORE=TRUE&startDate=01/01/2000&enddate=01/01/2000 https://apps.newyorkfed.org/markets/autorates/tomo-results-d...
- nickles 7y ago
  > I mean how else the current 2.00-2.25% rate is forced onto the financial system? Traditionally, Fed used open market operations to target the fed funds rate. This entailed either buying/selling treasuries or conducting repo operations (as was done here). This was a corridor system, as banks could earn no less than 0% interest keeping reserves on the Fed's balance sheet (no negative interest) and could finance at a cost no higher than the discount rate in which banks borrowed directly from the Fed's discount window (this, however, sent a very negative signal to the market). For the past decade, the Fed has relied on interest on excess reserves (IOER) to target the fed funds rate, a policy known as a floor system. Here, banks earn a given interest rate on reserves kept on the fed's balance sheet. The floor system theoretically ensures short term rates do not drop below the IOER rate (although it is not always the case). This does not entail engaging in open market operations. > Why else would anyone even care about what the FED rate is? All dollar interest rates are impacted in one way or another by the fed funds rate. The strength of the dollar is also impacted by the fed funds rate, as it may become more or less attractive to keep balances in the US. The floor system currently employed makes it less attractive for banks to use excess reserves to make loans, as the risk free rate (on the fed balance sheet) is greater. This diminishes the money multiplier effect that banks have. Additionally, some foreign institutions are able to keep money on the fed's balance sheet, helping them avoid negative interest rates. Again, this disincentivizes them from making loans and also undermines monetary policy implemented by their local central banks. Finally, some currencies have a USD peg (e.g. HKD). These pegs effectively import Federal Reserve monetary policy (to help mitigate the risk of currency crises) which affects the local economies.
AnimalMuppet 7y ago
> "The Fed won't admit this," Cabana said, "but it looks and smells an awful lot like the monetary authority is financing the fiscal authority." Frightening... if true. I hope Matt Levine's explanation (cited by mrosett) is the correct one. But also, if short-term rates are spiking (even if it's a rather different type of shrt-term rate), does that mean that the Fed was incorrect to drop the rate at its last meeting?
- Donald 7y ago
  No, it means that the federal funds rate has begun to stop responding to changes in the Federal Reserve's overnight rate based on supply and demand. The Federal Reserve will be required to use other policy tools, such as QE, if it wants to exert greater influence on interest rates.
  - yasp 7y ago
    I was wonder the impression that banks could always borrow reserves from the Fed at e.g. 100 bps above the Fed funds rate target. Guess I was mistaken?
    - gtr32x 7y ago
      I believe the idea is that not all entities and institutions are eligible to borrow via the FED discount window, e.g. there is the primary credit system (primarily banks), and the second credit system (for some other low risk entities). Thus the repo market serves this segment of the market for liquidity.
      - yasp 7y ago
        Oh I see. I assumed the rates had spiked in the federal funds market, which also uses repos.
  - deleted 7y ago
    [deleted]
- hogFeast 7y ago
benj111 7y ago
Something I've always wondered about overnight lending. All the money is basically repayable at one point in time, the start of business in the morning. What happens if theres a problem? What happens if a banks systems crash and that money can't be repaid, presumably having knock on impacts on the next days overnight lending. I'm not suggesting it would be an end of days scenario, just curious.
- viburnum 7y ago
  Failing a rescue from a central bank, you could have a bank run. I still don’t know why the ordinary payments system has to be coupled with hedge funds and derivatives and whatnot. It should be completely separate. It’s like having your car explode because a cup holder got a crack.
  - benj111 7y ago
    So it could be as bad as that? It's kind of why I asked the question, but I thought there would be a rule or process or something. It's 'nice' how occasionally you get a glimpse at the gaffer tape and baling twine holding the world together.
  - cm2187 7y ago
    But that's what central banks are there for, to provide emergency liquidity to regulated banks in order to support the stability of the financial system. Also do consider that most contracts include grace periods for technical glitches. But the first line of defense is the enormous amount of cash and liquid assets banks are required to hold to ensure they remain liquid.
  - coliveira 7y ago
    The system is coupled with hedge funds and etc. because the money they use come from banks. Goldman Sachs and others don't have the money to maintain all their obligations, it all comes from other banks that loan the required funds. When there are problems in money part of the banking system, everything goes down.
    - 7y ago
whatok 7y ago
This is a better publicly available recount of events: https://www.ft.com/content/345da16e-d967-11e9-8f9b-77216ebe1f17 https://www.ft.com/content/345da16e-d967-11e9-8f9b-77216ebe1... This is a pretty technical subject with a lot of moving parts so it's hard to really have a full understanding of things. This is not a one-off event and can easily happen in the future under similar or different circumstances unless the Fed makes some changes (that they've been seen behind the curve on). This is easily dismissed right now but this happened under relatively calm market conditions. When stuff like this happens under more volatile markets stuff breaks really quickly.
- mrosett 7y ago
  This is a much better link than the original story.
- throwaway5752 7y ago
  The Fed is not behind the curve. The Fed's role is to keep the inflation at target rates. Not finance structural budgetary deficits through quantitative easing.
  - deleted 7y ago
    [deleted]
- mzs 7y ago
  Thank you, here is a great thread as well. There is some doubt it was about the taxes coming due: https://twitter.com/moorehn/status/1174179038136610817 https://twitter.com/moorehn/status/1174179038136610817
quattrofan 7y ago
Idiotic Trumps chickens are coming home to roast
29_29 7y ago
QE4?
freejulian85 7y ago
To summarize: some banks were short dollars. Instead of forcing those banks to compete for more deposits (offer interest rates above inflation), the fed stepped in and conjured a bunch of new money into existence. By doing so, banks were able to meet their obligation without needing to attract new deposits - thereby robbing people who worked for their dollars from receiving higher interest rates.
ohiovr 7y ago
So much for unwinding the fed ballance sheet.
- cm2187 7y ago
  It's an overnight transaction, it should go away very quickly. The Fed has been surprisingly consistent in its reduction of QE [1]. There is no way QE will be drained by the next recession but what is interesting is that they keep draining even though they are considering lowering rates. I am surprised it doesn't have a bigger impact on the market given how large of an impact QE had on the way up. [1] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
  - wnissen 7y ago
    I suppose it's not something that the Fed would want trumpeted in every paper, but thanks for informing me that they were reversing QE. I agree, you would think that the effects of selling off a half trillion in assets per year since the beginning of last year would be much more substantial. Didn't they buy up a whole bunch of mortgages?
    - cm2187 7y ago
      I believe their balance sheet is about 50/50 between treasuries and mortgages, and that they are selling both.
  - somebodythere 7y ago
    Balance sheet runoff is over: https://www.cnbc.com/2019/03/20/fed-sets-end-of-balance-sheet-reduction-for-september.html https://www.cnbc.com/2019/03/20/fed-sets-end-of-balance-shee...
GoodJokes 7y ago
Not enough liquidity at home, can I get some money to cover that Fed?
igammarays 7y ago
Another $75B injection planned for tomorrow: https://www.ft.com/content/2c11a972-d941-11e9-8f9b-77216ebe1f17 https://www.ft.com/content/2c11a972-d941-11e9-8f9b-77216ebe1...
- ilaksh 7y ago
  I guess this is a dumb question but can they just keep "injecting" indefinitely? Do they have a magical Money Tree or something?
  - dragonwriter 7y ago
    Look at a US dollar bill and what kind of note it is. Yeah, the Federal Reserve has a “magical money tree”: the whole reason they exist is to manage the money supply.
    - cowwithbeef 7y ago
      >the whole reason they exist is to manage the money supply. That's a lot like saying the whole reason google exists is to help people find information. There are greedier reasons for these organizations to exist.
      - dragonwriter 7y ago
        > That's a lot like saying the whole reason google exists is to help people find information. No it's not. > There are greedier reasons for these organizations to exist. Any “greedier reason” for the Fed is a particular application of managing the money supply; it to exists to manage the money supply, independently of whether it exists to do that for the public interest or “greedier reasons”.
  - rhizome 7y ago
    That's why they call it the free market.
NTDF9 7y ago
When someone asks how does inflation increase with increasing deficit? This is the answer. Money printed out of thin air to buy bonds. Bye bye affordability if this continues.
OrgNet 7y ago
Any source that is more neutral reported on this?
- moonbread 7y ago
  https://monday-morning-macro.com/2019/09/17/far-too-little-far-too-late/ https://monday-morning-macro.com/2019/09/17/far-too-little-f... This is the best technical write-up. Most mainstream financial reporting will focus on explaining repo so hard to get into the details, and the truth is that 95%+ of those who work in financial services have no idea what the repo market is.
lifeisstillgood 7y ago
Is there a simple model of this - a script, spreadsheet or something - or in fact is there a open government set of figures showing the situation I know it's probably well known but i am looking for a modern version of the old coloured liquids in tubes
joshiefishbein 7y ago
Originally read this headline as "NYFD rescues overnight lending market with $53B" and momentarily thought the calendar photoshoots were more than just a joke.
brianpgordon 7y ago
> On Tuesday morning, the NY Fed launched what's called an "overnight repo operation," during which the central bank attempts to ease pressure in markets by purchasing Treasuries and other securities. It was my (perhaps mistaken?) understanding that the Fed operates an overnight repo facility regularly - like, every night. It reads like CNN is reporting this like an exceptional emergency maneuver. Is the newsworthiness in fact just the size of the liquidity injection, and CNN is a little confused about what the ON repo does? Or am I mistaken about the Fed making overnight repo agreements regularly?
purplezooey 7y ago
Hey, fiat money. Press a button, money appears. I just hope we can stop the attempts at politicizing the Fed, else we are doomed shortly.

338 points by aazaa 7y ago

rolltiide 7y ago

Just a couple of underestimations, it did its job expediently.

Gravityloss 7y ago

Loud autoplaying video.

mrosett 7y ago

Matt Levine's explanation of what happened is considerably less sensationalized. Take a look at the second item of his column today [0]. It's too long to quote and doesn't lend itself to an easy excerpt, but here are the facts that he quotes, from Bloomberg [1]: > A sudden surge in the overnight rate on Treasury repurchase agreements that began on Monday continued Tuesday -- with the rate opening at 7%, according to ICAP. … > What happened was an unfortunate coincidence -- just as companies were withdrawing cash from money markets to pay corporate tax, a glut of new bonds appeared on the market as the U.S. government sold some $78 billion of 10- and 30-year debt last week. > With just $24 billion of bonds maturing in the period, this became one of three occasions this year when the imbalance between debt redemption and cash needed to buy new Treasuries exceeded $50 billion. Again, if those paragraphs don't obviously relate to the overnight lending market, read his column for context. [0]: https://www.bloomberg.com/opinion/articles/2019-09-17/wework-s-ipo-doesn-t-work-yet https://www.bloomberg.com/opinion/articles/2019-09-17/wework... [1]: https://www.bloomberg.com/news/articles/2019-09-17/it-starts-as-a-repo-squeeze-before-spilling-into-funding-markets https://www.bloomberg.com/news/articles/2019-09-17/it-starts...

nickles 7y ago
> considerably less sensationalized To be clear, a GC repo at 7% to 9% is outrageously high. Lack of short term financing can have severe repercussions that ripple throughout the financial system.
- whatok 7y ago
  Agreed. This happened under a relatively calm market. People get closed out and this gets way worse when markets are more volatile.
- SilasX 7y ago
  Well, I guess it would be high on a typical loan. On an overnight loan, the difference between 9% APR and 1% APR is the difference between paying 0.0236% in interest for the loan and paying and 0.00273% [1]. Why do banks need special assistance in that situation? If you depend on your input prices not going up by that much for a short period, you're hosed anyway... [1] 1.09^(1/365) - 1 vs 1.01^(1/365) - 1
  - whatok 7y ago
    No one is saying that paying more for a short period of time is going to destroy the financial system. However, if this does continue for a longer period of time, many cannot afford to finance at these rates and it also shows that the Fed has lost control of things.
  - teej 7y ago
    Very few things can survive a 10x increase in costs.
  - JackFr 7y ago
    They're financing on the order of a trillion dollars. It makes a difference.
  - ivalm 7y ago
    because with ~1e12 in financing this ends up being a cool $209.7M.
    - SilasX 7y ago
      Distributed over numerous billion-dollar businesses will annual profits in billions.
  - 7y ago
mywittyname 7y ago
It does suggest that the Fed's goal of lowering rates may introduce some unintended consequences.
- zenmaster10665 7y ago
  How so? This is the result of a glut in treasuries and a lack of dollars in money market funds.
throwaway5752 7y ago
I don't know, maybe it's undersensationalized. World doesn't want to finance US deficits any more. The combination of nationalistic policies, aggressive and unilateral cancellation of treaties, grossly antagonizing one of our largest debt buyers, and removing any pretense of lowering the structural deficit - those are a pretty bad combination of behaviors to exhibit. If I were the world, I wouldn't want to finance the US's budget any more, either. edit: downvotes, please explain: "The rate spike may also be a symptom of the sharp increase in Treasury bonds being issued to fund the federal government. The federal deficit has spiked to $1 trillion this fiscal year because of the tax cuts and surge in government spending. Banks typically buy Treasuries by borrowing in the overnight market. The jump in Treasury issuance caused a large increase in demand for short-term financing." this is via the overnight market, but that is part of the aggregate treasuries demand. Further, changes in the mix of top treasury purchases is well documented. You will note, "No one knows why this is happening," Jim Bianco CEO of Bianco Research, said on Twitter. "If it persists more than another day or two, it will be a problem." in the article. There has been much speculation if any large treasury holder were to selectively start selling. One can speculate how evidence of that would emerge in the markets.
- lkrubner 7y ago
  The Fed can always buy the debt, unless it wanted to raise interest rates, which it doesn't.
  - throwaway5752 7y ago
    Seems like a pretty bad idea in an ostensibly good economy. QE was considered dangerous and hypothetical until 10 years ago and that was an actual crisis. Do you see some danger in normalizing QE (even in more niche markets like overnight)?
    - dv_dt 7y ago
      I don't know if its a good idea to continue either, but Japan has been actively doing something similar for a while now. It hasn't caused catastrophe, but it hasn't pulled them into high growth either - but it could be argued that there are other factors affecting the overall economy there (the graying and shrinking of their population for one).
bsanr2 7y ago
I just think it's funny that rich people can get billions of dollars to stay solvent in a sudden crisis, and I can't get a dime when I can't pay for lunch. Am I reading this wrong? Is this a bad analogy? Is it not exemplary of how creditworthiness seems to rise at a higher rate than the means used to justify that creditworthiness? I'm a layman, but I'd like to know more.
- anoncareer0212 7y ago
  Bad analogy - the banking system doesn't fall apart if you miss lunch
  - pjmorris 7y ago
    Actually, that's exactly how banking systems fall apart, if you push it too far.
    - anoncareer0212 7y ago
      Actually, that takes such a broad view of the analogy that it has no semblance to the analogy, only the idea of completely ceasing all spending
  - excitom 7y ago
    You basically proved his point. The analogy is correct but no one cares if a little guy can't buy lunch. Same problem, different scale.
    - anoncareer0212 7y ago
      HN comments tend to have more charity than other places online – it's unlikely I "proved his point" by answering his query regarding if it's a bad analogy :) Its not that "no one cares" about "a little guy", it's that even though I didn't eat lunch today, my colleagues did. If me skipping lunch meant my colleagues didn't have any food, someone would step in to avoid my colleagues dying
- deleted 7y ago
PKop 7y ago
>a glut of new bonds appeared on the market as the U.S. government sold some $78 billion of 10- and 30-year debt last week. But this isn't slowing down any time soon, so the problem will keep recurring. Deficit's are rising, and foreign purchases of treasury debt has plateaued the past few years. This, some say, is the real problem: banks are forced to purchase this debt and so the funding needs of the US government are crowding out domestic banking sector. If continues, this means the Fed will effectively be monetizing US deficits. Luke Gromen has covered this in various podcast interviews[0] and on twitter: @LukeGromen. [0] https://www.macrovoices.com/podcasts-collection/macrovoices-all-stars-podcasts/673-all-stars-51-luke-gromen-usd-faces-day-of-reckoning-when-it-becomes-clear-fed-will-have-to-monetize-gov-t-deficits https://www.macrovoices.com/podcasts-collection/macrovoices-...
- BurningFrog 7y ago
  > If continues, this means the Fed will effectively be monetizing US deficits. You seem informed, and I want to be upset by this, but... What does "monetizing US deficits" mean here?
  - colechristensen 7y ago
    That the US deficit is not going to be paid for by selling debt to people around the world, it is going to be paid for by the federal reserve creating money and giving it to the treasury.
    - ilaksh 7y ago
      Why would the global community tolerate this, especially when the United States consumes much more than most countries? Seems like a recipe for WWIII.
      - Mountain_Skies 7y ago
        Incrementalism. As long as the U.S. does it on a relatively small scale (emphasis on relatively), no one will want to pay the costs involved in fighting against it, even if over longer periods of time it adds up.
1980phipsi 7y ago
Matt Levine is also a lawyer by training...
blazespin 7y ago
Given that these sorts of things can shock the economy, we usually have significant more wiggle room at all times to deal with coincidences like this. The fact that we're running out of wiggle room is the sensational problem. It's not like these coincidences haven't been happening since 2008..

H8crilA 7y ago

Isn't this working as intended? Where else does the FED actually "enforce" its short term fed funds rate? I mean how else the current 2.00-2.25% rate is forced onto the financial system? Why else would anyone even care about what the FED funds rate is? In my home country the central bank rate is enforced by providing central bank deposits and central bank loans, available in unlimited quantity for commercial banks. When the market gets cash congested (like here) banks just start tapping the infinite central bank credit line, at central bank rate. Similarly if the market gets flush with cash banks just deposit it at the central bank. Ergo the market interbank lending rate is always between the central bank deposit and credit rates. The fact that it doesn't normally happen is like when most purchased options are not exercised but sold back. Yeah, sure, but if there was no possibility of exercising them then options would have no value. So it has to be there, then we can safely almost never use it.

rory096 7y ago
If you look at the trading desk logs, most recent operations have been reverse repos rather than repo operations. In other words, this week the Fed lent cash & borrowed treasuries to inject cash into the market, while in the recent past it's mostly borrowed cash & lent treasuries to remove cash from the market. That's consistent with the recent shift from a tightening (rising rates) environment to a softening environment. I agree it's not particularly newsworthy. https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWMORE=TRUE&startDate=01/01/2000&enddate=01/01/2000 https://apps.newyorkfed.org/markets/autorates/tomo-results-d...
nickles 7y ago
> I mean how else the current 2.00-2.25% rate is forced onto the financial system? Traditionally, Fed used open market operations to target the fed funds rate. This entailed either buying/selling treasuries or conducting repo operations (as was done here). This was a corridor system, as banks could earn no less than 0% interest keeping reserves on the Fed's balance sheet (no negative interest) and could finance at a cost no higher than the discount rate in which banks borrowed directly from the Fed's discount window (this, however, sent a very negative signal to the market). For the past decade, the Fed has relied on interest on excess reserves (IOER) to target the fed funds rate, a policy known as a floor system. Here, banks earn a given interest rate on reserves kept on the fed's balance sheet. The floor system theoretically ensures short term rates do not drop below the IOER rate (although it is not always the case). This does not entail engaging in open market operations. > Why else would anyone even care about what the FED rate is? All dollar interest rates are impacted in one way or another by the fed funds rate. The strength of the dollar is also impacted by the fed funds rate, as it may become more or less attractive to keep balances in the US. The floor system currently employed makes it less attractive for banks to use excess reserves to make loans, as the risk free rate (on the fed balance sheet) is greater. This diminishes the money multiplier effect that banks have. Additionally, some foreign institutions are able to keep money on the fed's balance sheet, helping them avoid negative interest rates. Again, this disincentivizes them from making loans and also undermines monetary policy implemented by their local central banks. Finally, some currencies have a USD peg (e.g. HKD). These pegs effectively import Federal Reserve monetary policy (to help mitigate the risk of currency crises) which affects the local economies.

AnimalMuppet 7y ago

> "The Fed won't admit this," Cabana said, "but it looks and smells an awful lot like the monetary authority is financing the fiscal authority." Frightening... if true. I hope Matt Levine's explanation (cited by mrosett) is the correct one. But also, if short-term rates are spiking (even if it's a rather different type of shrt-term rate), does that mean that the Fed was incorrect to drop the rate at its last meeting?

Donald 7y ago
No, it means that the federal funds rate has begun to stop responding to changes in the Federal Reserve's overnight rate based on supply and demand. The Federal Reserve will be required to use other policy tools, such as QE, if it wants to exert greater influence on interest rates.
- yasp 7y ago
  I was wonder the impression that banks could always borrow reserves from the Fed at e.g. 100 bps above the Fed funds rate target. Guess I was mistaken?
  - gtr32x 7y ago
    I believe the idea is that not all entities and institutions are eligible to borrow via the FED discount window, e.g. there is the primary credit system (primarily banks), and the second credit system (for some other low risk entities). Thus the repo market serves this segment of the market for liquidity.
    - yasp 7y ago
      Oh I see. I assumed the rates had spiked in the federal funds market, which also uses repos.
- deleted 7y ago
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hogFeast 7y ago

benj111 7y ago

Something I've always wondered about overnight lending. All the money is basically repayable at one point in time, the start of business in the morning. What happens if theres a problem? What happens if a banks systems crash and that money can't be repaid, presumably having knock on impacts on the next days overnight lending. I'm not suggesting it would be an end of days scenario, just curious.

viburnum 7y ago
Failing a rescue from a central bank, you could have a bank run. I still don’t know why the ordinary payments system has to be coupled with hedge funds and derivatives and whatnot. It should be completely separate. It’s like having your car explode because a cup holder got a crack.
- benj111 7y ago
  So it could be as bad as that? It's kind of why I asked the question, but I thought there would be a rule or process or something. It's 'nice' how occasionally you get a glimpse at the gaffer tape and baling twine holding the world together.
- cm2187 7y ago
  But that's what central banks are there for, to provide emergency liquidity to regulated banks in order to support the stability of the financial system. Also do consider that most contracts include grace periods for technical glitches. But the first line of defense is the enormous amount of cash and liquid assets banks are required to hold to ensure they remain liquid.
- coliveira 7y ago
  The system is coupled with hedge funds and etc. because the money they use come from banks. Goldman Sachs and others don't have the money to maintain all their obligations, it all comes from other banks that loan the required funds. When there are problems in money part of the banking system, everything goes down.
  - 7y ago

whatok 7y ago

This is a better publicly available recount of events: https://www.ft.com/content/345da16e-d967-11e9-8f9b-77216ebe1f17 https://www.ft.com/content/345da16e-d967-11e9-8f9b-77216ebe1... This is a pretty technical subject with a lot of moving parts so it's hard to really have a full understanding of things. This is not a one-off event and can easily happen in the future under similar or different circumstances unless the Fed makes some changes (that they've been seen behind the curve on). This is easily dismissed right now but this happened under relatively calm market conditions. When stuff like this happens under more volatile markets stuff breaks really quickly.

mrosett 7y ago
This is a much better link than the original story.
throwaway5752 7y ago
The Fed is not behind the curve. The Fed's role is to keep the inflation at target rates. Not finance structural budgetary deficits through quantitative easing.
- deleted 7y ago
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mzs 7y ago
Thank you, here is a great thread as well. There is some doubt it was about the taxes coming due: https://twitter.com/moorehn/status/1174179038136610817 https://twitter.com/moorehn/status/1174179038136610817

quattrofan 7y ago

Idiotic Trumps chickens are coming home to roast

29_29 7y ago

QE4?

freejulian85 7y ago

To summarize: some banks were short dollars. Instead of forcing those banks to compete for more deposits (offer interest rates above inflation), the fed stepped in and conjured a bunch of new money into existence. By doing so, banks were able to meet their obligation without needing to attract new deposits - thereby robbing people who worked for their dollars from receiving higher interest rates.

ohiovr 7y ago

So much for unwinding the fed ballance sheet.

cm2187 7y ago
It's an overnight transaction, it should go away very quickly. The Fed has been surprisingly consistent in its reduction of QE [1]. There is no way QE will be drained by the next recession but what is interesting is that they keep draining even though they are considering lowering rates. I am surprised it doesn't have a bigger impact on the market given how large of an impact QE had on the way up. [1] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
- wnissen 7y ago
  I suppose it's not something that the Fed would want trumpeted in every paper, but thanks for informing me that they were reversing QE. I agree, you would think that the effects of selling off a half trillion in assets per year since the beginning of last year would be much more substantial. Didn't they buy up a whole bunch of mortgages?
  - cm2187 7y ago
    I believe their balance sheet is about 50/50 between treasuries and mortgages, and that they are selling both.
- somebodythere 7y ago
  Balance sheet runoff is over: https://www.cnbc.com/2019/03/20/fed-sets-end-of-balance-sheet-reduction-for-september.html https://www.cnbc.com/2019/03/20/fed-sets-end-of-balance-shee...

GoodJokes 7y ago

Not enough liquidity at home, can I get some money to cover that Fed?

igammarays 7y ago

Another $75B injection planned for tomorrow: https://www.ft.com/content/2c11a972-d941-11e9-8f9b-77216ebe1f17 https://www.ft.com/content/2c11a972-d941-11e9-8f9b-77216ebe1...

ilaksh 7y ago
I guess this is a dumb question but can they just keep "injecting" indefinitely? Do they have a magical Money Tree or something?
- dragonwriter 7y ago
  Look at a US dollar bill and what kind of note it is. Yeah, the Federal Reserve has a “magical money tree”: the whole reason they exist is to manage the money supply.
  - cowwithbeef 7y ago
    >the whole reason they exist is to manage the money supply. That's a lot like saying the whole reason google exists is to help people find information. There are greedier reasons for these organizations to exist.
    - dragonwriter 7y ago
      > That's a lot like saying the whole reason google exists is to help people find information. No it's not. > There are greedier reasons for these organizations to exist. Any “greedier reason” for the Fed is a particular application of managing the money supply; it to exists to manage the money supply, independently of whether it exists to do that for the public interest or “greedier reasons”.
- rhizome 7y ago
  That's why they call it the free market.

NTDF9 7y ago

When someone asks how does inflation increase with increasing deficit? This is the answer. Money printed out of thin air to buy bonds. Bye bye affordability if this continues.

OrgNet 7y ago

Any source that is more neutral reported on this?

moonbread 7y ago
https://monday-morning-macro.com/2019/09/17/far-too-little-far-too-late/ https://monday-morning-macro.com/2019/09/17/far-too-little-f... This is the best technical write-up. Most mainstream financial reporting will focus on explaining repo so hard to get into the details, and the truth is that 95%+ of those who work in financial services have no idea what the repo market is.

lifeisstillgood 7y ago

Is there a simple model of this - a script, spreadsheet or something - or in fact is there a open government set of figures showing the situation I know it's probably well known but i am looking for a modern version of the old coloured liquids in tubes

joshiefishbein 7y ago

Originally read this headline as "NYFD rescues overnight lending market with $53B" and momentarily thought the calendar photoshoots were more than just a joke.

brianpgordon 7y ago

> On Tuesday morning, the NY Fed launched what's called an "overnight repo operation," during which the central bank attempts to ease pressure in markets by purchasing Treasuries and other securities. It was my (perhaps mistaken?) understanding that the Fed operates an overnight repo facility regularly - like, every night. It reads like CNN is reporting this like an exceptional emergency maneuver. Is the newsworthiness in fact just the size of the liquidity injection, and CNN is a little confused about what the ON repo does? Or am I mistaken about the Fed making overnight repo agreements regularly?

purplezooey 7y ago

Hey, fiat money. Press a button, money appears. I just hope we can stop the attempts at politicizing the Fed, else we are doomed shortly.