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Why the Federal Reserve is pouring money into the financial system
- thorwasdfasdf 7y agoIs there no limit at which point the Fed will stop printing money? In theory, once all that money printing hits the actual economy and inflation starts going up, they'll have increase interest rates. I'm not sure I believe that 100%. I wonder how complacent they will be once inflation does start to raise, and eventually spiral out of control.
- charwalker 7y agoInflation rates under the current administration have been very high relative to previous years after the 2008 crash. The Obama era Fed struggled to hit their 2% controlled inflation mark during the economic recovery but it has sat closer to 3% in recent years. See the chart in the link below: https://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp?reloaded=true https://inflationdata.com/Inflation/Inflation_Rate/CurrentIn...
- neonate 7y agohttp://archive.is/yScft http://archive.is/yScft
- steve_taylor 7y agoarchive.is seems to be blocked by the Great Firewall of Australia.
- unilynx 7y agoOr you're behind the Cloudflare 1.1.1.1 dns? They're not getting along well: https://news.ycombinator.com/item?id=19828317 https://news.ycombinator.com/item?id=19828317
- joshuafkon 7y agoI thought the Financial Times had a more in-depth analysis of the structural reasons behind the spike in the REPO market than I've seen elsewhere. I've seen a few sources point out the tax payment due on the 15th, and the settlement of a large treasury sale, but as the article says: "...Analysts say these two things alone should not cause the deep cracks in the repo market that we have seen this week. The underlying issue is more structural. The Fed has been reducing the size of its balance sheet, letting the Treasuries and mortgage bonds it bought following the financial crisis roll off. In turn, that reduces the amount of cash reserves banks hold at the Fed... 'We have had tax payments in the past. What is different this time is that it has followed a period of quantitative tightening,' said Jon Hill, an interest rate strategist at BMO Capital Markets. 'Companies sucking cash from the market was just the tripwire that brought things falling down.'”
- nickles 7y ago> The Fed has been reducing the size of its balance sheet, letting the Treasuries and mortgage bonds it bought following the financial crisis roll off. In turn, that reduces the amount of cash reserves banks hold at the Fed. I'm somewhat skeptical that the reduction in Fed balance sheet is the impetus for the recent surge in repo rates, especially since the Fed ended its balance sheet unwind in August. From August 2014 to January 2018, the Fed held $4.4 trillion in assets [0]. From 2014 to 2016, overnight repo rates remained stable and low [1]. In December 2015, the Fed began its hiking cycle. From this point onwards, repo rates began drifting up, consistent with an increasing fed funds rate [2]. It would appear that the changes in repo rates were not driven by Fed balance sheet during this period. Starting in January 2014, banks held $2.4 trillion in excess reserves at the Fed, peaking at $2.7 trillion in August 2014 [3]. By January 2018, excess reserves held at the Fed had fallen to $2.1 trillion, independent of any change in the size of the Fed's balance sheet. In 2016, repo rates remained steady, despite a $400 billion decrease in excess reserves. In 2017, overnight repo rates drifted up, despite an increase in excess reserves of $200 billion. Here, repo rates do not exhibit any obvious impact from fluctuations in excess reserves. As Fed balance sheet declined by $700 billion in 2018, excess reserves declined by roughly the same amount. However, even as Fed balance sheet continued shrinking in 2019, repo rates held fairly steady, corresponding to the stable level of the effective fed funds rate. Given all this, it doesn't look like reductions in Fed balance sheet have been the sole driver of declining excess reserves, nor does it appear that the quantity of excess reserves correlates strongly with overnight repo rates. Furthermore, the Fed announced an August 2019 conclusion of the balance sheet unwind in July's FOMC statement. Finally, excess reserves held at the Fed are now 1000x greater than they were in 2007. In short, the recent spike in repo rates happened despite a massive overhang of excess reserves and in the absence of a shrinking Fed balance sheet. I wonder if the decline of the interbank loan market, which serves as a source of short term funding for banks, is related. At the time the Fed discontinued reporting interbank loan volume (2018), volumes had declined ~75% from precrisis levels [4]. Such low volumes were last seen in 1979. This, in part, explains the large amount of excess reserves held by banks. If they do not have confidence they will be able to borrow when they need to, they must maintain such reserves. [0] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... [1] https://tradingeconomics.com/united-states/repo-rate https://tradingeconomics.com/united-states/repo-rate [2] https://fred.stlouisfed.org/graph/?g=URW https://fred.stlouisfed.org/graph/?g=URW [3] https://fred.stlouisfed.org/series/EXCSRESNS https://fred.stlouisfed.org/series/EXCSRESNS [4] https://fred.stlouisfed.org/series/IBLACBW027NBOG https://fred.stlouisfed.org/series/IBLACBW027NBOG
- yasp 7y agoHow can reserves be too low when there are $1.4 T in excess reserves? How can repo rates spike to nearly 10% when the interest earned on those $1.4 T reserves only yields 1.80%? edit: more questions. As I understand it, the "repo market" is broader than only banks. Why is it that the Fed performing repo operations will alleviate the liquidity issue in the repo market, unless it is some such bank borrowing in the repo market that is the cause of the problem? And given the point about the size of excess reserves, and the low yield they earn, is there any way for the repo rate to have spiked unless there were some bank that weren't able to muster adequate collateral?
- thedudeabides5 7y agoThese are good questions and not sure I’ve seen good answers out there yet The rate spiking is indeed reflective of someone needing collateral quickly and being willing to pay up for it. Now the fact that it spiked doesn’t mean Armageddon, just check out Chinese interbank stats to get a sense of how much they can move. That being said looks like a narrative has formed that it must mean reserves are “too low” and so, I guess we should print more. Another perspective is we had a decent amount of monetary tightening, and tightening are designed to reduce liquidity, especially on the front end. This is a sign that, that tightening, combined with regulatory pressure on banks to get out of this market, have indeed reduced liquidity. Now, no one really wants to make levered entities go under because randomly repo liqidity dries up, so the answer is clearly to just print more money. What’s being missed though is that this illiquidity is not a bug, it’s a lagged feature of monetary policy decisions from 2014-2018.
- pishpash 7y agoSomeone needing liquidity? Yeah, the Treasury needs its debt funded, all the VC's need their IPO's bought, there is just a lot of supply right now. That they converged in the overnight market on one particular day might be a coincidence, but the structural issue is the very large funding needs in the economy at a time when foreign buyers are turned away due to protectionism.
- elSidCampeador 7y ago
- exabrial 7y agoNon paywall?
- Yhippa 7y agoThe web link worked for me.
- suprfsat 7y agohttps://news.google.com/articles/CAIiEAXg95Bg14zQtz-eQsudoDAqFwgEKg8IACoHCAow-4fWBzD4z0gw4tp6?hl=en-US&gl=US&ceid=US%3Aen https://news.google.com/articles/CAIiEAXg95Bg14zQtz-eQsudoDA...
- andreitp1 7y agoSearch the title of the article on Google. They can't afford to ban visitors from Google as they would lose half of their traffic.
- ptah 7y agoI like the question based structure of this article. it does lack the one question I have though: "How does it affect everyone else that is not a bank?"
- 25b183 7y agoWhat happens in USA affects all of us
- hw 7y agoHere is another good writeup assuming you aren't too familiar with the repo markets https://www.forexlive.com/news/!/lets-talk-about-the-repofunding-issue-20190920 https://www.forexlive.com/news/!/lets-talk-about-the-repofun...
- helpPeople 7y agoHere's a question. Is there any reason to believe USD is a good investment right now? I had a conversation with someone who was quite confident we are undergoing deflation because most money is digital and not real. Is there any chance this person has a point?
- known 7y agoTo reduce OPEC Oil price for Importers?
- freejulian85 7y agoThe money absolutely impacts the economy and the individual. If the fed were not providing this printed money to the banks, the banks would need to do some combination of the following to increase liquidity: 1) Increase interest rates to attract new deposits 2) Sell assets — such as foreclosed homes now in the banks possession With house prices at all time highs and interest rates at all time lows, both 1&2 sound great to me and absolutely have a direct impact on me.
- turk73 7y agoWhy can't they do any of those other things? Instead they pick my pocket using inflation. Fuckers. My MM Fund was paying 2.4% for most of this year. Two rate cuts later it is 2.0% and falling. Is .4% really that big of a deal? Do they need ALL of my money? Look at the value of the dollar from 1913 (when the Fed came into being) to today and you see that it is worth a mere $.05 of what it was back then. We are being fucked over. Also, I would like to buy another house and sell the one I own and generally do things that would increase money velocity, but I can't do any of that because I'm too fearful that I'm going to lose my job and that my savings will again be cut in half in some asinine banking fiasco like we had in 2008. It is sick what we do in this country and it makes me physically ill to even play a part in it. So when I say I pray for a "revolution" each day, I mean it. It doesn't have to be the violent kind, it just has to be the "come to Jesus" kind for the jack offs doing this fuckery.
- jhayward 7y ago> If the fed were not providing this printed money to the banks I'm pretty sure you don't actually mean "printed money", since the Federal Reserve doesn't do that. No currency was created for this market operation, just balances in books kept by the Federal Reserve Bank of New York.
- mindslight 7y agoYes, it is not literally "printing money" in the way that the US Mint physically does. The term is appropriate though, as the result of translating from the paradigm banks operate in into the paradigm natural persons are bound by. We can only give away what we have received - I cannot give a friend $20 in exchange for an IOU, and then transmute that IOU into a crisp new $20 bill.
- thiago_fm 7y agoThey can always pump more money to the market in different ways, but what is clear that is happening there is a shift on the dollar not being the world currency / international trade currency. FED will have always more trouble to handle that. What will happen is hard to say, maybe some crazy inflation, or liquidity crisis... or something I don't care about. What I care about is that economy and money will be broken for a while which will make people move away from the Dollar.
- chosenbreed37 7y ago> What I care about is that economy and money will be broken for a while which will make people move away from the Dollar. Why though?
- thiago_fm 7y agoBecause if FED and US can't do a good job to keep their currency and country running properly, doing austerity when it is needed, not bailing out banks etc. Nobody will trust that currency anymore. No country in the world can run a $1 trillion deficit or 5%(?) of their GDP every year and not have consequences. This might be "okay" now, but this will create an effect that when people finally start to move away from the dollar, things will run completely out of control in America.
- meddlepal 7y agoAh so you want to see America collapse? That'll turn out great for everyone I'm sure.
- delfinom 7y agoThe fact you think he wants to see America collapse is part of the problem. People like you further contribute to not solving problems.
- drjesusphd 7y agoThis is nonsense. Predicted is not the same thing as wanting. If the economy runs on everyone clapping for Tinkerbell, we have more problems.
- sbmthakur 7y agohttps://outline.com/BqFFzM https://outline.com/BqFFzM
- neogodless 7y agoThis link is broken for me. I tried it a few different Firefox containers and a private window. No dice!
- sbmthakur 7y agoCould you be more specific? It worked fine for me on Firefox(Android and Windows), no containers.
- Qub3d 7y agoTurn off enhanced tracking protection[0]. As outline inherently works by grabbing data off of third-party sites, the new enhanced protection may break it. [0]:https://support.mozilla.org/en-US/kb/enhanced-tracking-protection-firefox-desktop https://support.mozilla.org/en-US/kb/enhanced-tracking-prote...
- neogodless 7y agoAh that might be it. I think I'll leave it on and skip the article, but thanks for figuring out why I had the issue!
- zxcb1 7y agoWhat would the difference be in this scenario with full versus fractional reserve?
- zxcb1 7y agoPlease answer instead of downvoting
- andreitp1 7y agoYou can use Google to bypass the paywall: https://www.google.com/search?gl=us&hl=en&pws=0&source=hp&ei=FdKEXf-KFsuZkwW4q4XADQ&q=Why+is+the+Federal+Reserve+pouring+money+into+the+financial+system%3F&oq=Why+is+the+Federal+Reserve+pouring+money+into+the+financial+system%3F&gs_l=psy-ab.3...1181.1181..1912...0.0..0.70.70.1......0....2j1..gws-wiz.2vjQOkG_nR4&ved=0ahUKEwi_6fn0vt_kAhXLzKQKHbhVAdgQ4dUDCAg&uact=5 https://www.google.com/search?gl=us&hl=en&pws=0&source=hp&ei...
- NKCSS 7y agoI still had some money in USD on my paypal... I think this is a good time to convert those back to Euro's :)
- ComputerGuru 7y agoI wish it were that simple. It’s truly a global economy and between the spike in oil prices, the looming brexit/not-brexit, the US-China trade war, and everything else, I think it’s all one big cluster%]+} and it doesn’t make a difference which of the two currencies you store your money in, long term.
- paulmd 7y agoYou might be surprised. When the shit really hits the fan, people run back to USD holdings first and foremost and the dollar spikes.
- resters 7y agoOn the question of "Are reserves too low" posed by the article: Reserves are simply a low pass filter, making it very unlikely that high frequency events (routine events) will cause a crisis. But they still allow low frequency events to potentially cause problems. Since the "cutoff frequency" of the "filter" is determined by the political process, then to answer the question about whether reserves are adequate we must consider how effectively the political process addresses these sorts of issues in general. Consider the PBGC, the government coordinated insurance system for pension funds. It is dramatically under-funded, and if more than one or two large firms with big pension obligations went under, so would the PBGC. What this means is that it would be up to the political system to bail it out. Underwriting capital (reserve capital, or capital that is generally kept idle) is useful for financial contracts because it is far more reliable than the uncertain outcome of the political system. It is also much faster to access pre-arranged underwriting capital than it is to wait for the political system to resolve an issue. We learned in 2008 that underwriting requirements were too low, and the policy response was actually to reduce them further, allowing firms to use riskier assets for underwriting and the government buying some of those assets (QE). From the perspective of a politician, the response to the 2008 crisis was superb. The Fed and Treasury teamed up to prevent more widespread insolvency of financial firms and even automakers. This led to both industries being increasingly beholden to politicians and the political process in general. But imagine if the underwriting levels prior to 2008 had actually been adequate to prevent the cascade of insolvency. There would simply have been no crisis. From the perspective of an insurance company or banker, reserve capital is sitting idle and going to waste. If the US requires more reserve capital, this gives a competitive advantage to foreign firms whose governments require less caution. So reducing underwriting requirements is a view supported by economic nationalists. So considering that most policy discussion these days is dominated by the political class and by economic nationalists, of course the conclusion is that everything is being done in a very smart, sensible way. In the past, before bailouts were so commonplace, we could expect the firms' selfish interests to moderate their appetite for risks to the firm's solvency, but this check is not really a factor anymore.
- donclark 7y agoCould it be that the system is just too complex, with too many variables - that nobody can really make sense of the entire world economy? Sure, you can look at segments and smaller systems and maybe make sense, but are we not wanting to focus long term (which means the world, not just US)?
- DebtDeflation 7y agohttps://www.newyorkfed.org/markets/opolicy/operating_policy_190920 https://www.newyorkfed.org/markets/opolicy/operating_policy_... The facility is being extended and will run daily through October 10.