10 ms·

Statement Regarding Repurchase Operations

147 points by lazerpants 7y ago

helen___keller 7y ago
Additionally, three overlapping 14-day term operations of atleast $30 billion each. Adding it together we can see the fed is going to be providing a minimum of $165B in total liquidity to the market while all the operations are undergoing. Curious how this will play out in the long term. Are we going to add even more liquidity when these operations end?
- joobus 7y ago
  So nice of the Fed to help the banks mark the close of the quarter.
- deevolution 7y ago
  I wish the fed would print some money for me to help pay my student debt
  - germinalphrase 7y ago
    There are presidential candidates essentially promising just that.
jjuhl 7y ago
Smoke and mirrors and games...
- bonestamp2 7y ago
  Hey, it's all fun until 14 million people lose their homes again right? /s
  - jjuhl 7y ago
    My point was purely that this is the financial market playing their usual games again.
    - bonestamp2 7y ago
      I hear you, and my point was that sometimes those games go sideways in a big way.
ipython 7y ago
I wish I understood what this meant. From my primitive understanding, we have too much money concentrated in too few people trying to make unrealistic returns, so they hold on to it rather than invest it. Does this move mean that the fed is trying to keep its benchmark rate too low and absent market forces it would be much higher?
- yasp 7y ago
  From what I've been able to gather, there has been a decrease in demand for US Treasurys from certain segments of the market. This has resulted in primary dealers having to purchase the difference. They don't purchase USTs from cash on hand. Instead, they use the repo market to fund the purchase. However, the supply of repo market funds is relatively inelastic. Thus, you have a big spike in repo demand with a relatively fixed supply. This was causing the rate spikes we saw. Thus the Fed stepping in as lender of the last resort.
  - not2b 7y ago
    It seems to me that the issue is that there has been an increase in supply, because of the massive deficit. This means that there are more US Treasuries for sale than there are buyers. They could sell more by letting the interest rate rise, but that would have major negative effects if a large increase is required.
    - yasp 7y ago
      The increased supply of UST is another contributing factor, yes. Important point AFAICT is the supply inelasticity of repo funds.
  - AnimalMuppet 7y ago
    So: Not enough demand for Treasuries, dealers have to purchase the difference, dealers running out of money to keep doing that, the Fed supplying the money for repo. I can buy all that, and it makes me nervous. How close are we to a failed auction where the dealers won't or can't purchase the difference? How close are we to the Fed having to buy them directly?
LocalTrust 7y ago
Wow this is not good. Repo market is the market of overnight debt between banks. Banks lend money to each other to cover their collateral needs/exposures at the end of each day. If banks lose confidence in each other, they start demanding more collateral from each other in the overnight market, which means the overnight rate goes up. The NYFed is trying to keep interest rates down and is having trouble doing it. As a result, it's having to take some extraordinary measures to the tune of injecting $100b into banks, every night, for the next month. They are basically trying to ensure that no bank gets caught with it's shirt off, while the banks are signaling that they think their peers might be naked.
- spiantino 7y ago
  I don't think that's whats happening. Basically, in a repo you have one party posting a treasury bond as collateral and being lent the equivalent amount of cash. There's an interest rate you're charged on the cash, and potentially a "haircut" on the amount of cash relative to the value of the bond that a bank might take if they decide the other party is a risk and they want more collateral posted. What you're describing is an increase in "haircuts" in these transactions between banks, but I haven't heard anyone report that has been happening. It has been, more simply, that too many people are showing up with bonds and want cash and too few people are showing up with cash and want to lend it. So the interest rate has risen
  - opportune 7y ago
    Why is there such a liquidity crunch though? And why is the fed stepping in when the liquidity crunch could just correct itself via market mechanisms - if the market rate for overnight lending was 9% I assume plenty of organizations would race to take advantage of that Aside from something that would just naturally correct itself (lenders being temporarily short on cash due to some statistical anomaly), the only explanation I can think of is that some of the lenders believe that some of the creditors are about to default
    - karpodiem 7y ago
      Shades of LTCM.
RandomGenerated 7y ago
We've come a long way from stress tests I see
- deleted 7y ago
  [deleted]
SilasX 7y ago
To retry my earlier comment[1]: The Fed is nobly ensuring banks' 2.25% APR ("target federal funds") rate against being viciously squeezed to 9%. Over three weeks. That means banks are, at most, saved from having to pay an (extra) interest charge of $3.6 million per 1 billion (revolving) dollars borrowed. [2] That ... still seems like a rounding error against their typical quarterly profits, considering it's a one-time anomalous event. Is that really something that justifies extreme Fed measures? [1] https://news.ycombinator.com/item?id=21000023 https://news.ycombinator.com/item?id=21000023 [2] computed from 1,000,000,000(1.09^(3/52) - 1.025^(3/52))
- toomuchtodo 7y ago
  It’s to prevent a cascading failure due to a rapid loss in confidence requiring even greater action from the Fed (such would occur if interbank lending dries up because of counterparty risk [perceived or actual]). Disclaimer: I work in financial services, but am not involved in these operations.
  - tracer4201 7y ago
    I vaguely remember my macroecon class in college so many moons ago. The point is to stop a “contagion” from spreading and causing panic, right?
    - toomuchtodo 7y ago
      Essentially. Read about the 2007-2008 GFC [1] to understand how fast the system can break down (weeks). Personally, I find the story of how JP Morgan (the financier) first acted as this sort of national economic backstop in 1907 very interesting and a fun read [2]. [1] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008 https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80... [2] https://en.wikipedia.org/wiki/Panic_of_1907 https://en.wikipedia.org/wiki/Panic_of_1907
      - disiplus 7y ago
        im in the middle of the book Crashed, that pretty good explains exactly this in the events of 2008 crash https://www.amazon.com/Crashed-Decade-Financial-Crises-Changed/dp/0670024937 https://www.amazon.com/Crashed-Decade-Financial-Crises-Chang...
MarkPNeyer 7y ago
This is great for bitcoin.
Bostonian 7y ago
My understanding is that repo trades are 1-day loans collateralized by government bonds. So I don't see how the government is taking any risk here or why it is problematic.
motohagiography 7y ago
What is the asset banks are so worried their counterparties have on their balance sheets that they need a Fed repo operation? Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said CEOs stock in a private company that has negative cash flow and no real assets, which he also happens to control? Surely there is no reason to doubt the quality of collateral like that. But more seriously, legit question is what do the banks know about each other that the financial press hasn't reported yet? Personally I think the Fed is keeping interest rates down to defuse a massive geopolitical conflict that is closer to blowing than anyone realizes, but that doesn't explain why banks are worried about getting stiffed by each other.
- draw_down 7y ago
  Reading between the lines, your theory is that WeWork is causing the Fed to do this?
- o-__-o 7y ago
  >Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said CEOs stock in a private company that has negative cash flow and no real assets, which he also happens to control? Surely there is no reason to doubt the quality of collateral like that. As a startup CEO with available stock, an actual positive cash flow and no _real_ assets.. please tell me where I can apply for this type of loan? Because all the loans I'm looking at are 3-8% interest and requires me to sign over my personal assets as collateral in return for a paltry $250k. I'd rather use that loan to just buy more real assets for myself instead (which is what I am doing)
  - motohagiography 7y ago
    https://www.bloomberg.com/news/articles/2019-09-19/neumann-s-lenders-seek-changes-to-his-500-million-credit-line https://www.bloomberg.com/news/articles/2019-09-19/neumann-s...
    - o-__-o 7y ago
      Are you telling me the assets that WeWork owns are not real assets? Well, then, if real estate is not an asset then what qualifies as assets?
situational87 7y ago
Could you even imagine what we could do with $100B every day? My god. They just sit down at the keyboard and print money out of thin air and electrons and give it to any of the 20 biggest banks who ask for it. We could literally solve every single problem.
- atemerev 7y ago
  Banks are there to give capital to businesses, which do solve every single problem from the beginning of capitalism. This is how it works.
  - Moral_ 7y ago
    More like 95% of that is going to go into funding/offsetting some obscure financial derivative that 8 Mathematics and Finance PhDs in a room cooked up.
  - lawn 7y ago
    Pure capitalism does not "solve every single problem"...
- opportune 7y ago
  Well part of the idea is that they get it back pretty quickly. If the fed just gave it all away it would rapidly expand the monetary supply and cause a lot of inflation Though there is something to be said for longer term QE operations only going through banks rather than through citizens
  - simplecomplex 7y ago
    They did rapidly expand the monetary supply and it did cause inflation. Assets are sky high (stocks and real estate). Properties are priced 10-20x cash flow. Stocks are similarly trading at absurd earnings ratios. Does anyone remember https://en.wikipedia.org/wiki/Japanese_asset_price_bubble https://en.wikipedia.org/wiki/Japanese_asset_price_bubble ? Massively expanding credit to the point where money is free .... reduces the value of money. But denial is a helluva drug.
ww520 7y ago
One thing to note is that $100B is created everyday but the $100B is destroyed the next day. It's not like $100B created everyday for the next month.
- stingraycharles 7y ago
  This is indeed very important to understand. While overall of course it’s not a bad sign, the Fed is behaving like a _lender of last resort_ for very short term loans. And the situation can also be explained. Of course it’s not a good sign overall, but there’s no reason to panic.
- LocalTrust 7y ago
  I guess that's a fair point. Sorry for oversimplified explanation. So, to attempt to improve on your further clarification: technically it is $75b per night created and destroyed each morning. And 3 separate cycles of $30b will be created for 2 weeks and then destroyed. Therefore $90b injected for 2-weeks then destroyed. Point is this is being injected to help banks cover their overnight exposures with the hope that they won't need the help anymore after Oct 10.
  - rising-sky 7y ago
    Is there some resource I can look up to better understand what you mean by "destroyed"? Will they be absorbing the value back through financial instruments or how does this "destruction" happen?
    - lmkg 7y ago
      They are loans. Money is given to the banks, and then repaid (with interest, but a low rate and short time makes this marginal). The fact that the money is "created" and "destroyed" is the nature of the Fed. They don't need to have money in order to lend it. That's what the Fed is. These loans are literally the same as printing money, loaning it, collecting the loans, and destroying the printed money. Except everything is just numbers on a balance sheet, so no physical money needs to be physically printed or shredded. The effect is still the same: The Fed decides that money should enter the money system, and also describes how that money will leave the money system.
howeyc 7y ago
In order for the overnight rate to be within the Fed target range shouldn't the Fed be involved in the market every day anyway?
CyanLite4 7y ago
Hoping to clear up some FUD here: 1) This is the financial equivalent of taking a sledgehammer to squash a bug. Financial markets operate largely on confidence, and especially the rule that the Fed is the lender of last resort at their specified Fed Funds Rate (now 25 basis points lower as of Wednesday). 2) This isn’t $165b. It could be the same $75b used every day. 3) No, this isn’t a sign of a healthy market, but bond prices especially in Europe have gone bananas the past few months and we could be in the biggest bond bubble of our generation. This was evident in negative yields as also a very quick yield curve inversion in the U.S. for 2y10s. 4) I personally believe some banks were over levered as bond prices began to unwind this week and got caught with their pants down. 5) I think the Fed is using this sledgehammer approach to allow some banks to unwind and de-lever their bond positions safely and orderly over the next 2 weeks. 6) I said #5 about 11 years ago, but I believe “this time it’s different.”
- helen___keller 7y ago
  > 2) This isn’t $165b. It could be the same $75b used every day. I made the $165b comment, my understanding is that there's four overlapping liquidity injections (three 14-day operations and the recurring overnight operation). Would this not be 30 + 30 + 30 + 75?
- colechristensen 7y ago
  It might not be happening this time but there are thoughts out there that the era of constant inflation is over. Automation and a sinking or negative growth rate among the top economies will lead to a long phase of economic retraction which is not at all the same as the periodic growth/recession cycle, but a longer term net negative. Many populations of people have a birth rate under the replacement rate and automation is making workers less necessary. Zoom out and it could be the first phase of the transition from capitalism to a post-scarcity economy which would look very much different. Obviously that is a lot of speculation, but there are going to be all sorts of population peak points which are going to pass in the next 20-30 years and it's really hard to believe economic growth can continue or even ever happen again with a steadily shrinking global population. When you pack smart successful people into cities like rats and have them paying half their income to live in a few hundred square feet they just won't have babies. They have to work too hard for too little and don't have interest in places with more space because the job market doesn't want to leave the cost-efficiency of the city. The effect is that populations are going to shrink until cost of living becomes cheap enough for people to want to afford the luxury of working less and raising children. I am honestly in that position myself at the moment. I am of the age and life situation where it should be time to start having children but I don't want to because I can't afford it despite being in the top X percentile of income because I want to live in a decently sized space less than 30 minutes away from my work.
beezle 7y ago
Bloomberg only gives a few free stories out so choose wisely: https://www.bloomberg.com/quicktake/the-repo-market https://www.bloomberg.com/quicktake/the-repo-market https://www.bloomberg.com/news/articles/2019-09-18/powell-seeks-to-regain-control-over-fed-funds-with-ioer-tweak https://www.bloomberg.com/news/articles/2019-09-18/powell-se... https://www.bloomberg.com/news/articles/2019-09-18/overnight-u-s-funding-rate-at-2-8-elevated-for-a-third-day https://www.bloomberg.com/news/articles/2019-09-18/overnight... https://www.bloomberg.com/news/articles/2019-09-16/repo-market-chaos-drives-overnight-rate-up-by-most-in-months https://www.bloomberg.com/news/articles/2019-09-16/repo-mark...
csense 7y ago
So if banks are super desperate for Fed funds, but actually have Treasuries to put up as collateral to borrow those funds in the overnight market, why don't they just sell their Treasuries instead, or let them mature, and hold more cash? Hasn't the Fed for years now been literally paying the banks to do just that with IOER?
aazaa 7y ago
Zooming out, here are some points I've been considering: 1. A repo intervention on this scale hasn't happened since the 2008 crisis. 2. Experts seem divided on what's causing the extremely tight overnight liquidity phenomenon. 3. The Fed refused to budge from its tepid stance on long-term rates and restarting QE in its recent meeting. This stands against a backdrop of a stagnating world economy, the collapse of foreign sovereign bond yields, and unprecedented browbeating from the White House.
- JumpCrisscross 7y ago
  > Experts seem divided on what's causing the extremely tight overnight liquidity phenomenon Divided on root cause, but not on its seriousness. Quarterly tax payments on the same day as a massive Treasury issuance amidst a Eurodollar carry trade that yields more, for longer, than the overnight markets. Nothing related to the soundness of the financial system.
FigmentEngine 7y ago
fed$ git push repo
dang 7y ago
Related: https://news.ycombinator.com/item?id=21029481 https://news.ycombinator.com/item?id=21029481
h2odragon 7y ago
NFI what any of it means myself, but it does seem sensible that upcoming Brexit and middle eastern news has a lot of large funds moving around, which might be sufficient reason for extra liquidity to be needed?
Rury 7y ago
To me it sounds like there is glut in treasuries due to the huge government deficit and there are not enough buyers. This event is the banks not having enough on hand on hand for the treasuries and the corporate tax event at once, so the fed is stepping in to provide temporary liquidity. Is it possible, or are we close to to where the banks (or other buyers) won't be able absorb the glut in treasuries themselves, and the fed has to buy them, effectively monetizing our deficits?
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147 points by lazerpants 7y ago

Additionally, three overlapping 14-day term operations of atleast $30 billion each. Adding it together we can see the fed is going to be providing a minimum of $165B in total liquidity to the market while all the operations are undergoing. Curious how this will play out in the long term. Are we going to add even more liquidity when these operations end?

joobus 7y ago
So nice of the Fed to help the banks mark the close of the quarter.
deevolution 7y ago
I wish the fed would print some money for me to help pay my student debt
- germinalphrase 7y ago
  There are presidential candidates essentially promising just that.

jjuhl 7y ago

Smoke and mirrors and games...

bonestamp2 7y ago
Hey, it's all fun until 14 million people lose their homes again right? /s
- jjuhl 7y ago
  My point was purely that this is the financial market playing their usual games again.
  - bonestamp2 7y ago
    I hear you, and my point was that sometimes those games go sideways in a big way.

ipython 7y ago

I wish I understood what this meant. From my primitive understanding, we have too much money concentrated in too few people trying to make unrealistic returns, so they hold on to it rather than invest it. Does this move mean that the fed is trying to keep its benchmark rate too low and absent market forces it would be much higher?

yasp 7y ago
From what I've been able to gather, there has been a decrease in demand for US Treasurys from certain segments of the market. This has resulted in primary dealers having to purchase the difference. They don't purchase USTs from cash on hand. Instead, they use the repo market to fund the purchase. However, the supply of repo market funds is relatively inelastic. Thus, you have a big spike in repo demand with a relatively fixed supply. This was causing the rate spikes we saw. Thus the Fed stepping in as lender of the last resort.
- not2b 7y ago
  It seems to me that the issue is that there has been an increase in supply, because of the massive deficit. This means that there are more US Treasuries for sale than there are buyers. They could sell more by letting the interest rate rise, but that would have major negative effects if a large increase is required.
  - yasp 7y ago
    The increased supply of UST is another contributing factor, yes. Important point AFAICT is the supply inelasticity of repo funds.
- AnimalMuppet 7y ago
  So: Not enough demand for Treasuries, dealers have to purchase the difference, dealers running out of money to keep doing that, the Fed supplying the money for repo. I can buy all that, and it makes me nervous. How close are we to a failed auction where the dealers won't or can't purchase the difference? How close are we to the Fed having to buy them directly?

LocalTrust 7y ago

Wow this is not good. Repo market is the market of overnight debt between banks. Banks lend money to each other to cover their collateral needs/exposures at the end of each day. If banks lose confidence in each other, they start demanding more collateral from each other in the overnight market, which means the overnight rate goes up. The NYFed is trying to keep interest rates down and is having trouble doing it. As a result, it's having to take some extraordinary measures to the tune of injecting $100b into banks, every night, for the next month. They are basically trying to ensure that no bank gets caught with it's shirt off, while the banks are signaling that they think their peers might be naked.

spiantino 7y ago
I don't think that's whats happening. Basically, in a repo you have one party posting a treasury bond as collateral and being lent the equivalent amount of cash. There's an interest rate you're charged on the cash, and potentially a "haircut" on the amount of cash relative to the value of the bond that a bank might take if they decide the other party is a risk and they want more collateral posted. What you're describing is an increase in "haircuts" in these transactions between banks, but I haven't heard anyone report that has been happening. It has been, more simply, that too many people are showing up with bonds and want cash and too few people are showing up with cash and want to lend it. So the interest rate has risen
- opportune 7y ago
  Why is there such a liquidity crunch though? And why is the fed stepping in when the liquidity crunch could just correct itself via market mechanisms - if the market rate for overnight lending was 9% I assume plenty of organizations would race to take advantage of that Aside from something that would just naturally correct itself (lenders being temporarily short on cash due to some statistical anomaly), the only explanation I can think of is that some of the lenders believe that some of the creditors are about to default
  - karpodiem 7y ago
    Shades of LTCM.

RandomGenerated 7y ago

We've come a long way from stress tests I see

deleted 7y ago
[deleted]

SilasX 7y ago

To retry my earlier comment[1]: The Fed is nobly ensuring banks' 2.25% APR ("target federal funds") rate against being viciously squeezed to 9%. Over three weeks. That means banks are, at most, saved from having to pay an (extra) interest charge of $3.6 million per 1 billion (revolving) dollars borrowed. [2] That ... still seems like a rounding error against their typical quarterly profits, considering it's a one-time anomalous event. Is that really something that justifies extreme Fed measures? [1] https://news.ycombinator.com/item?id=21000023 https://news.ycombinator.com/item?id=21000023 [2] computed from 1,000,000,000(1.09^(3/52) - 1.025^(3/52))

toomuchtodo 7y ago
It’s to prevent a cascading failure due to a rapid loss in confidence requiring even greater action from the Fed (such would occur if interbank lending dries up because of counterparty risk [perceived or actual]). Disclaimer: I work in financial services, but am not involved in these operations.
- tracer4201 7y ago
  I vaguely remember my macroecon class in college so many moons ago. The point is to stop a “contagion” from spreading and causing panic, right?
  - toomuchtodo 7y ago
    Essentially. Read about the 2007-2008 GFC [1] to understand how fast the system can break down (weeks). Personally, I find the story of how JP Morgan (the financier) first acted as this sort of national economic backstop in 1907 very interesting and a fun read [2]. [1] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008 https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80... [2] https://en.wikipedia.org/wiki/Panic_of_1907 https://en.wikipedia.org/wiki/Panic_of_1907
    - disiplus 7y ago
      im in the middle of the book Crashed, that pretty good explains exactly this in the events of 2008 crash https://www.amazon.com/Crashed-Decade-Financial-Crises-Changed/dp/0670024937 https://www.amazon.com/Crashed-Decade-Financial-Crises-Chang...

MarkPNeyer 7y ago

This is great for bitcoin.

Bostonian 7y ago

My understanding is that repo trades are 1-day loans collateralized by government bonds. So I don't see how the government is taking any risk here or why it is problematic.

motohagiography 7y ago

What is the asset banks are so worried their counterparties have on their balance sheets that they need a Fed repo operation? Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said CEOs stock in a private company that has negative cash flow and no real assets, which he also happens to control? Surely there is no reason to doubt the quality of collateral like that. But more seriously, legit question is what do the banks know about each other that the financial press hasn't reported yet? Personally I think the Fed is keeping interest rates down to defuse a massive geopolitical conflict that is closer to blowing than anyone realizes, but that doesn't explain why banks are worried about getting stiffed by each other.

draw_down 7y ago
Reading between the lines, your theory is that WeWork is causing the Fed to do this?
o-__-o 7y ago
>Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said CEOs stock in a private company that has negative cash flow and no real assets, which he also happens to control? Surely there is no reason to doubt the quality of collateral like that. As a startup CEO with available stock, an actual positive cash flow and no _real_ assets.. please tell me where I can apply for this type of loan? Because all the loans I'm looking at are 3-8% interest and requires me to sign over my personal assets as collateral in return for a paltry $250k. I'd rather use that loan to just buy more real assets for myself instead (which is what I am doing)
- motohagiography 7y ago
  https://www.bloomberg.com/news/articles/2019-09-19/neumann-s-lenders-seek-changes-to-his-500-million-credit-line https://www.bloomberg.com/news/articles/2019-09-19/neumann-s...
  - o-__-o 7y ago
    Are you telling me the assets that WeWork owns are not real assets? Well, then, if real estate is not an asset then what qualifies as assets?

situational87 7y ago

Could you even imagine what we could do with $100B every day? My god. They just sit down at the keyboard and print money out of thin air and electrons and give it to any of the 20 biggest banks who ask for it. We could literally solve every single problem.

atemerev 7y ago
Banks are there to give capital to businesses, which do solve every single problem from the beginning of capitalism. This is how it works.
- Moral_ 7y ago
  More like 95% of that is going to go into funding/offsetting some obscure financial derivative that 8 Mathematics and Finance PhDs in a room cooked up.
- lawn 7y ago
  Pure capitalism does not "solve every single problem"...
opportune 7y ago
Well part of the idea is that they get it back pretty quickly. If the fed just gave it all away it would rapidly expand the monetary supply and cause a lot of inflation Though there is something to be said for longer term QE operations only going through banks rather than through citizens
- simplecomplex 7y ago
  They did rapidly expand the monetary supply and it did cause inflation. Assets are sky high (stocks and real estate). Properties are priced 10-20x cash flow. Stocks are similarly trading at absurd earnings ratios. Does anyone remember https://en.wikipedia.org/wiki/Japanese_asset_price_bubble https://en.wikipedia.org/wiki/Japanese_asset_price_bubble ? Massively expanding credit to the point where money is free .... reduces the value of money. But denial is a helluva drug.

ww520 7y ago

One thing to note is that $100B is created everyday but the $100B is destroyed the next day. It's not like $100B created everyday for the next month.

stingraycharles 7y ago
This is indeed very important to understand. While overall of course it’s not a bad sign, the Fed is behaving like a _lender of last resort_ for very short term loans. And the situation can also be explained. Of course it’s not a good sign overall, but there’s no reason to panic.
LocalTrust 7y ago
I guess that's a fair point. Sorry for oversimplified explanation. So, to attempt to improve on your further clarification: technically it is $75b per night created and destroyed each morning. And 3 separate cycles of $30b will be created for 2 weeks and then destroyed. Therefore $90b injected for 2-weeks then destroyed. Point is this is being injected to help banks cover their overnight exposures with the hope that they won't need the help anymore after Oct 10.
- rising-sky 7y ago
  Is there some resource I can look up to better understand what you mean by "destroyed"? Will they be absorbing the value back through financial instruments or how does this "destruction" happen?
  - lmkg 7y ago
    They are loans. Money is given to the banks, and then repaid (with interest, but a low rate and short time makes this marginal). The fact that the money is "created" and "destroyed" is the nature of the Fed. They don't need to have money in order to lend it. That's what the Fed is. These loans are literally the same as printing money, loaning it, collecting the loans, and destroying the printed money. Except everything is just numbers on a balance sheet, so no physical money needs to be physically printed or shredded. The effect is still the same: The Fed decides that money should enter the money system, and also describes how that money will leave the money system.

howeyc 7y ago

In order for the overnight rate to be within the Fed target range shouldn't the Fed be involved in the market every day anyway?

CyanLite4 7y ago

Hoping to clear up some FUD here: 1) This is the financial equivalent of taking a sledgehammer to squash a bug. Financial markets operate largely on confidence, and especially the rule that the Fed is the lender of last resort at their specified Fed Funds Rate (now 25 basis points lower as of Wednesday). 2) This isn’t $165b. It could be the same $75b used every day. 3) No, this isn’t a sign of a healthy market, but bond prices especially in Europe have gone bananas the past few months and we could be in the biggest bond bubble of our generation. This was evident in negative yields as also a very quick yield curve inversion in the U.S. for 2y10s. 4) I personally believe some banks were over levered as bond prices began to unwind this week and got caught with their pants down. 5) I think the Fed is using this sledgehammer approach to allow some banks to unwind and de-lever their bond positions safely and orderly over the next 2 weeks. 6) I said #5 about 11 years ago, but I believe “this time it’s different.”

helen___keller 7y ago
> 2) This isn’t $165b. It could be the same $75b used every day. I made the $165b comment, my understanding is that there's four overlapping liquidity injections (three 14-day operations and the recurring overnight operation). Would this not be 30 + 30 + 30 + 75?
colechristensen 7y ago
It might not be happening this time but there are thoughts out there that the era of constant inflation is over. Automation and a sinking or negative growth rate among the top economies will lead to a long phase of economic retraction which is not at all the same as the periodic growth/recession cycle, but a longer term net negative. Many populations of people have a birth rate under the replacement rate and automation is making workers less necessary. Zoom out and it could be the first phase of the transition from capitalism to a post-scarcity economy which would look very much different. Obviously that is a lot of speculation, but there are going to be all sorts of population peak points which are going to pass in the next 20-30 years and it's really hard to believe economic growth can continue or even ever happen again with a steadily shrinking global population. When you pack smart successful people into cities like rats and have them paying half their income to live in a few hundred square feet they just won't have babies. They have to work too hard for too little and don't have interest in places with more space because the job market doesn't want to leave the cost-efficiency of the city. The effect is that populations are going to shrink until cost of living becomes cheap enough for people to want to afford the luxury of working less and raising children. I am honestly in that position myself at the moment. I am of the age and life situation where it should be time to start having children but I don't want to because I can't afford it despite being in the top X percentile of income because I want to live in a decently sized space less than 30 minutes away from my work.

beezle 7y ago

Bloomberg only gives a few free stories out so choose wisely: https://www.bloomberg.com/quicktake/the-repo-market https://www.bloomberg.com/quicktake/the-repo-market https://www.bloomberg.com/news/articles/2019-09-18/powell-seeks-to-regain-control-over-fed-funds-with-ioer-tweak https://www.bloomberg.com/news/articles/2019-09-18/powell-se... https://www.bloomberg.com/news/articles/2019-09-18/overnight-u-s-funding-rate-at-2-8-elevated-for-a-third-day https://www.bloomberg.com/news/articles/2019-09-18/overnight... https://www.bloomberg.com/news/articles/2019-09-16/repo-market-chaos-drives-overnight-rate-up-by-most-in-months https://www.bloomberg.com/news/articles/2019-09-16/repo-mark...

csense 7y ago

So if banks are super desperate for Fed funds, but actually have Treasuries to put up as collateral to borrow those funds in the overnight market, why don't they just sell their Treasuries instead, or let them mature, and hold more cash? Hasn't the Fed for years now been literally paying the banks to do just that with IOER?

aazaa 7y ago

Zooming out, here are some points I've been considering: 1. A repo intervention on this scale hasn't happened since the 2008 crisis. 2. Experts seem divided on what's causing the extremely tight overnight liquidity phenomenon. 3. The Fed refused to budge from its tepid stance on long-term rates and restarting QE in its recent meeting. This stands against a backdrop of a stagnating world economy, the collapse of foreign sovereign bond yields, and unprecedented browbeating from the White House.

JumpCrisscross 7y ago
> Experts seem divided on what's causing the extremely tight overnight liquidity phenomenon Divided on root cause, but not on its seriousness. Quarterly tax payments on the same day as a massive Treasury issuance amidst a Eurodollar carry trade that yields more, for longer, than the overnight markets. Nothing related to the soundness of the financial system.

FigmentEngine 7y ago

fed$ git push repo

dang 7y ago

Related: https://news.ycombinator.com/item?id=21029481 https://news.ycombinator.com/item?id=21029481

h2odragon 7y ago

NFI what any of it means myself, but it does seem sensible that upcoming Brexit and middle eastern news has a lot of large funds moving around, which might be sufficient reason for extra liquidity to be needed?

Rury 7y ago

To me it sounds like there is glut in treasuries due to the huge government deficit and there are not enough buyers. This event is the banks not having enough on hand on hand for the treasuries and the corporate tax event at once, so the fed is stepping in to provide temporary liquidity. Is it possible, or are we close to to where the banks (or other buyers) won't be able absorb the glut in treasuries themselves, and the fed has to buy them, effectively monetizing our deficits?

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