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It really helps to have a look at the graph: https://fred.stlouisfed.org/series/RRPONTSYD https://fred.stlouisfed.org/series/RRPONTSYD This is clearly the hig
by aazaa 5y ago
It really helps to have a look at the graph:
https://fred.stlouisfed.org/series/RRPONTSYD https://fred.stlouisfed.org/series/RRPONTSYD
This is clearly the highest level of reverse repo since the program was introduced, by a wide margin.
There are three factors behind this:
1. The Treasury has temporarily backed off issuance of short term debt as it drains down an overflowing General Account.
https://www.reuters.com/article/us-usa-treasury-liquidity-explainer/explainer-u-s-treasurys-cash-drawdown-and-why-markets-care-idUSKBN2AM26A https://www.reuters.com/article/us-usa-treasury-liquidity-ex...
2. Banks have been inundated with cash resulting from federal government transfers (stimmy checks, paycheck protection program giveaways, etc.).
3. Banks can't simply accept cash from depositors and be done with it. They need to convert that cash into an asset of some kind. And right now, the asset of choice is short term treasuries (exactly the thing in short supply).
Reverse repo is when the Fed loans treasuries to banks, typically at very low rate and no more than one day. This avoids the need for the Fed to sell its short term treasuries on the open market.
By running reverse repo, the Fed can prevent short term interest rates from falling below zero (they have briefly broken this level in recent months). Such an occurrence would send a very unexpected signal to markets and could result in panic as investors see the value of money market funds shrink for the first time ever.
Of course, you might ask why on earth the Fed doesn't just sell the treasuries it picked up by performing all that quantitative easing over the last 18 months or so. This is what's known as "quantitative tightening." If you want to see markets really freak out, watch what happens if the Fed were to suddenly announce a massive quantitative tightening program.
Whether or not any of this matters is not clear. The Fed still has some tricks up its sleeve to keep the train rolling. And once the TGA is spent down, that could open the path to much more short term debt issuance. Of course, if demand grows faster than supply at that point, things could get crazy.
- deleted 5y ago[deleted]
- testfoobar 5y agoSec. Yellen is operating close to the debt ceiling. It will take an act of Congress to remedy this. https://www.rollcall.com/2021/06/14/democrats-have-no-easy-options-for-raising-the-debt-limit/ https://www.rollcall.com/2021/06/14/democrats-have-no-easy-o...
- mistrial9 5y agoQ. How many US Presidencies have "operating close to the debt ceiling" and needed an "act of Congress" to continue on.. factual answers please, partisans
- eightysixfour 5y agoThe chart from 1940 to 2018 makes it look like the answer is "most of them." https://www.crfb.org/sites/default/files/DebtCeilingChart.JPG https://www.crfb.org/sites/default/files/DebtCeilingChart.JP...
- Traster 5y agoThere's something uniquely amusing about a chart that has an axis that goes $2,$4,$6,$8 and then in the title (trillions).
- testfoobar 5y agoWikipedia is your friend: https://en.wikipedia.org/wiki/History_of_United_States_debt_ceiling https://en.wikipedia.org/wiki/History_of_United_States_debt_...
- MR4D 5y agoDifferent answer than you’re asking for, but the debt limit is probably not even legal. Congress authorizes the Executive branch to spend funds, not to manage the debt. The Constitutional question will probably never be answered, but my gut tells me if it is violated, that there is no real remedy.
- darkwizard42 5y agoFound this quite insightful. Thank you for breaking it down!
- AnimalMuppet 5y ago> Such an occurrence would send a very unexpected signal to markets and could result in panic as investors see the value of money market funds shrink for the first time ever. Not the first time ever. At least two money market funds "broke the buck" (that is, lost value) in 2008, IIRC.
- rsync 5y agoThat is correct.
- ProjectArcturis 5y agoYes, although the investors were made whole fairly quickly.
- alisonkisk 5y ago> Such an occurrence would send a very unexpected signal to markets and could result in panic as investors see the value of money market funds shrink for the first time ever. Panic how? what will they do, withdraw the cash that banks don't want anyway? I dont undertand the weird mythologizing of 0% interest rate, pretending transaction costa dont exist.
- dcolkitt 5y agoI do agree with you that most commentators freak out about the zero bound more than is justified. Especially given the fact that negative rates have existed in Europe and Japan for a while without any major effects. But generally, banks are extremely discourages, both by regulation and convention, from charing negative interest rates on consumer accounts. The first bank that "burns" funds in your checking or savings account is going to get assailed by a pitchfork wielding mob. So you're forced to borrow deposits at zero, and lend negative, which is obviously unprofitable. Negative interest rates do create a game of hot potato, where banks continuously try to offload their consumer depositors on one another.
- jcranmer 5y ago> The first bank that "burns" funds in your checking or savings account is going to get assailed by a pitchfork wielding mob. I think some banks have already done this as a result of Europe's persistent negative rates. See this Bloomberg article for a citation: https://www.bloomberg.com/news/articles/2019-09-22/banks-just-changed-the-rules-of-the-negative-rate-game-for-danes https://www.bloomberg.com/news/articles/2019-09-22/banks-jus...
- wcoenen 5y agoThe current approach seems to be negative rates on deposits over a certain amount. E.g. ING Belgium will have a -0.5% interest on deposits over 250K EUR starting next month[1]. Rabobank.be simply decided to close all accounts[2], which is another way to get rid of customer deposits while avoiding mobs. It will increase the pressure on the other banks who will receive those deposits though. [1] https://www.ing.be/en/retail/daily-banking/savings-accounts/interest-and-conditions https://www.ing.be/en/retail/daily-banking/savings-accounts/... [2] https://www.brusselstimes.com/news/business/174304/200000-belgians-look-for-a-new-bank-as-rabobank-shuts-down/ https://www.brusselstimes.com/news/business/174304/200000-be...
- jcranmer 5y ago> Such an occurrence would send a very unexpected signal to markets and could result in panic as investors see the value of money market funds shrink for the first time ever. Apparently "ever" covers neither 2008 (where the Lehman Brothers bankruptcy caused the money market to implode) nor 1994, nor 1978.
- aazaa 5y agoI stand corrected. https://en.wikipedia.org/wiki/Money_market_fund#Breaking_the_buck https://en.wikipedia.org/wiki/Money_market_fund#Breaking_the... That said, I think it's safe to say nobody is prepared for what will happen if this became the norm.
- OldHand2018 5y agoA significant number of US money market funds have been operating under fee waivers to keep yields positive since last year. One of my retirement accounts sent me an email stating that their fee waiver expires June 30 of this year and can’t be extended. This is very different from “breaking the buck”, but I am curious to see what things would look like if money market yields went negative, which apparently is likely to happen next month.
- alfiedotwtf 5y agoI'm curious but don't know enough about this topic. What could be likely impacts?
- OldHand2018 5y agoI’m not really sure. It would definitely mean that holding cash in an investment account costs money - you have to invest it in something to avoid losing money. But then again, investing in something involves the risk of losing a lot more money than holding it in “cash”!
- _spoonman 5y agoSince the Fed owns so much of its own debt, couldn’t it just decide not to repay itself the principal when those treasuries mature?
- dragonwriter 5y ago> Since the Fed owns so much of its own debt, The Fed(eral Reserve) and the federal government are not the same thing. The forming owning debt of the latter isn’t owning its own debt.
- andrekandre 5y agoReverse repo is when the Fed loans treasuries to banks, typically at very low rate and no more than one day. This avoids the need for the Fed to sell its short term treasuries on the open market. coming from a programmers mindset, my immediate reaction was "this seems like a hack, whats the root cause of the issue, we should fix that instead"... i wonder what us the root cause? or in economics, i guess its never so straightforwards...?
- f38zf5vdt 5y agoWhenever I delve into this stuff in depth it feels like people are explaining the world's most complicated PID controller for dealing with the human economy, which is itself a product of human psychology. Since no one understands the latter, it seems like economics is just the constant over-fitting of mathematics to the incomprehensible.
- lvs 5y agoIt is definitely a process with an incredibly long lag. What's amazing is that some of these control loops have only been operational since 2008 and/or 2013.
- MR4D 5y agoI work in finance. It IS a hack, and a bad one, too. I expect this will end badly as they keep kicking the can down the road. A recession - a real one - would help us rest this problem, but the Fed is afraid of hosing all the 401k retirement money in the process.
- imtringued 5y ago>"this seems like a hack, whats the root cause of the issue, we should fix that instead"... There is nothing to fix. You have an aging population that pays back loans and never takes any new ones on. This contracts the money supply. Business profitability shrinks as less people spend their money and more save it instead. Given a limited number of dollars saving cannot continue forever. At some point you have saved every dollar there is. The only way you can save even more money is by creating new dollars. It's an entirely human made problem. If you stop saving beyond the point where it makes sense the problem goes away. Telling people to stop saving doesn't work because their decision to save is just the result of being at the end of their life. The other solution is to make the dollars real. E.g. by investing the money and letting the dollars in your bank account represent a physical resource somewhere on the planet. This approach suffers from a problem: Companies are saving as well. The interest rates on credit are too high to justify investments. You can just sit on cash for a risk free loss vs the uncertainty of investing into a market that is shrinking in profitability as people stop spending money. So the only answer left is to let the government take on the debt so the retiring people and companies don't have to. If the government decides to be "financially (ir)responsible" it can just kick the problem back to the private sector by running a balanced budget or even a surplus. Without negative interest rates the problem will not resolve itself and zero sum games start dominating until the only acceptable solution is a war. At that point we get to decide whether we want to kill people in our country or go to another country and kill people there.
- OldHand2018 5y ago> Banks have been inundated with cash resulting from federal government transfers (stimmy checks, paycheck protection program giveaways, etc.). Oh man, you left out one of the weirdest ones going on right now! Because of the insanity of the housing market, there are tons of people who close on the house they’re selling a week or more before they close on the house they’re buying and are parking half a million or more in a bank account for a very short duration! I’ve been in two hotels long-term this spring and both have been filled with people in this situation. They can’t be the only two hotels in the country with people doing this…
- jgalt212 5y ago> 3. Banks can't simply accept cash from depositors and be done with it. They need to convert that cash into an asset of some kind. And right now, the asset of choice is short term treasuries (exactly the thing in short supply). When interest rates are 0% there's nothing stopping them from doing this.