Also there's this article from Sept 18, 2019.
Explainer: The Fed Has a Repo Problem.
What's That ?
As if the U.S. Federal Reserve didn't already have enough on its plate heading into its meeting on interest rates this week, chaos deep inside the plumbing of the U.S. financial system has thrown policymakers an unexpected curveball.
Cash available to banks for their short-term funding needs all but dried up on Monday and Tuesday, and interest rates in U.S. money markets shot up to as high as 10% for some overnight loans, more than four times the Fed's rate.
That forced the Fed to make an emergency injection of more than $50 billion, its first since the financial crisis more than a decade ago, to prevent borrowing costs from spiraling even higher.
It will conduct another one on Wednesday.
The exact cause of the squeeze is a matter of some debate, but most market participants agree that two coincidental events on Monday were at least partly to blame. First, corporations had to withdraw funds from money market accounts to pay for quarterly tax bills,
and then on the same day the banks and investors who bought the $78 billion of U.S.
Treasury notes and bonds sold by Uncle Sam last week had to settle up.
On top of that, the reserves that banks park with the Fed and are often made available to other banks on an overnight basis are at their lowest since 2011
thanks to the central bank's culling of its vast portfolio of bonds over the past few years.
Added together, these factors are testing the limits of the $2.2 trillion repurchase agreement - or repo - market, a gray but essential component of the U.S. financial system.
Whatever the cause, the episode has added fuel to the argumentthat the Fed needs to take steps to avoid more disruptions in the repo market down the road.
WHY IS THE REPO MARKET IMPORTANT ?
The repo market underpins much of the U.S. financial system, helping to ensure banks have the liquidity to meet their daily operational needs and maintain sufficient reserves.
In a repo trade, Wall Street firms and banks offer U.S. Treasuries and other high-quality securities as collateral to raise cash, often overnight, to finance their trading and lending activities.
The next day, borrowers repay their loans plus what is typically a nominal rate of interest and get their bonds back. In other words, they repurchase, or repo, the bonds.
The system typically hums along with the interest rate charged on repo deals hovering close to the Fed's benchmark overnight rate, currently set in a range of 2.00% to 2.25%.
That rate is expected to be cut by a quarter percentage point on Wednesday.
But sometimes, investors get fearful of lending, as seen during the global credit crisis,
or at other times there are just not enough reserves or cash in the system to lend out, as appeared to be the case this week.
And that can cause a squeeze on the market and send borrowing costs zooming higher.
But when investors get fearful of lending, as seen during the global credit crisis, or when there are just not enough reserves or cash in the system to lend out, it sends the repo rate soaring above the Fed Funds rate.
Trading in stocks and bonds can become difficult.
It can also pinch lending to businesses and consumers and, if the disruption is prolonged, it can become a drag on a U.S. economy that relies heavily on the flow of credit.
WHAT HAS CAUSED THE DROP IN BANK RESERVES ?
Coming out of the financial crisis, after the Fed cut interest rates to near zero and bought more than $3.5 trillion of bonds, banks built up massive reserves held at the Fed.
But that level of bank reserves, which peaked at nearly $2.8 trillion, began falling when the Fed started raising interest rates in late 2015.
They fell even faster when the Fed started to cut the size of its bond portfolio about two years later.
The Fed stopped raising interest rates last year and cut them in July and is expected to do so again on Wednesday.
It has also now ceased allowing to bonds to roll off its balance sheet.
The question vexing policymakers now is whether those actions are enough to stop the downward drift in reserves, which are a main source of liquidity in funding markets like repo.
Bank reserves at the Fed last stood at $1.47 trillion, the lowest level since 2011 and nearly 50% below their peak from five years ago.
WHAT CAN THE FED DO TO CALM THE REPO MARKET ?
1. RUN SPOT REPO OPERATIONS
Through the Federal Reserve Bank of New York, the Fed can conduct occasional spot repo operations at times of funding stress, allowing banks and dealers to swap their Treasuries and other high-quality securities for cash at a minimal interest rate.
It did this on Tuesday and will do it again on Wednesday.
2. LOWER THE INTEREST IT PAYS ON EXCESS RESERVES
By making it less profitable for banks, especially foreign ones, to leave their reserves at the Fed, it may encourage banks to lend to each other in money markets.
3. CREATE A STANDING REPO FACILITY
Such a permanent financing program will allow eligible participants to exchange their bonds for cash at a set interest rate.
Fed and its staff have considered such a facility, but they have not determined who qualifies, what would be the level of interest paid and the timing for a possible launch.
4. RAMP UP BUYING OF TREASURIES
The Fed can replenish the level of bank reserves by slightly increasing its holdings of U.S. government debt.
This comes with the risk that it may be perceived as a resurrection of quantitative easing rather than a technical adjustment.
----------------------------------------------------------------------
Well, here we go again,
back intoBAILING OUT BANKS,
and THE FEDERAL RESERVE JUST PRINTING MONEY OUT OF THIN AIR !
To: Yosemitest
10 percent overnight? Wow.
2 posted on
09/20/2019 11:40:01 PM PDT by
dp0622
(Bad, bad company Till the day I die.)
To: Yosemitest
For some reason I feel like I’m driving down the road and have just seen a big fat bug hit the windshield.
Just one of those feelings ya know.
3 posted on
09/20/2019 11:54:22 PM PDT by
Herakles
(Diversity is applied Marxism!)
To: Yosemitest
4 posted on
09/21/2019 12:50:07 AM PDT by
MarMema
To: Yosemitest
Trump has really hired some disastrous people. Powell is one of them
5 posted on
09/21/2019 1:44:33 AM PDT by
RummyChick
("Pills, money .. this city is wicked. Your best friend will kill you here." Smoove about Baltimore)
To: Yosemitest
The problems elites have manipulating the markets.
6 posted on
09/21/2019 2:41:53 AM PDT by
Moonman62
(Charity comes from wealth.)
To: Yosemitest
Well, here we go again,
back into
BAILING OUT BANKS,
and THE FEDERAL RESERVE JUST PRINTING MONEY OUT OF THIN AIR !
...
Did the you read the articles you posted?
7 posted on
09/21/2019 2:45:32 AM PDT by
Moonman62
(Charity comes from wealth.)
To: Yosemitest
Due to the nature of my work Ive been following this nonstop over the week. I believe though this is the first time anyone is posting it on FR
8 posted on
09/21/2019 2:56:23 AM PDT by
spetznaz
(Nuclear-tipped Ballistic Missiles: The Ultimate Phallic Symbol)
To: Yosemitest
bookmrking
fed awaits a failure of plan a to control money market rates, shifts back to repo...
9 posted on
09/21/2019 3:02:12 AM PDT by
SteveH
(intentionally blank)
To: Yosemitest
Admittedly, not a financial guy and have very basic understanding of the markets and Wall St. That doesn’t make me a bad guy or an idiot as some on this page would automatically assume. I could have went the Wall St/banking route like many of friends, I chose not too. That being said.....
Can someone explain, in layman’s terms, what this means and how the Fed seems to be, once again, playing a game to enrich itself and its cronies on Wall St, and the taxpayer will end up footing the bill if it all sh*ts the bed?
I understand completely how the Fed has taken over our banking system and they set the rates for loans, credit cards, etc. So, if the Fed disappeared tomorrow and the banks were forced to set their own rates, how does that happen and what would it mean for us?
I think it’s pretty obvious that the Fed and Big Banks act in collusion to screw over their captive audience, all of us, every chance they get to make more and more money, while we get left holding the bag.
10 posted on
09/21/2019 4:13:19 AM PDT by
qaz123
To: Yosemitest
In 2008, overnight rates rose because firms didn’t trust their counterparties or their collateral. In this case, rates are being driven up by a lack of supply - banks have to hold more reserves post-crisis, other firms were making tax payments. There will likely be a shortage again at the end of this month when a bunch of Treasuries expire.
12 posted on
09/21/2019 5:25:08 AM PDT by
oincobx
To: Yosemitest
The New York Fed fired their chief of market operations earlier this year, Mr. Simon Potter. The new guy was apparently not ready for prime time.
To: Yosemitest
Raise your hand if you believed the big banks were not under collateralized.
23 posted on
09/21/2019 7:24:34 AM PDT by
Georgia Girl 2
(The only purpose of a pistol is to fight your way back to the rifle you should never have dropped)
To: Yosemitest
I believe the FED is planning to engineer a market downturn for next year’s election just like they did last year.
24 posted on
09/21/2019 7:25:33 AM PDT by
OrioleFan
(Republicans believe every day is July 4th, Democrats believe every day is April 15th.)
To: Yosemitest
Two very long articles filled with good information and then you come up with a conclusion that makes no sense.
...to operate a floor system with the minimum level of reserves necessary to permit the efficient and effective conduct of monetary policy:
minimally ample reserves for short.
The Fed controls short term rates AND dictates overnight bank holding requirements. TWO different things.
Increasing or decreasing reserve requirements is meant to provide liquidity, prevent a run on the bank and goes hand in hand with a tight or loose money stance. With inflation low there is no reason for tight money now.
This is a return to normalcy from Keynesian insanity of the Obama years.
28 posted on
09/21/2019 8:19:44 AM PDT by
jdsteel
(Americans are Dreamers too!!!)
To: Yosemitest
Inevitable consequences of pretending debt is money...
To: All
115 posted on
09/23/2019 3:36:31 PM PDT by
Drago
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