Holy Moly, the Fed’s peak repo at $ 756 billion, canceling 6 months of QE. In the opposite direction, Fed QE pushes assets past $ 8 trillion


Yesterday the Fed hiked its overnight repo interest rate, and this morning there was a huge cash sucking noise.

By Wolf Richter for WOLF STREET.

The Fed this morning sold a record $ 756 billion of treasury securities in exchange for cash via “reverse repos” overnight. This was up 45% from yesterday’s operations of $ 521 billion. There were 68 counterparties involved. Yesterday’s overnight repo had matured and unfolded this morning, only to be replaced by today’s tsunami.

During the period starting in 2014 and then easing with the Fed’s quantitative tightening in 2018, the U.S. financial system was also crunching under a huge amount of liquidity after years of QE, and the Fed drained some of the cash. this liquidity via reverse repurchase agreements. There were also peaks, but they came on the last day of the quarter, and particularly at the end of the year.

This time the overnight repo (RRP) increased during the neighborhood, and today they’ve reached the stratosphere. Yesterday the Fed had raised the RRP supply rate to 0.05% (down from 0.0%), and this morning there was a huge money-sucking noise (forgive me, Ross). The RRP balance of $ 756 billion drains more than six months of QE from the market:

The New York Fed, which manages day-to-day reverse repurchase transactions, does not disclose the specific counterparty it has dealt with today, but it does have a long list of approved counterparties that include the largest banks and brokers (Primary Dealers) as well as government sponsored companies. (GSE), like Fannie Mae, Freddie Mac, etc., and asset managers with money market funds.

They can now make 0.05% risk-free on their excess liquidity by handing over that liquidity to the Fed, in exchange for Treasury securities.

The yield on short-term treasury bills has recently been close to zero or sometimes zero or briefly below zero, with the three-month yield mostly falling between 0.01% and 0.025%. Today, with the RRP offer rate at 0.05%, the three-month yield hit 0.038%, the highest since March.

QE liquidity tsunami: Fed assets exceed $ 8 trillion.

Even though the Fed was busy removing liquidity from the system, it continued to add liquidity to the system through QE. The Fed’s total assets in its balance sheet for the week through Wednesday, June 16, jumped $ 112 billion from the previous week, to a stunning new record of $ 8,064 billion.

In the 15 months since the money-printing madness started, the Fed has accumulated an additional $ 3.75 trillion in assets on top of its existing mountain and has more than doubled its assets since September. 2019, when the repo market exploded and triggered a crisis. massive bailout.

The two main factors behind the $ 112 billion increase in total assets during the week were:

  • Treasury securities increased by $ 24 billion to $ 5.15 billion.
  • Mortgage-backed securities (MBS) increased by $ 84 billion to $ 2.33 trillion, according to their typical pattern, after declining for a week and remaining stable for three weeks. The net increase over the four weeks was $ 50 billion.

The Drawdown of the General Treasury Account (TGA).

Among the distortions resulting from the money madness last spring, the federal government issued about $ 3 trillion in new debt to fund various stimulus and bailouts. The Fed bought around $ 3 trillion in assets over time and thus monetized this newly issued government debt.

But the government did not actually spend the $ 3 trillion in newly borrowed money. Instead, much of it remained in his checking account, the Federal Reserve Bank of New York’s Treasury General Account (TGA), which swelled $ 1.4 trillion and peaked at $ 1. , $ 8 trillion in money borrowed but not spent in July 2020.

That $ 1.4 trillion that the government borrowed and then the Fed monetized did not go into the economy and the markets but stayed in the government’s current account.

Treasury Yellen early on formalized a plan to bring the TGA down to $ 500 billion by the end of June. But the timeline seems to stretch further into the summer.

On Wednesday, according to the Fed’s weekly report today, the TGA balance rose by $ 92 billion to $ 765 billion. $ 265 billion more to go:

The Treasury Department taps into the TGA balance by spending more cash than it takes out through tax revenues and issuing new debt. The money the government spends in this way was already monetized by the Fed last spring, but stayed in its TGA until it started entering the economy in February, when it also flooded the country. silver.

This rapid withdrawal from the TGA contributed to the distortions the Fed is now trying to mop up with its overnight repurchases, still distributing liquidity through QE with one hand and mopping up liquidity even faster on the other. .

With inflation higher than expected, the Fed is trying to slow the pace at which it is falling further behind. Lily... The Fed “had discussions” on tapering, reconciles rate hikes, raises interest rates on reserves (IOER) and overnight reverse repurchase agreements

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