Fed to Increase Emergency Repos to $120 Billion, But Hey, It's Not Monetary

-edited

The Fed announced today it would increase "Overnight" repos to $120 billion.

Please consider a Statement Regarding Repurchase Operations from the New York Fed moments ago.

The Desk has released an update to the schedule of repurchase agreement (repo) operations for the current monthly period. Consistent with the most recent FOMC directive, to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation, the amount offered in overnight repo operations will increase to at least $120 billion starting Thursday, October 24, 2019. The amount offered for the term repo operations scheduled for Thursday, October 24 and Tuesday, October 29, 2019, which span October month end, will increase to at least $45 billion.

Repo Timeline

Three Fed Statements

  1. Emergency repos were needed for "end-of-quarter funding".
  2. Balance sheet expansion is "not QE". Rather, it's "organic growth".
  3. This is "not monetary policy".

Three Mish Comments

  1. Hmm. A quick check of my calendar says the quarter ended on September 30 and today is October 23.
  2. Hmm. Historically "organic" growth was about $2 to $3 billion.
  3. Hmm. Somehow it takes an emergency (but let's no longer call it that), $120 billion "at least" in repetitive "overnight" repos to control interest rates, but that does not constitute "monetary policy"

On October 8, I noted Fed Seeks Firm Grip On Interest Rates, Supposedly Not QE

Mr. Powell emphasized that the coming moves are aimed at "maintaining a firm grip on very-short-term lending rates."

This is not QE. In no sense is this QE,” said Powell.

Effective Lower Bound

Firm Grip

It seems the Fed is still struggling to get a "firm grip" on interest rates.

Why?

Please review my September 25 post In Search of the Effective Lower Bound.

I claim these "non-emergency", "non-QE", "non-monetary policy" operations suggest we may already be at the effective lower bound for the Fed's current balance sheet holding.

Mike "Mish" Shedlock

Comments (35)
No. 1-15
Harry-Ireland
Harry-Ireland

A financial system that requires over $100B of liquidity injections every day, temporary, permanent or otherwise, has major issues. Sven H.

Bam_Man
Bam_Man

"Nothing to see here folks. Please move along." -- Lt. Frank Drebin

Ian Alexander
Ian Alexander

Taking bad collateral to keep banks solvent. It's not QE. It's ST OMO or TALF or one of the many other acronyms the Fed uses to pretend it's normal.

Jackula
Jackula

I think you are right. They were losing control of the short term rates. "Quality" and qualified collateral may be in short supply as well as Mr Market having a say on the value of the qualified collateral.

Mish
Mish

Editor

"Taking bad collateral to keep banks solvent."

This is not TARP 2009 https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program

"No collateral" is a better description. Someone or someones is caught in some sort of borrow-short lend-long scheme and the Fed is giving them reserves with nothing in return.

The Fed holds treasuries created out of thin air and gives financial institutions cash? Where's the collateral?

WeAreSoFucked
WeAreSoFucked

This is bound for NIRP - No other alternative. That is the moment any sane person realizes The FED has DEFAULTED.

Defaulting is just what is happening now. No?

frozeninthenorth
frozeninthenorth

Aside from all the posturing "about this fake collateral" the big and unanswered question is really: What is going on in the market since liquidity is so lacking -- I have yet to hear any useful ideal as to why the repo market is so large and not shrinking. Really, why are banks using the Repo market is it because they hold so much US government debt that its cheap and easy to go to the Repo funding window?

It would be nice to hear from some of the boys on the big banks' funding desk why or why are they so in love with the repo market!

Herkie
Herkie

The New York Fed announced it is increasing its temporary overnight repo operations to $120 billion a day from the current $75 billion. In addition to the repo increase, term repo operations are rising to $45 billion, from $35 billion

Not QE 4.... QE 4 AND 5 combined and that is not all....

Federal Reserve economist says growth would have been better with negative interest rates

What do you think they are grooming the economy for?

Six000mileyear
Six000mileyear

The FED is paying a bribe to financial institutions to prevent them from selling stocks. If interbank lending is illiquid, then shouldn't everything that is farther out on the risk spectrum?

bradw2k
bradw2k

Every kid knows the Monopoly game is almost over when someone starts making "deals" with the bank.

Axiom7
Axiom7

I think the timing and this uptick in repo just gave us a nice clue as to who is in trouble and it reinforces what we already thought we knew. Euro banks are starving for dollar funding (Captain Obvious) and if there is a hard Brexit both UK and German banks are in big trouble - that probably explains the timing. I wonder if this implies that the EU will crack in negotiations knowing that a DB fail is too-big-to-bail?

abend237-04
abend237-04

I think private banking has successfully waltzed themselves out of the short term LOC trade because there's no longer any money in it, but a lot of risk. They've de facto invited the Fed to take it over and they have. It looks to me like an extended Lehman moment in disguise.

GerryTsai
GerryTsai

Check out DEEP THROAT'S blog post on this. He speculates that the Chinese are pulling USD deposits from the banking system. If u run a bank and lose your deposit base, u lose the funds that support the loan side of your balance sheet, and that makes u insolvent.

Deep Throat might be right, but the answer is probably more simple. Banks are likely simply losing trust in each other as they begin to see the end of this economic cycle. And concerns about the trade war are not helping. Positioning themselves defensively, anticipating liquidity problems due to unstable funding sources, they remember 2007 to 2009. By trying to prevent a run on the bank they are creating a run on the bank. Reminds me of Mr. Soros's Theory of Reflexivity.

RonJ
RonJ
Emergency repos were needed for "end-of-quarter funding".
Balance sheet expansion is "not QE". Rather, it's "organic growth".
This is "not monetary policy".

Bernanke would have said it is confined to subprime.