When short-term funding markets went haywire last week, analysts and market participants rushed to tweak their September FOMC calls to include the possibility that the Fed would announce imminent balance sheet expansion or a standing repo facility.
Those are generally seen as the two long-term “fixes” to what would otherwise be intermittent flareups, necessitating intervention in the form of “ad hoc”, “Band-Aid” liquidity injections.
Most analysts link last week’s funding squeeze to reserve scarcity. Indeed, the common refrain is simply that we hit the upward sloping portion of the reserve demand curve sooner than expected.
(BofA)
Having bought some time with the release of a schedule for O/N repos and term operations, officials will likely spend the next several weeks laying the groundwork for balance sheet expansion. We got a bit of that on Monday with John Williams’s prepared remarks for the 2019 US Treasury Market Conference.
“The FOMC will assess the implications for the appropriate level of reserves and time to resume organic growth of the Federal Reserve’s balance sheet consistent with the successful execution of the FOMC’s ample reserves framework”, Williams said.
Well, if you ask Jim Bullard – who of course dissented at the September meeting in favor of a 50bp cut – a standing repo facility is preferable.
“I think the repo facility would put a cap on rates in this situation”, he told reporters, in Effingham, Illinois, following a presentation. “The best part about having a standing repo facility is that you probably would not have to use it most of the time because its mere existence would stabilize trading”, he went on to remark, effectively rolling out the old Hank Paulson “bazooka” logic. Jim went on to indicate he’s not convinced last week’s repo volatility was tied to reserve scarcity.
Unsurprisingly, he also said he favors another 25bp rate cut in 2019. In his prepared remarks for the presentation in Effingham, Bullard said the Fed would decide on further rate cuts “on a meeting-by-meeting basis”.
During a Q&A session at the same event, Jim opined on NIRP. Negative nominal yields are not a sign of a health economy, he assessed.
On the dollar, Bullard said the US is “doing better than our rivals so we have a strong currency right now”. “In a way it is good news for the US”, he remarked.
Be careful Jim – too much of that kind of talk and you’ll never be Trump’s Fed chair.
Nothing overly sinister here: Andolfatto, a St. Louis Fed VP, proposed a standing repo facility some time ago.
there’s no suggestion of anything “sinister”. where do you see that in this post? we’re simply reporting what he said about one of two options for addressing a funding squeeze.
I highly suggest reading the entire Selgin post, but here’s his conclusion from May 2019:
“But if a Standing Repo Facility can make Treasuries, and perhaps other assets, just as good as reserves for meeting banks’ liquidity needs in a floor system, then it can also achieve a similar degree of effective bank liquidity in a corridor system. The difference is that an SRF-supplemented corridor system would require far fewer reserves than even the most efficient floor system. Banks in such a system could get by with very slim reserve cushions, provided they also kept plenty of Treasury securities (or, for a “broad” SRF, other eligible collateral) on hand. A corridor option will for this reason always be the more efficient option, meaning the one most consistent with a “lean” Fed balance sheet and with a correspondingly smaller risk of departures from an optimal government debt maturity structure and related conflicts of interest between the Fed and the Treasury.”
https://www.alt-m.org/2019/05/02/the-feds-new-repo-plan/
That’s my question.
If the Fed is always ready to swap cash for bank-owned Treasuries (SRF), then why does it need to buy Treasuries (QE) to assure adequate liquidity of banking system reserves?
QE or QE-lite depresses yields, which isn’t helpful if you’re trying to de-invert the curve. The Fed will end up buying Treasuries from other-than-banks, so the effect on bank reserve liquidity will be diluted. Banks can always sell Treasuries to other-than-Fed, to improve their liquidity without QE-lite.
I don’t understand why QE-lite is needed for reserve liquidity – unless the Fed is worried about the reserve liquidity of entities that are not banks and hence cannot access the SRF. Any hint of that?
Furthermore, the size of QE-lite being talked about ($250BN initially, $150BN/yr thereafter) seems awfully large if improving bank reserve liquidity is the only issue. $150BN is close to 100% of current total primary dealer net position in Treasuries. It is well over 10% of net annual Treasury issuance.
Is it alarmist to wonder if net supply (issuance) of Treasuries is starting to push the limits of demand and dealer capacity, such that the Fed is being pushed to lend a hand absorbing the excess supply?
Note this is in a period when investors are anxious and holding higher Treasury positions than normal, despite negative real yields. What happens when investors are cutting Treasuries in favor of riskier and higher-yielding assets? The net supply of Treasuries won’t decline – today’s $1TR deficit is structural, not cyclical.