IK of FTAV on Fed operations

NY Fed has just slipped something out

It’s very exciting. One of my predictions was that rather than do QE

They would either fiddle with IOER or increase reverse repos

and now..

http://www.newyorkfed.org/markets/opolicy/operating_policy_110812.html

Going forward, the Federal Reserve plans to conduct a series of small-scale reverse repurchase transactions about every two months, which will bring the frequency of these operational exercises in line with that of the Term Deposit Facility exercises.

the statement has a certain “move on, nothing to see here”

THIS is HUGELY important IMO

Because what were we conditioned to think about reverse repos?

That they were an exit policy… a move towards tightening

Yet.. note what the Fed says:

"Like the earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. The operations have been designed to have no material impact on the availability of reserves or on market rates. Specifically, the aggregate amount of outstanding reverse repo transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future."

“The operations have been designed to have no material impact on the availability of reserves or on market rates”

These are reverse repos that are not ANYTHING to do with tightening

JM

So therefore… it’s merely a funding issue?

IK

No not at all JM

I fear… this is because they’ve come to a brick wall

Market wanted QE

But what market misunderstands, is that at a certain point in a liquidity trap QE becomes the exact opposite of adding liquidity

It arguably becomes deflationary

because it kills the number of Treasuries in the market

If the liquidity preference for Treasuries is such that the market doesn’t mind overpaying vs face value…

You get a very similar situation you had during the great depression

And with fewer Ts in the market, that becomes a risk

Especially if the “floor mechanism”

which the fed has instituted, has been compromised

By the FDIC fee

And money markets funds are finding it hard to not break a buck, and custodians are charging for large deposits

In which case… the best thing the Fed can do, is start reverse repos

Especially to money market funds, who are tight tight tigh on bills

Does that make sense?

It’s basically to stop treasuries becoming a bit of a giffen good

I see “bit of” because giffens re inferior goods… but the point is the same

Usual supply demand law doesn’t apply. Price goes up, people still want to buy…capital is destroyed.. we start the deflationary chain

Negative rates in the US have to be avoided if there is indeed a liquidity trap

Unlike switzerland which has arguably a good amount of creditworthy individuals to intermediate funds to

In a system where banks won’t lend cause they don’t think they’ll get their capital back..

Negative interest rates will not necessarily encourage banks to lend

Anyway this is definitely Bernanke’s thinking, if you read his magnum opus

@milky – that’s the point, they can’t inflate

They are stuck in a liquidity trap

Like Japan

They would love to inflate

which is why they don’t intervene when people go around suggesting QE is money printing. If market psychology thinks QE=money printing

That’s just fine

But QE isn’t really money printing at all

not in the sense that everyone thinks. It’s an asset swap. (Richard Koo makes similar point)

designed to help liquidity

Helicopter Ben is a fallacy

He’s expanding the Fed’s balance sheet, and base money

But wider monetary measures are not budging

In deflation the debt burden gets bigger

and in a highly leveraged society

that’s just awful

@Icarus.. expansion of balance sheet yes. But that’s not tantamount to money printing.

@Icarus .. if you research the Fed’s actions in the Great Depression

They also hit the socalled “printing presses”

Exactly the same way as now

If QE was money printing, how come it didn’t help back then?

The only difference really between what the Fed did then and now (from what i’ve researched…) is that they didn’t impose Interest on excess reserves

And there was the gold factor to consider

@schöneblume – since when is the m2 growth?

I had a chart of m2

Right — but when was the sharpest increase?

hang on cause it really makes the point

http://av.r.ftdata.co.uk/files/2011/08/M2.jpg

there’s the M2 chart

2nd biggest US M2 jump in history in 6 weeks to Aug 1…

led by a 26.1%, $147.4bln jump in demand deposits and a 4.8%,

$222.2bn rise in savings depos at banks….. and funded by

a $140bln, 7.9% fall in institutional money market funds

From Sean Corrigan

So the “money printing” only became a problem very very recently

Only on a M2 basis

That means money market funds started investing in cash rather than in bills

And that’s only because they didn’t want to lose money

Or break the buck

But since then the market moved… to contain that issue. BNYM said it would charge for deposits over $50m

What will MMs do

They’re stuck. They lose money on deposits.. or on bills

So the M2 boom is only temporary. And goes no further than MMs.

Which is why.. Fed sees it as a problem with the MMs. They have to have to be able to invest in bills

and Fed is responding by increasing its reverse repos

The MMs have MORE than enough cash on their hands…

Double Dip

Denmark now enters a recession, following Portugal and Japan. Yet not much coverage of this economic double dip.

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