A massive source of liquidity is approaching peter-out moment.
By Wolf Richter for WOLF STREET.
The excess balances in the federal government’s checking account – the “Treasury General Account” (TGA) at the Federal Reserve Bank of New York – that had ballooned to $1.8 trillion by July 2020 plunged to $674 billion as of Wednesday, according to the Fed’s balance sheet, released today, the lowest since April 2, 2020, having now unwound most of the monetized-but-unspent debt-binge spike from spring last year.
The Mnuchin Treasury started reducing the balance in the TGA in baby steps by borrowing less than they were spending. The Yellen Treasury announced in February that it would draw down the account to $500 billion by the end of June. $174 billion more to go:
Last spring, the government sold a gigantic amount of debt, piling an additional $3 trillion on top of its mountain of debt in just a few months.
At the same time, the Fed bought $3 trillion in securities as part of its QE and wealth effect program, thereby monetizing nearly all of the $3 trillion in new debt that the government issued during that time.
But the government didn’t spend all of the $3 trillion in proceeds from the new debt, and the TGA – a liability on the Fed’s balance sheet – soared from around $400 billion in February 2020 to $1.8 trillion in July. This $1.4 trillion addition that the government had borrowed and that the Fed had then monetized didn’t go into the economy and the markets but sat in the government’s checking account.
But now, during the drawdown of the TGA, that money has been going into the economy and the markets. The drawdown so far is money that the government has spent since February but didn’t have to collect in taxes or borrow from investors since it already borrowed it over a year ago, with the Fed having monetized the new debt.
Since February, this money has started circulating in the economy, markets, and banking system, as the government spent it, and is in part responsible for the flood of cash that suddenly started to show up in the banking system that was already up to the gills in cash, and poured out from there.
And this liquidity was starting to go haywire, pushing several interest rates to or below zero, even as inflation has started to spike at a pace not seen in decades.
So the Fed stepped in with its reverse repos (RRP) to mop up this liquidity and keep those interest rates above zero. This has the opposite effect of QE.
This morning, the Fed sold a record $535 billion in Treasury securities via overnight RRPs, to 54 counterparties. These overnight RRPs will mature and unwind Friday morning, and will be replaced by a new batch of RRPs. Wednesday’s $503 billion in overnight reverse repos matured and unwound this morning and were replaced with this new pile.
The amount of liquidity that the Fed has mopped up on any given day is the RRP balance on that day, currently $534 billion, having thus undone 4.5 months of QE of $120 billion a month.
When the TGA is finally drawn down to $500 billion, that source of liquidity will have dried up. At the same time, the Fed is getting closer to tapering its asset purchases. And it is under pressure to do so sooner rather than later because they’re another source of this flood of liquidity in a system already creaking under the crazy amount of liquidity.
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