QT continues. Liquidity is “more than ample.” Money market spreads widening briefly is OK. Selling MBS and shifting from longer-term Treasuries to T-bills is on the table.
By Wolf Richter for WOLF STREET.
Lorie Logan, president of the Dallas Fed, is a leading voice on the technicalities of the Fed’s balance sheet and QT. Prior to the current job, she was an executive VP of the New York Fed, managing the System Open Market Account (SOMA) which handles the operations of the Fed’s securities portfolio. Her hawkish commentary on Monday about the future of QT, the balance sheet composition, and liquidity contributed to roiling the bond market, with longer-term yields and mortgage rates spiking to multi-month highs.
She was the one who said in January 2024 that QT would eventually drain Overnight Reverse Repos (ON RRPs) to near zero, from over $2.3 trillion at the peak, which was a shock for lots of folks because it implied far bigger QT than they’d feared.
ON RRPs are a way for money market funds and other counterparties to deposit excess cash at the Fed and get paid interest on it. She said when they “eventually approach zero,” it would be time to slow the pace of QT. In March, with ON RRP balances plunging apparently straight toward zero, Logan became more detailed and explained why QT should slow when ON RRPs approach zero: “Moving more slowly can reduce the risk of an accident that would require us to stop too soon,” she said.
In May, with ON RRPs down by about $2 trillion and still plunging, the FOMC announced that it would slow QT starting in June. But then, ON RRP stopped their descent for a while and then slowly zigzagged lower, and are currently at $238 billion (see chart of ON RRPs below this article in the comments).
Reserves (cash that banks put on deposit at the Fed and get paid interest on) have started to finally drop a little. Bringing reserves down from “abundant” to merely “ample” has been the purpose of QT all along. But after two years and nearly $2 trillion of QT, reserves are still considered “abundant.”
On Monday, she gave another speech on the balance sheet, titled “Normalizing the FOMC’s monetary policy tools” – at the Securities Industry and Financial Markets Association annual meeting. Here are the salient points on the future of QT and the balance sheet.
QT will continue despite rate cuts. QT and “gradually lowering the policy rate toward a more normal or neutral level” are both part of monetary policy normalization, she said, and added:
“Normalizing the fed funds rate means bringing it down from the elevated levels that were needed to restore price stability and returning to a level that will be consistent with sustaining maximum employment and price stability over time.”
“Normalizing our balance sheet means bringing our asset holdings down from the elevated quantity that was necessary to support the economy during the pandemic and returning to a balance sheet size that will be consistent with implementing monetary policy efficiently and effectively.”
Liquidity is still “more than ample.” The purpose of QT is to reduce liquidity from “abundant” to “ample.” Since no one knows where “abundant” ends and “ample” begins, Logan is looking at clues that money markets are giving off.
“One sign liquidity remains in abundant supply, and not merely ample, is that money market rates continue to generally run well below IORB [the interest rate the Fed pays the banks on reserves, currently 4.9%]. The tri-party general collateral rate (TGCR) on repos secured by Treasury securities has been averaging 8 basis points below IORB [currently at 4.82%]. Because reserves and Treasury repos are both essentially risk-free overnight assets – and reserves are, if anything, more liquid – the spread of IORB over TGCR indicates reserves remain in relatively excess supply compared with other liquid assets.”
“Unsecured funding conditions [in the federal funds market] also continue to reflect abundant liquidity. The effective federal funds rate has been running 7 basis points below IORB and remains insensitive to short-term fluctuations in reserve levels.”
“And the continuing substantial balances in the Fed’s overnight reverse repo (ON RRP) facility provide another sign that liquidity remains more than ample.”
Get used to money market spreads widening briefly. The Fed is going to tolerate these brief events, especially at the end of the quarter because they’re “price signals” that markets need in order to distribute liquidity. She said:
“For example, on September 30 and October 1, the spread between SOFR and TGCR widened by 7 to 12 basis points. This widening reportedly resulted from limited balance sheet availability at dealers that intermediate between the triparty and centrally cleared market segments.”
“Such temporary rate pressures can be price signals that help market participants redistribute liquidity to the places where it’s needed most. And from a policy perspective, I think it’s important to tolerate normal, modest, temporary pressures of this type so we can get to an efficient balance sheet size.”
ON RRPs should essentially vanish from the balance sheet. She said it would be “appropriate in the long run to operate with only negligible balances in the ON RRP facility.”
And if ON RRPs refuse to vanish… “I anticipate the remaining balances will move out of the facility as repo rates rise closer to IORB, but if they do not, reducing the ON RRP interest rate [currently 4.8%] could incentivize participants to return funds to private markets” instead of leaving them parked at the Fed.
Get rid of MBS, maybe sell them to speed up the process. “We intend to hold primarily Treasury securities in the long run,” Logan said, citing what the Fed has said for years. But getting rid of MBS has been slow going. MBS come off the balance sheet mostly via passthrough principal payments when the underlying mortgages are paid off or are paid down. But much higher mortgage rates have caused mortgage refis to collapse and sales of mortgaged homes to plunge, and passthrough principal payments have slowed to a trickle. She said:
“As indicated in the minutes of the May 2022 FOMC meeting, a number of FOMC participants have suggested it could be appropriate at some point to sell MBS to move the mix of assets closer to our goal. But that’s not a near-term issue in my view.” So maybe medium-term?
Shifting Treasury holdings toward shorter maturities. Logan expects the balance sheet composition to shift toward shorter maturities, where the Fed would replace maturing long-term securities with T-bills and shorter-term securities. She said the “two most plausible options in the long run” for this shift are:
Either “hold a roughly neutral Treasury portfolio, meaning one with a maturity composition similar to that of the Treasury universe.”
The Fed is overloaded with longer-term maturities, and only 4.5% ($195 billion) of its Treasuries are T-bills. But 22% of marketable Treasury securities outstanding are T-bills. To get to a neutral composition with T-bills at 22% of its Treasury holdings, the Fed would have to replace a lot of longer maturities with T-bills.
Or “tilt toward shorter maturities” which “would allow more flexibility.” So even more T-bills would replace even more longer-term securities. That’s how the Fed used to do it before 2008.
The flexibility a “tilt toward shorter maturities” provides would matter if the Fed cut interest rates to 0% (the effective lower bound), and the economy still needs more help with lower long-term rates. In that case, instead of restarting QE, the Fed could let T-bills run off the balance sheet and buy longer maturities, which would keep the balance sheet size the same but would push down longer-term yields.
“Either way, the System Open Market Account portfolio is significantly underweight Treasury bills, and its weighted average maturity remains significantly longer than that of marketable debt outstanding. The tradeoffs around how to move toward a more neutral portfolio are complex and will require thoughtful policy deliberations,” she said.
The Fed’s role as liquidity provider to banks. As QT removes more liquidity, and as reserves decline toward “ample,” the Fed’s classic role of short-term liquidity provider to banks is expected to make a comeback. Logan briefly discussed two basic liquidity tools, the Standing Repo Facility (SRF) and the Discount Window.
The Standing Repo Facility was revived in July 2021, a year before QT started, after the Fed had shut it down in 2009 because the massive amount of new liquidity from QE had made it useless. Before 2009, banks used it on a daily basis to manage their liquidity. And the Fed used the SRF to deal with market problems before QE. For example, on 9-11, when markets were shut down for days, the SRF was the balance sheet tool the Fed used to calm the waters – and not QE.
But use of the SRF is not automatic. Banks have to get set up and approved. Logan exhorted banks “to consider the potential benefits of establishing access to the SRF.”
And there was a little bit of use at the end of the quarter, when lots of liquidity flows all over the place. On September 30, banks borrowed $2.6 billion from the Fed via overnight repos that matured on October 1. It was minuscule, and it was just for one day, but it was the first draw on the SRF since its revival. Logan referred to it:
“I was pleased to see the SRF drawn on over the quarter-end turn as market participants worked through frictions in the redistribution of liquidity.”
The discount window. Logan exhorted banks: “Every bank in the United States should be operationally ready to access the discount window. That means completing the legal documents, making collateral arrangements and testing the plumbing…. Take out and repay small-dollar test loans. And practice moving collateral between the window and other collateralized funding sources, in case a scenario arises where you can’t get the funding you want from those sources. The window is an important tool for healthy banks to meet their liquidity needs, but it works only when banks are ready to use it.”
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“Get rid of MBS, maybe sell them to speed up the process. “We intend to hold primarily Treasury securities in the long run,” Logan said, citing what the Fed has said for years. But getting rid of MBS has been slow going. MBS come off the balance sheet mostly via passthrough principal payments when the underlying mortgages are paid off or are paid down. But much higher mortgage rates have caused mortgage refis to collapse and sales of mortgaged homes to plunge, and passthrough principal payments have slowed to a trickle.”
Good, just do it already. A good way to unwind something they arguably shouldn’t have been so aggressively buying to begin with. As a bonus, if this will help drive down home prices and keep mortgage rates high, then sweet cherry on top..
Enough talk, the manipulation needs to end. They weren’t nearly this measured and cautious when they went off the rails and started doing all of this craziness.
You argue that they were crazy in adding money but now argue they should be crazy again removing it?
Adding money has long-term consequences which aren’t generally tied to how fast the money was added.
Removing money has related (but opposite) long-term consequences but ALSO has major short-term consequences if done too quickly.
Take your time. Do it right.
I’m not sure what you’re confused about. What the fed should do is balance both sides of their mandate instead of building a dovish bias into everything they do, which is what they have been doing. If they’re going to be cautious and measured about the labor market, they shouldn’t do things like buy a trillion dollars of MBS while home prices are going through the roof, or do jumbo 50bp cuts when inflation is still well above target and by financial conditions are loose by almost every metric.
And this comes from your extensive background in economics?
The Fed rate is still significantly above the inflation rate which is generally considered to put a negative pressure on inflation.
With the trend of inflation being downward, a moderate reduction (50 basis points is in no way “jumbo”) in the rate was reasonablemin order to guard the economy from a sharp downturn.
History may show the choice to have been wrong but that doesn’t make the choice unreasonable in the moment, without the benefit of hindsight.
I don’t know what will happen but I do know that people would complain if they held rates and things got worse.
Brian, you said “I don’t know what will happen but I do know that people would complain if they held rates and things got worse.”
Credibility is lost with that type of thinking.
Greasing squeaky wheels is not the Fed’s job, but unfortunately many people seem to think so.
To put the economy on a sustainable path from bloated debt and deficit levels, it’s going to take lots of pain. Printing money is not the answer. It has severe consequences.
Can’t sell the MBS now without realizing a huge capital loss!
And re “The window is an important tool for healthy banks to meet their liquidity needs,” … LOL, I am pretty sure healthy banks don’t need the Discount Window, that’s why it’s not in use.
But a demonstrated ability to use the Discount Window in a pinch is something that the Fed ought to demand of all banks, as part of their regulatory role. It’s not something that should merely be jawboned about. It should be written into the bankers’ fiduciary responsibilities. An annual Discount Window Test should be part of all Stress Tests and all other authorizations by the Fed. This should be like having an annual dental X-ray, or testing the battery every time you change the oil on your car…
“Can’t sell the MBS now without realizing a huge capital loss!”
The Fed creates its own money and losses are meaningless for the Fed. So no problem.
Also the losses from selling MBS will be relatively small compared to its current losses:
1. If they sell $17 billion a month in MBS to bring the roll-off to $35 billion a month, they might lose $1-$3 billion a month, depending on what they sell. And that’s just peanuts for the Fed.
2. It started having operating losses in Q4 2022. For 2023, it reported $114 billion in operating losses, no problem. This year, it might lose $80 billion or so, just guessing from the current pace of losses.
3. Next year, the operating loss is going to be a LOT LESS because reserves and ON RRPs are much less, and because it cut its policy rates, and will cut them further. So lower rates on smaller balances produce much smaller interest expenses. Its income comes mostly from long-term bonds with fixed rates. Even though the balances also shrink, the rates are roughly the same.
Here’s the quarterly income/loss through Q2. We’ll get Q3 in a few days, and I’ll report on it. These are hefty losses, it just doesn’t matter, and no one cares because the Fed creates its own money.
Yes! However, while the Fed as an institution doesn’t care about losing money, they don’t seem to care much about law and order either as the many revelations of insider trading by the people at the Fed has demonstrated. Rule of law is important, but does CONgress evne care? People seem to forget that it’s CONgress’ job to balance the budget in the first place.
Full FAITH and credit.
Wolf,
Your Jan articles states:
“At that point, instead of remitting the income to the Treasury Department, it will take this income against the negative balance in “Earnings remittances due to the U.S. Treasury” until the balance turns positive. This will likely take years. And once the balance turns positive, it will start remitting its income to the Treasury.”
How many years do you think it will take to turn the balance positive? A video on Yahoo (I know!! Yahoo:-) said it could take 10 years! It won’t actually take that long, right?! Thanks!
Janna
It would take many years, 10 is probably a reasonable number.
But it doesn’t matter. The amounts that the Fed remitted to the Treasury before QE were small, in the $20-billion a year range, and in a $7-trillion federal budget, it’s nothing.
The only reason why the Fed has to remit nearly 100% of its income is that it is not allowed to accumulate capital. This is a feature Congress imposed on the Fed to control the Fed, whose 12 regional Federal Reserve Banks are companies that are owned by the largest financial firms in their district. That’s where that came from. It’s not an income feature for the government. It’s just that during QE, this income ballooned. And now the process has reversed.
They shouldn’t have been buying MBS *or* Treasuries, at all, to begin with. Let alone buying both. Let alone buying both, and continuing to buy them long after it was abundantly evident that the economy was very overstimulated.
Agreed. It was terrible that thr FED bought MBS. Absolutely no doubt.
Point is, they did. Right or mostly wrong, it happened.
So what is the best course forward?
She already planted the response: it’s a political escape clause and nothing more:
“Normalizing our balance sheet means bringing our asset holdings down from the elevated quantity that was necessary to support the economy during the pandemic and returning to a balance sheet size that will be consistent with implementing monetary policy efficiently and effectively.”
The irony being that the primary dealer banks (Fed Shareholders) have purchased CONgress via K-street. Just ask Hank “TARP/TALF” Paulson.
Another great update Wolf. A friend of mine bought a house for airbnb purposes a couple of years ago and has been waiting to refinance. Sounds like it’s going to take a while longer than he anticipated.
I just realized wasn’t following your X account and I am now… @wolfofwolfst
October 09, 2024
The Fed’s Discount Window: 1990 to the Present
Vice Chair Philip N. Jefferson
“ Data suggest that this encouragement is working. By the end of 2023, 3,900 banks, or roughly 80 percent of all banks, had completed the legal documentation required to borrow from the discount window.16 Of those, nearly 2,000 banks had pledged collateral, with an aggregate lendable value of over $2.6 trillion after applying appropriate discounts. These figures are notably above their levels at the end of 2021 and 2022. Although I am pleased to see the improvements in discount window readiness statistics, continued outreach is still important…”
Continued outreach to the SVB casino crowd that are always ahead of the curve
“In that case, instead of restarting QE, the Fed could let T-bills run off the balance sheet and buy longer maturities, which would keep the balance sheet size the same but would push down longer-term yields.”
I RTGDFA but don’t understand the utility in pushing down longer-term yields in this hypothetical scenario if the FED brought the rate to 0%. If yields remained high, would that suggest that yields are higher elsewhere, like the private sector, or, potentially, international bond markets.
I suspect I’m missing something or a few significant things. I apologize. Pretty please don’t bite, Wolf.
The way I read it and not at all sure is correct is that having too many long term treasuries with high yields is not good. So if a downturn occurs then it can expire the short term and the rates for long term will be low, but can still attract buyers. This also achieves a better balance as well and of course less interest for the government to pay that could be locked in with longer terms.
On a basic level it is just to stimulate the economy without having to print money. One of the objectives of QE was to bring down longer duration interest rates. That allows things like cheap home loans and cheap money for companies to invest.
The FED realizes that QE brought with it done problems they need to unwind, but they still want the ability to manipulate long term interest rates. That’s why I like to call it QE 2.0.
MC Bear
The Fed targets short term rates with its five policy rates. These policy rates don’t have much influence over long-term yields. The Fed uses its balance sheet in an attempt to manipulate long-term yields (as big buyer in the market drives up prices and drives down yields).
If there is a crisis, and the Fed wants long-term yields in the 2-3% range, but they’re at 4-5%, even with the policy rates at near 0%, then that kind of Operation Twist can push down long-term yields without expanding the balance sheet.
The Fed had that issue after the Great Recession. Short-term rates were at 0%, but the 10-year yield was mostly 3-4%. Then in the summer of 2011, there was talk of an Operation Twist, and just that talk caused the 10-year yield to drop. When the Fed finally started Operation Twist in Sep 2011, yields fell further and in 2012 were in the 1.5%-2.0% range.
But then in late 2012, the Fed replaced Operation Twist with QE infinity, and the 10-year yield promptly rose and in late 2013 hit 3%. So long-term bond markets do have a mind of their own.
Thanks, Wolf and others. Is there a term describing this phenomenon? Based on your use of Operation Twist, if it hasn’t been named, Operative Tightening has a nice ring to it.
“Operation Twist” is the official term for the kind of thing they did in 2011-2012, letting T-bills run off and buying longer maturity notes and bonds. You can look it up on Wikipedia even. The term has been around for a long time.
Logan was now talking about the opposite, replacing longer-term maturities with T-bills, and I don’t know if there is an officially sanctioned term for it yet. Maybe we’ll call it Operation Back Twist. For the longer-term bond market, this would be a form of tightening. And this would give them the “flexibility” to do another Operation Twist if they needed to.
It’s just a different way to withdraw punch from the vodkabowl. The intended downstream effect is the same.
I really enjoy these insights into the working of the FED plumbing.
“and only 4.5% ($195 billion) of its Treasuries are T-bills. But 22% of marketable Treasury securities outstanding are T-bills.”
Am I correct to interpret this as implying that the FED plans to be a buyer of TBills as it reduces longer dated debt to gets it’s holding of TBills up to 22%, or there abouts, of it’s portfolio ?
Does this have the effect of pushing down rates on the short end of Treasuries issuance ?
I don’t think the Fed’s bigger entry will push down T-bill yields in a measurable way. Here’s why:
1. T-bill yields are mostly impacted by Fed’s five policy rates and expectations of those rates over the next few months.
2. There is always much more demand for T-bills than the auction size. For example, at last week’s 28-day bill auction, $275 billion in bids were tendered and $95 billion were accepted.
3. There is a HUGE volume of T-bills getting sold at auction every week now – 1. to roll over maturing T-bills since these $7 trillion in bills outstanding mature all the time, and 2. to add to T-bills. There are 5 auctions every week of 1-month to 6-month bills. Each of these auctions has been between $64 billion and $95 billion recently. In addition, once a month, there is a 1-year T-bill auction. So this might currently amount to about $400 billion in T-bills in an average week. And as time goes on, and the debt rises, those T-bill auctions will get larger and may reach $500 billion a week. These are unthinkably huge amounts of money that roll through these T-bill auctions.
4. When the Fed starts replacing maturing long-term notes and bonds with T-bills, it will buy T-bills in those amounts at auction. So let’s assume it starts that after QT ends. By then, the Fed might add between $10 and $60 billion a month in new T-bills depending on how much in notes and bonds mature, and I’m sure they will cap this because they always cap everything. So it’s not a huge amount in this mega flow of T-bills.
5. The Fed used to have a balance sheet where most of its Treasuries were T-bills, and I don’t think I ever heard that it pushed down T-bill yields.
Will be interesting to see how far below 7 trillion (an affront to any sensible eCONomist) the Fed can get AND MAINTAIN their balance sheet.
Full FAITH and credit
IMHO as an old or perhaps these days elderly investor in Treasuries only since getting OUT of the SM mid ’80s when realizing I had only made good money with what is now called insider trading,,,
IT will be VERY interesting to see how far below $$100TRILLION of global debt,,, (Most recent figure seen from usually responsible web source )
OUR, yours and mine and every other ones debts can get…
Make no mistake youngsters,,, Sooner and/or later, that debt will be paid,,, and most certainly at par.
‘ In addition, once a month, there is a 1-year T-bill auction.’
Minor quibble. the auction every 4 weeks, so there are 13 per year of the 52 week(1 year) bill. This comment adds nothing to the excellence of the article, but could not help myself…
Yes, and we call the 28-day T-bill a 1-month T-bill and the 13-week T-bills a 3-month T-bill, etc. Weeks and months don’t line up, but we abbreviate to make life easier and more confusing?
for Wolf:
Last I heard, or perhaps was one of the herd who saw that 13 weeks and 3 months did in fact line up?
Back in the day when I had to do months,,, it was very clear that a generic month was 4.33 weeks..
As usual WR, LOVE your work, and plan to continue my usual yearly contribution to help and hope you are able to continue the really great reporting…
HOPE all on here will do their best to help similarly!!!!
13 weeks (91 days) do NOT line up with three calendar months because there are 3-month periods with 92 days, and 91 days, and even 89 days.
The treasuries’ yields look interesting. We’ll see what the private sector has to say about it as we enter a recessionary environment.
You’re still hyping the recession? This has been going on for 2.5 years, as GDP has been growing at a rate that’s above the 10-year average, and people never tire of this recession palaver?
He has correctly called 10 of the last 5 recessions…….
Old joke, I know, but always seemingly appropriate among the sky is always falling crowd.
Recession? Those are a thing of the past, easily defeated by trillions continually pumped into the economy. Uncle Sam: Put it on my tab!
lol in 2026-2027??
🤣
You recession hawks get poorer by the day
Too many good things going on for a recession.
-Record Oil production and exports
-Low commodity prices
-AI leadership in the next growth technology
-Government is expanding debt which enters the economy
– Fed rates are not restrictive.
– low unemployment – you cannot have a recession with unemployment this low.
“– low unemployment – you cannot have a recession with unemployment this low.”
I’m not calling for a recession, I don’t know, but this statement is not correct. Look at a long-term graph of the unemployment rate and recessions. By its very nature the unemployment rate typically bottoms when recessions begin and rises during the recession. Maybe this time is a bit different with all the pandemic distortions, but a recession can certainly begin with unemployment this low.
https://fred.stlouisfed.org/series/UNRATE
I am seeing the price of metals going up,perhaps a bit too quickly.
I while well prepped ect. bought some metals in hand to hopefully keep up with inflation/general market unease ect.
My goal was to get the same amount of loaves of bread with my metals in a inflationary environment as what I bought metals for.
I am starting to wonder will folks still find it worthwhile to bake bread for more then their families.
Costco started selling platinum bars. You can now get your bread and metals at warehouse discount prices 😄
Hmmmmm…..,Doc,can I borrow your card?
Here is what is interesting. I bought my house in 1999 for 186k. It is now worth 415k. The price has increased 123% in U.S. Dollars.
In 1999 equivalent cost to buy the house in other assets:
-It would have cost 300 gold coins
-It would have cost 2089 shares of SP500
-4,500 barrels of oil
-258,333 pounds of copper
Now the cost to buy the same house:
-It would cost 153 gold coins
-It will cost 711 shares of SP500
-It will cost 5760 barrels of oil
-It will cost 92,222 pounds of copper.
Thus, even though my house has increased 123% in USD:
– i can buy the house with 50% fewer gold coins
– I can buy the house with 66% fewer SPY shares.
– I can buy the house with 64% fewer pounds of copper.
– But I need 26% more barrels of oil.
Is housing is in a big bubble or is everything in a bigger bubble.
I’ve done this analysis myself. Priced in gold almost everything is worth far less than it was 25 years ago. Of course only “looney tunes gold bugs” (or Central Banks) have gold, so to most people the price of everything in their local currency has skyrocketed. What about the next 25 years I wonder?
This clearly isn’t a house in San Diego. LOL!
more likely you’re in an area that hasn’t seen massive house price increases. most places have gone up way more than 123%.
look at some of the past articles on the most splendid housing bubbles.
I live in the midwest but in a suburban city of 145k.
So i am on the low side of house prices i am guessing.
Lots of commodities are in a long-run deflationary cycle for all sorts of reasons, to mention a few: abundant supplies, huge advances in extraction, refining and other efficiencies. Anyhow, comparing the price of your home to the price of oil is sort of apples to oranges since the price of all things is a function of supply v demand. Further, assuming the property was bought for investment, it could have generated yield during these 25 years, also the case with SPY but not gold, oil or copper, and that would add meaningfully to the total return.
A more objective way to go about your property comp would be to look at median income in your area in ’99 versus in ’24 and, possibly, adjust for cost of capital (rates prevailing in ’99 v today).
“Is housing is in a big bubble or is everything in a bigger bubble.”?
YES, and YES
“Ding Dong the (price discovery) witch is dead!”
Great insights on the Treasury market. So, the Fed’s balance sheet is way overweighted on longer maturity Treasury securities. No wonder long term rates are so low. If/when they transition, or attempt to transition, to short term rates, long term rates should soar, I guess as they are now. The bond vigilantes return.
“Liquidity is more than ample:” from the graph there was a tsunami of paper money. The only thing that has happened is the peak level dropped some, but the flood waters of paper money still engulf everything.
“And there was a little bit of use at the end of the quarter, when lots of liquidity flows all over the place. On September 30, banks borrowed $2.6 billion from the Fed via overnight repos that matured on October 1. It was minuscule”
Wolf,
SRF usage during last quarter-end was miniscule because most funding was from *private* repos – this despite the fact that TCGR > SRFR & DR! The Fed’s ‘repo ceiling’ didn’t actually contain repo rates like it’s supposed to, and banks were paying *more* to borrow in private repo than tap the SRF.
Any thoughts on this? I wonder if part of the reason is simply that the SRF opens so late in the trading day – although I imagine there’s still stigma attached to tapping the SRF similar to the DW.
Reasons aside, it seems like there was, very temporarily, a genuine cash shortage.
Yeah, it’s not a dollar swap.
Read the rest of her comment, which is HUGELY IMPORTANT for the balance sheet and all this next-QE-mongering out there, and you missed it:
“…it’s important to tolerate normal, modest, temporary pressures of this type so we can get to an efficient balance sheet size.”
Wolf – I did read that blub.
But we had $600B in private repos that cleared above the Fed’s SRFR and discount rates – compared with the miniscule $2.6B that went thru the SRF.
Why are so many market participants in need of repo funding willing to pay a higher rate than what they’d get from the Fed?
There are $5 to 6$ TRILLION in repos every day. It’s a huge market.
P.s. definitely not trying to QE monger… I think a very simple fix is to open the SRF earlier than 1:30pm.
You’re making up problems where there are none.
Fair. I guess I was trying to say it “warrants attention” (quoting SOMA manager Roberto Perli in regards to SOFR > IORB)
Seems like the MBS – a finite quantity of issues – could just be put on a shelf and forgotten about until they are all gone. Yes it’s slow now but someday all ~$2.3T of those mortgages will be paid or retired one way or another. I’m not understanding why the urgency now. If the Fed sells those into the open market buyers are going to want a 7% yield like they can get on new MBS.
That’s the program they’re on right now. But it would be nice to speed up the process to cleanse the balance sheet off those things.
There was a rate blowout in 2019 and the Fed responded with immediate liquidity. They’d do the same thing today if it happens again.
Not that I have any faith in the fed whatsoever, but I think they will be a little slower to turn on the spigot next time around if for no other reason than public perception. In the long run of course all bets are off.
1. So read the article. Logan made a reference to that, by saying that going slow will allow them to go further to avoid accidents.
2. Back then, they didn’t have the Standing Repo Facility and they had to improvise. Now they have the SRF, and just its existence is likely to prevent that kind of thing – just knowing it’s there will prevent that kind of panic. And if there are funding pressures, the SRF is there as an option for banks, so that they can borrow at the SRF and lend to the repo market and make a bunch of money when repo rates spike like they did last time.
3. There already was a crisis in March 2023, and look how they solved it: QT continued, rate hikes continued, but there were some temporary liquidity measures, that within months either vanished or were wiped out by QT
Ever expanding monetary policy? It is clear you haven’t been paying attention. Rather than start with the narrative and look for evidence, start with evidence and create a narrative.
Dump the MBS already! The Fed NEVER should have touched MBS in the first place!
Full FAITH and credit
I’d like to see them normalize by reintroducing required reserves with zero interest.
I have said this many times before, it is time for the Fed start to sell off the MBS holdings, they are now “lead in the shelf.” How long will the Fed wait? Until the next crash where nobody wants MBS?
Shifting the bond holdings into the shorter end is generally a good plan, because the portfolio duration is far too long and not appropriate for monetary policy. Sell off MBS and a “Operation Twist” into shorter maturities should start rather earlier than later.
It is interesting to see people suggest what the FED should do which really just means what they would do. These posters are just looking through the lense of what is good for them. The FED looks at the whole economy. Huge difference.
Heard an interesting theory today: the Fed is specifically targeting bond volatility and the MOVE index with their policies.
It explains the rate cut despite above-target inflation: the Fed is trying to reduce bond volatility by normalizing the yield curve. By cutting its policy rates, the Fed is hoping rates on bills and short-dated coupons comes down, while rates on longer durations rise in a (hopefully) orderly fashion.
Sounds similar to my slightly-conspiratorial theory that the Fed’s true mandate is to ensure the smooth functioning of the Treasury market (with inflation and unemployment being secondary concerns).
4.25% on the ten year this morning. Things are coming along nicely.
Mortgages have to be getting close to 7% again – that’s going to cause some sleepless nights. A lot was riding on “rates will drop again soon”.
Ol’B:
Rates DID drop. Refis increased “massively” in percentage terms.
That was a great day, a few weeks ago, for mortgage brokers. A “high- low” looking for a higher-high.
That’s why people in my neighborhood just pay cash (for $8-$13 million condos). Duh!
IMHO, very humble far damn shore STLT, the ”fed’s ONLY TRUE JOB” is to protect the banksters and the banks holding SO much of the wealth of WE the People who trust the banks these days.
”back in the days before the FRB,” most, or at least many folx knew better than to trust the banks and banksters because they had gone bust SO many times in almost everyone’s lifetime, and taken all the common folx money when doing so,,,
and many folx just buried their gold in jars in the yard in the ”good times” then took the gold out and bought RE and other solid assets when the next crash happened to clean out the banksters/etc…
While ”HIS STORY” does not and never will record this accurately because history is written by and for the rich folx who can pay the writers of history,,, THIS is how it was for many many years for us working folx,,, probably back for eva…
VVnVet,
I’d argue the Treasuries are the single most important asset class in the world right now – so it makes sense that the Fed’s job is to ensure the smooth functioning of this market.
If you always look for crazy conspiracies you can certainly find them. They might not fit the actual facts of reality, but i armure you can find crazy reasons to dismiss inconvenient information.
Good luck. You will need it.
Logan’s policy will stoke housing prices.
Opposite.
It will cause mortgage rates to be higher for two reasons: reverse Operation Twist which pushes up longer-term Treasury yields; and shedding MBS, which widens the spread between the 10-year Treasury yield and mortgage rates. Double whammy for mortgage rates = lower prices.
If the Fed is not replacing the MBS when they mature (implied buying) the private market will have to make up this difference.
Yes, which is why the spread between 10-year Treasury yield and MBS has been quite a bit wider during QT than during QE.
MW: Dow falls over 250 points as Treasury yields rise further
MW: Existing-home sales sink to a 14-year low, as home buyers pull back
Wolf,
Last March you published an article with some great analysis indicating that the Fed can’t really reduce their balance sheet to under $5.8T while still honoring its obligations.
Do you still feel that this is the case?
That’s my story and I’m sticking to it.
If the Fed changes from the current “ample reserves regime” to the old “scarce reserves regime,” that amount could be lower, maybe as low as $4 trillion. But that would be a big change in strategy, and I have seen nothing to indicate that the Fed will make that shift, though it could and might.
Wolf – What is the justification for the ample reserves regime? I thought that Banks could always borrow reserves when they needed them and that the major constraint on lending was capital requirements.
The Fed – including Logan – outlined the benefits of ample reserves plus paying interest on reserves. Those two go together. Paying interest on reserves is the only way there will even be ample reserves.
Among the stated benefits of ample reserves:
It gives the Fed better control over short-term interest rates for monetary policy reasons, and we have seen that in the EFFR. It used to fluctuate a lot before 2008. Now it’s mostly locked in. Same with secured short-term rates.
It makes sure that there is now a lot of liquidity in the banking system which makes for a more stable banking system.
Reserves at the Fed is the liquidity with which banks pay each other on a daily basis through the Fed’s central payment system. Huge amounts flow through the system every day. When you make your mortgage payment to your bank, or buy stocks, or engage in the repo market, your bank then transmits this cash out of its reserves via the Fed’s central payments system to the recipient’s bank. Every payment in the US flows through this on a daily basis. Reserves are the cash with which those payments are made. And banks time those payments with the incoming payments in order to avoid running out of reserves for an hour. The Fed lends to them for short periods when that happens, but that costs interest. Ample reserves ensure that these payments run through the banking system smoothly.
The Fed has cited some other reasons. And they all sort of make sense in a way.
MW: Dow falls over 350 points as Treasury yields rise further
Reading anything into individual days market movement is a fools game. You can find stuff to back up what you want regardless
Good to see that there is at least a plan towards normalization.
MBS sale will put pressure on mortgage rates preventing them from falling if not rising. The Fed has a long way to go.
It also makes the job of Treasury Secretary harder. They have tried every trick in the book to prevent long term yields from rising while issuing record debt.
Now comes the hard part for our policy mandarins.
“They have tried every trick in the book to prevent long term yields from rising”
Tried? I’d say they’ve been pretty successful. The 10-year is a full 1-2% lower than it should be.
What exactly “SHOULD ” the 10 year be at?
The 10 year treasury is a huge market subject to all sorts of market forces resukting in the orice being what it is. Don’t get me wrong, there are times I find the market absurd, but that just means I take advantage of the absurdity. I think it is arrogant and irrational to say what the market “should” be.
It “should” be more than just ~15bps above the 2-year, for starters.
There’s a reason term premium is a thing. Future money should be worth more than current money.
“Avoided bankruptcy by taking my losses early” department. Held TLT for 12 months but yesterday sold it for a small but ego deflating ding. Decided instead to invest in a sure thing….a six pack of Rainier swill. The market can stay irrational a lot longer than humble nsa can stay sober.
A six-pack of anything other than PBR is a better investment than TLT.
Don’t diss the Blue Ribbon!
I have graduated to bourbon these days.
the media is losing its mind that the dow is down 550 points. but it’s back to where it was long ago, on october 8th or 9th. long time i tell ya
One more slightly-controversial comment to generate discussion: bank backstops such as the SRF and DW are a form of “not-QE” indirect easing.
Consider that the Fed is pulling back from the tsy market via QT, but simultaneously encouraging banks to house more treasuries to use as collateral for dollar funding. This is part and parcel of their policy of de-stigmatizing Fed loans, but has the effect of increasing bank demand for treasuries.
I can imagine the Fed eventually exempting treasuries and maybe agencies from SLR (and perhaps other Basel III reqs) so that banks have room on their balance sheets for them.
Logically, this also means they don’t need to keep as many reserves on hand, since they could simply pledge their treasuries at the SRF or DW to access dollars and pass their stress tests. In this context, falling reserves isn’t necessarily concerning.
IMO interest rates are still very low (artificially).
The yellow metal has been sniffing the rat’s nest. The high yield spread just touched a multi- year low below 3%. The slosh-market has a 30PE as a “new normal” risk-free floor.
The crypto-verse barely sniffed when SBF went to the Bahamas with a mere half-Tril.
The distortion is real.
ShortTLT,
The Discount Window and SRF have ALWAYS been how the pre-QE Fed backstopped bank liquidity and solved market disfunction, including on 9-11. It’s just that it killed the SRF in 2008 because QE took over. This is the return trip to the old pre-QE Fed.
Before QE, the SRF had daily activity, every single day. And its use grew with the economy and the banking system.
Here is the SRF before QE. Note 9/11 — that’s how the Fed stepped in when markets shut down for days. No QE, and after a couple of weeks, it was back to normal:
People talks about rates as if they are living beings. Rates went up, rates went down, as if they have life of their own. And, then people try to predict their movement as if they are random and there is mystery surrounding it. People should write “Central Planning Commitee of American Communist Party decided to manipulate the rates today and set it to this level or that level.
The Fed is pretty good about “setting” overnight rates with its five policy rates. But “setting” is not the right word… it “sets” four policy rates and “targets” one market rate (EFFR). It publishes those rates at each FOMC statement. We discussed those 5 policy rates here. So close enough. But longer-term rates are decided by the market on a minute-by-minute basis. The Fed can manipulate those markets with QE or QT, or verbiage, etc. but it cannot “set” longer-term rates, which is why longer-term rates fluctuate so much even if the Fed doesn’t do anything, and which is why long-term rates sometimes, like right now, go in the opposite direction of the Fed’s short-term policy rates.
— “The flexibility a “tilt toward shorter maturities” provides would matter if the Fed cut interest rates to 0% (the effective lower bound), and the economy still needs more help with lower long-term rates.” —
Well that sounds like a nightmare scenario that would make the irresponsible Fed actions of 2020 look paltry. I would hope they’d want to avoid that type of action at all costs.