After injecting extreme amounts of liquidity into the markets, the US Federal Reserve appears to be reducing its monetary easing policy via repurchase agreements (RRP). Following this week’s minutes of the Fed’s monetary policy meeting in April, it looked like central bank members were ready to discuss cutting back on large-scale treasury and back-to-back purchases. to mortgages (MBS). This week, over a three-day period, the US central bank withdrew $ 351 billion in liquidity according to reports.
Fed removes $ 351 billion in market liquidity through overnight RRP operations
Last week, the Federal Reserve released the minutes transcription of the central bank Political meeting from April 27 to 28. The transcript of the minutes noted that a “number” of the Fed’s board members started the conversation about reducing quantitative easing (QE) policy. Beyond kicking off the conversation, the Fed said it needed “substantial” progress to curb massive purchases of Treasuries and MBS. Reiterating this view, Fed Chairman Jerome Powell told reporters now is not the time to start the process of cutting QE purchases.
âNo, it’s not yet time. We said we would let the public know when it’s time to have this conversation, and we said we would do that long before any actual decision to cut back on our asset purchases, and we will, âstressed Powell.
However, Powell’s comment is at odds with actions the Fed participated in earlier this week. In fact, the Fed began to gradually reduce QE without letting the general public know aloud through the mainstream media. After the myriad of press reports revealing the statements from the recently released debriefing, the public has been led to believe that the Fed is not even ready to talk about cutting QE. This is not the case according to data from reverse repo operations (RRP) which saw $ 351 billion in cash withdrawn from the markets.
Wolf Street financial columnist Wolf Richter explained that the Fed cut that liquidity as “the banking system crumbled under [a] mountain of reserves. Essentially, RRP operations are the exact opposite of QE, and the central bank removes M1 from the system by selling Treasuries back to the market. The Richter editorial and a report by Michael Derby of the Wall Street Journal are the only two reports that disclose the operations of the RRP.
Reverse Repos a sign of “ unintended consequences ”
Meanwhile, a majority of mainstream media posts continue to lead the public to believe that the Fed isn’t quite ready to have a narrowing conversation. On May 20, 2021, the US central bank began selling $ 351 billion in treasury bills through overnight RRP operations. The deal between the Fed was with 48 counterparties, and no sale of MBS is mentioned in any of the published reports. The recently released minutes discussed RRP tools and recent action suggests that the Fed is shirking its responsibility.
Richter’s report also details that the Fed will likely increase the rate the central bank pays on reserves at the next monetary policy meeting. The transcript of the minutes explains that the pressure prompted the central bank to adjust overnight rates as RRPs “trade at negative rates.” Members of the System Open Market Account (SOMA), an organization run by the Fed, have noticed negative rates when acquiring assets on a large scale through open market operations.
âThe director of SOMA noted that the downward pressure on overnight rates in the coming months could lead to conditions that justify taking into account a modest adjustment in administered rates and could ultimately lead to a most of the Federal Reserve’s balance sheet expansion funneled into ON RRP. [overnight reverse repurchase agreement] and other liabilities of the Federal Reserve, ânotes the Fed report.
Wolf Street’s Richter points out in his report that he has never seen the banking system beg the Fed to reverse QE. The financial reporter thinks the Fed has figured out it could pass the tipping point.
“This is the first time that I see Wall Street banks asking the Fed to give up QE while the banking system cracks and tires under the huge pile of reserves,” said Richter’s report. “And apparently, from the response in the minutes, the Fed finds out that you can only push QE this far before something big goes wrong with unintended consequences,” he added. .
What do you think of the Federal Reserve withdrawing $ 351 billion in liquidity from the market via reverse repurchase agreements overnight? Let us know what you think of this topic in the comments section below.
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