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Reverse Repos Hit a New Record High Today, It's Tapering With a Twist

Reverse Repos are the reverse of QE, the Fed is tapering already, with a key twist that merits discussion.
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Reverse Repos 2021-12-16

Given that reverse repos are reverse of QE, the Fed has actually reduced its balance sheet over time.

On April 5, 2021, Reverse Repos were $3 billion. On April 4, 2021 they were $0. Historically, some of the $0 numbers are bogus, typically a holiday, but April 4 is confirmed by the small positive number on the 5th.

While expanding its balance sheet, the Fed has simultaneously been reducing it. Effectively, QE needs to be subtracted from the Fed's balance sheet.

Fed's Balance Sheet 

Fed's Balance Sheet 2021-12-16

Let's Twist Again

The Fed's balance sheet has effectively been shrinking since the surge in reverse repos started. 

What's happening is a Twist operation, while the Fed has effectively been reducing its balance sheet it has been simultaneously been adding to duration. 

The Fed added assets at the long end (long  duration treasuries and mortgage backed securities giving the housing market a huge boost it does not need) while subtracting at the short end in attempts to not break the money market mutual funds.

If the Fed did not do this twist operation rates would go negative at the short end. 

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"Working as Designed"

I discussed this before including the Twist aspect.

Down the Rabbit Hole 

Please recall my July 1 post Down the Rabbit Hole in Reverse Repos, What is the Fed Doing?

I discussed the Twist aspect, noting and answering "The Fed just unwound over 8 months of QE. What's going on?"

I expect this kind of manipulation will continue, if and when the Fed ever gets around to hiking rates.

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