On Wednesday, the Fed announced it would continue its QE program to the tune of $120 billion a month even though banks are choking on the cash.
In addition, the Fed boosted the Reverse Repo rate it pays and hiked the interest it pays on excess reserves rate to 0.15% from 0.10%.
Those actions spiked demand for Reverse Repos to a record $756 billion as shown by the chart from Wolf Richter.
Doing What It’s Supposed To
Similarly, the WSJ reports Fed Reverse Repos Surge to Record of $756 Billion After Rate Tweak
The reverse repo facility takes in cash primarily from money-market funds, as well as government-sponsored companies and banks. Until Wednesday, this facility offered a return of zero percent to eligible users, which the Fed moved up to 0.05%, while at the same time lifting another rate, called the interest on excess reserves rate, to 0.15% from 0.10%.
At his press conference after the Federal Reserve meeting on Wednesday, central bank leader Jerome Powell said “the reverse repo facility is doing what it’s supposed to do, which is to provide a floor under money-market rates and keep the federal-funds rate well within its—well within its range. So we’re not concerned” about the current level of usage.
At the same time, the Fed’s $120 billion in asset buying each month is creating an ever-rising amount of money that needs to be parked somewhere, and increasingly, that place is the Fed.
Free Money
The Fed Pumps $120 Billion a month to banks via QE.
Then the Fed mops up after itself by offering a now record $756 Billion in reverse repos effectively giving participants free money.
In effect the Fed undid 6.3 months of QE.
Excess Reserves
The Fed stopped reporting on excess reserves as per this announcement on March 15, 2020.
The Board of Governors reduced reserve requirement ratios on net transaction accounts to 0 percent, effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
Interest on Excess Reserves
Despite the fact that there are no reserve requirements and the Fed stopped reporting excess reserves, on Wednesday the Fed hiked the interest rate it pays on excess reserves to 0.15% from 0.10%.
Total Reserves
There are no excess reserves or required reserves, only reserves.
Working As Designed
The Fed crams money down banks throats then paying them interest when they send it right back. Banks also get interest on excess reserves even though there are no reserve requirements.
If this sounds totally preposterous you must be mistaken. Powell says it’s working as designed.
Mish
They’re pumping in 120 billion by buying Treasuries & Mortgage backed securities, ie term bonds putting downwards pressure on term yields. Reverse Repos are very short term, so taking the dollars back via these puts upward pressure on short term rates.
And it’s a raw deal, too: You put up real cash as a down payment, plus your house and your credit as collateral, and what does the bank do? It literally link to medium.com, which you then have to pay back, with interest and hard-earned real money. And if you miss just 3–6 payments in a row in a 25–40 year window, they take your house away, ruin your credit, and make you start again.”
And it’s a raw deal, too: You put up real cash as a down payment, plus your house and your credit as collateral, and what does the bank do? It literally link to medium.com, which you then have to pay back, with interest and hard-earned real money. And if you miss just 3–6 payments in a row in a 25–40 year window, they take your house away, ruin your credit, and make you start again.”