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The Fed's Reverse Repo and Balance Sheet Tapering Madness Accelerates

Reverse repos, effectively a QE drain, hit new record levels even as the QE madness continues.
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Reverse Repos 2021-09-21

Choking on Liquidity

The New York Fed Market Data Dashboard shows $1.283 trillion in reverse repos. 

At Wednesday's FOMC meeting the the Fed announced that a "moderation in the pace of asset purchases may soon be warranted".  

Soon be warranted? How about many months ago? 

Better yet, why is there a Fed?

As Fed continues its monetary QE (asset purchases) to the tune of $120 billion a month, it has conducted Reverse Repos (asset sales) to the tune of $1.28 trillion. 

It get even more amusing as the New York Fed just doubled the amount of cash eligible parties can send back to the Fed. 

The Federal Open Market Committee directed the Open Market Trading Desk at the Federal Reserve Bank of New York to conduct overnight reverse repurchase agreement (ON RRP) operations with a per-counterparty limit of $160 billion per day, effective September 23, 2021. The increase in the per-counterparty limit from the current level of $80 billion per day helps ensure that the ON RRP facility continues to support effective policy implementation.

Not only that but Wolf Street noted the number of eligible counterparties increased as well.

  • At the end of June, the Fed had already approved 74 counterparties. Now there are 128 approved counterparties.
  • Fidelity has 11 money market funds on the list of approved RRP counterparties.

The amount of reverse repos is guaranteed to soar. 

The Fed does not list daily participation but here are the reverse repo numbers as of the end of August.

  • Fidelity: $267 billion
  • Vanguard: $102 billion
  • Blackrock: $92 billion
  • Morgan Stanley: $86 billion
  • Federated: $85 billion

Were it not for Reverse Repos, overnight rates would be negative. Simply put, the system is choking on liquidity that the money market funds don't want and cannot use.

Balance Sheet Reduction In Progress With a Twist

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The Fed has mopped up $1.283 trillion in reverse repos. That not just tapering but an effective balance sheet reduction. 

 $1.283 Trillion / $120 Billion in QE Per Month = 10.69 Months.

The Fed has effectively undid nearly 11 months of QE! And that pace of unwinding will accelerate because the Fed doubled the eligible amount and increased the number of eligible parties.

However, reverse repos are not precisely the same as balance sheet reduction. The Fed accumulated longer term securities, suppressing rates on mortgages, while ridding itself of shorter term securities. 

Rate Hikes? When?

Dot Plot of Anticipated Rate Hikes 2021-09

Fade This Consensus

The FOMC meeting on Wednesday provided some real humor. The meeting participants believe the Fed will hike in 2022 then accelerate the rate of hikes through 2024.

For discussion, please see Fed Anticipates Rate Hikes in 2022 and 2023 - Fade This Consensus

Hells bells, the Fed cannot even taper properly and participants believe the Fed is going to get in all those hikes.

Heck, I bet there is another recession before 2024. 


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