
NY Fed rescues overnight lending market with $53B - aazaa
https://www.cnn.com/2019/09/17/business/overnight-lending-rate-spike-ny-fed/index.html
======
mrosett
Matt Levine's explanation of what happened is considerably less
sensationalized. Take a look at the second item of his column today [0]. It's
too long to quote and doesn't lend itself to an easy excerpt, but here are the
facts that he quotes, from Bloomberg [1]:

> A sudden surge in the overnight rate on Treasury repurchase agreements that
> began on Monday continued Tuesday -- with the rate opening at 7%, according
> to ICAP. …

> What happened was an unfortunate coincidence -- just as companies were
> withdrawing cash from money markets to pay corporate tax, a glut of new
> bonds appeared on the market as the U.S. government sold some $78 billion of
> 10- and 30-year debt last week.

> With just $24 billion of bonds maturing in the period, this became one of
> three occasions this year when the imbalance between debt redemption and
> cash needed to buy new Treasuries exceeded $50 billion.

Again, if those paragraphs don't obviously relate to the overnight lending
market, read his column for context.

[0]:
[https://www.bloomberg.com/opinion/articles/2019-09-17/wework...](https://www.bloomberg.com/opinion/articles/2019-09-17/wework-
s-ipo-doesn-t-work-yet)

[1]: [https://www.bloomberg.com/news/articles/2019-09-17/it-
starts...](https://www.bloomberg.com/news/articles/2019-09-17/it-starts-as-a-
repo-squeeze-before-spilling-into-funding-markets)

~~~
bsanr2
I just think it's funny that rich people can get billions of dollars to stay
solvent in a sudden crisis, and I can't get a dime when I can't pay for lunch.

Am I reading this wrong? Is this a bad analogy? Is it not exemplary of how
creditworthiness seems to rise at a higher rate than the means used to justify
that creditworthiness? I'm a layman, but I'd like to know more.

~~~
mgraczyk
Aside from the fact that you can easily borrow money for lunch in a variety of
ways, the main difference is that banks almost never default, compared to
individuals.

Only one bank has failed in the US in the last two years.

[https://www.fdic.gov/bank/individual/failed/banklist.html](https://www.fdic.gov/bank/individual/failed/banklist.html)

The real risks are systematic (many banks failing), not that an individual
bank will fail.

~~~
taneq
This feels like a circular argument: Banks get bailed out, because banks
always repay their loans, because banks can’t go broke, because banks get
bailed out.

~~~
mgraczyk
Whether or not bank bailouts were prudent is a matter of debate, but unlike
individuals, default is rare and overall bailouts were repaid quickly.

[https://www.politifact.com/new-
hampshire/statements/2012/oct...](https://www.politifact.com/new-
hampshire/statements/2012/oct/25/barack-obama/barack-obama-says-banks-paid-
back-all-federal-bail/)

------
whatok
This is a better publicly available recount of events:

[https://www.ft.com/content/345da16e-d967-11e9-8f9b-77216ebe1...](https://www.ft.com/content/345da16e-d967-11e9-8f9b-77216ebe1f17)

This is a pretty technical subject with a lot of moving parts so it's hard to
really have a full understanding of things. This is not a one-off event and
can easily happen in the future under similar or different circumstances
unless the Fed makes some changes (that they've been seen behind the curve
on). This is easily dismissed right now but this happened under relatively
calm market conditions. When stuff like this happens under more volatile
markets stuff breaks really quickly.

~~~
throwaway5752
The Fed is not behind the curve. The Fed's role is to keep the inflation at
target rates. Not finance structural budgetary deficits through quantitative
easing.

------
H8crilA
Isn't this working as intended? Where else does the FED actually "enforce" its
short term fed funds rate? I mean how else the current 2.00-2.25% rate is
forced onto the financial system? Why else would anyone even care about what
the FED funds rate is?

In my home country the central bank rate is enforced by providing central bank
deposits and central bank loans, available in unlimited quantity for
commercial banks. When the market gets cash congested (like here) banks just
start tapping the infinite central bank credit line, at central bank rate.
Similarly if the market gets flush with cash banks just deposit it at the
central bank. Ergo the market interbank lending rate is always between the
central bank deposit and credit rates.

The fact that it doesn't normally happen is like when most purchased options
are not exercised but sold back. Yeah, sure, but if there was no possibility
of exercising them then options would have no value. So it has to be there,
then we can safely almost never use it.

~~~
nickles
> I mean how else the current 2.00-2.25% rate is forced onto the financial
> system?

Traditionally, Fed used open market operations to target the fed funds rate.
This entailed either buying/selling treasuries or conducting repo operations
(as was done here). This was a _corridor_ system, as banks could earn no less
than 0% interest keeping reserves on the Fed's balance sheet (no negative
interest) and could finance at a cost no higher than the _discount rate_ in
which banks borrowed directly from the Fed's discount window (this, however,
sent a very negative signal to the market).

For the past decade, the Fed has relied on interest on excess reserves (IOER)
to target the fed funds rate, a policy known as a _floor_ system. Here, banks
earn a given interest rate on reserves kept on the fed's balance sheet. The
floor system theoretically ensures short term rates do not drop below the IOER
rate (although it is not always the case). This does not entail engaging in
open market operations.

> Why else would anyone even care about what the FED rate is?

All dollar interest rates are impacted in one way or another by the fed funds
rate. The strength of the dollar is also impacted by the fed funds rate, as it
may become more or less attractive to keep balances in the US. The floor
system currently employed makes it less attractive for banks to use excess
reserves to make loans, as the risk free rate (on the fed balance sheet) is
greater. This diminishes the money multiplier effect that banks have.

Additionally, some foreign institutions are able to keep money on the fed's
balance sheet, helping them avoid negative interest rates. Again, this
disincentivizes them from making loans and also undermines monetary policy
implemented by their local central banks. Finally, some currencies have a USD
peg (e.g. HKD). These pegs effectively import Federal Reserve monetary policy
(to help mitigate the risk of currency crises) which affects the local
economies.

~~~
H8crilA
It sounds like you agree that this is the mechanism of choice used to push
down overnight interbank interest rates to keep them in line with the federal
funds rate. IOER, by design, provides just a floor. Discount rate is, by
design, quite a bit higher than the fed funds rate, and is only tapped for
credit in emergencies.

Also this is what Wikipedia says on the topic:

 _> The (effective) federal funds rate is achieved through open market
operations at the Domestic Trading Desk at the Federal Reserve Bank of New
York which deals primarily in domestic securities (U.S. Treasury and federal
agencies' securities)._

[https://en.wikipedia.org/wiki/Federal_funds_rate#Comparison_...](https://en.wikipedia.org/wiki/Federal_funds_rate#Comparison_with_LIBOR)

So, WAI. We just haven't seen cash injection through this mechanism in a
while.

~~~
nickles
> Discount rate is, by design, quite a bit higher than the fed funds rate, and
> is only tapped for credit in emergencies.

That's right. Open market operations were traditionally used to target the fed
funds rate. The discount window does serve as the upper bound though _in
extreme cases_. Typically, reserves would be loaned overnight between banks on
the fed funds market. This market has been decimated by the floor system.

> IOER, by design, provides just a floor.

In theory, yes. It has also acted as a ceiling. Not all institutions with
access to Fed's balance sheet are able to receive IOER (e.g. GSE's). These
entities loan the money to banks overnight at a rate below IOER. The banks
then earn IOER on that money. This arbitrage can lead to an effective fed
funds rate below IOER.

~~~
H8crilA
_> This market has been decimated by the floor system._

You mean there has been so much cash around that nobody really needed to get
cash via the fed funds market, for quite a while? It does seem like the spread
between fed funds and IOER is generally just a few bp, maybe even 1bp
sometimes, which I guess is where the "ceiling" you were talking about comes
from:

[https://fred.stlouisfed.org/series/IOER](https://fred.stlouisfed.org/series/IOER)

[https://fred.stlouisfed.org/series/FEDFUNDS](https://fred.stlouisfed.org/series/FEDFUNDS)

~~~
nickles
> You mean there has been so much cash around that nobody really needed to get
> cash via the fed funds market, for quite a while?

Prior to IOER, banks needed to lend money on the fed funds market to earn
interest on any excess reserves. Doing so exposed them to the credit risk of
their counterparty. Once it became possible to earn IOER risk free, banks had
no incentive to expose themselves to the credit risk. Since banks (of all
sizes) could not then rely on being able to access the fed funds market for
liquidity, it became necessary for them to keep more reserves at the Fed.
Perversely, as the quantity of reserves held at the Fed increased, interbank
lending decreased (for more detail, see [0] pages 33-39).

> It does seem like the spread between fed funds and IOER is generally just a
> few bp

Until recently, it looks like the spread has been roughly 5-17bps [1]. For a
floor system, it seems rather odd that this would exist at all, especially for
a period of a decade (see [0] pages 18-19).

[0]
[https://www.cato.org/sites/cato.org/files/pubs/pdf/working-p...](https://www.cato.org/sites/cato.org/files/pubs/pdf/working-
paper-50-updated-3.pdf)

[1] [https://imgur.com/n3R366c](https://imgur.com/n3R366c)

~~~
H8crilA
All makes sense.

Thank you for many details, you've greatly increased my (and hopefully other
people's too) knowledge of the United States money markets.

------
AnimalMuppet
> "The Fed won't admit this," Cabana said, "but it looks and smells an awful
> lot like the monetary authority is financing the fiscal authority."

Frightening... if true. I hope Matt Levine's explanation (cited by mrosett) is
the correct one.

But also, if short-term rates are spiking (even if it's a rather different
type of shrt-term rate), does that mean that the Fed was incorrect to drop the
rate at its last meeting?

~~~
hogFeast
This has almost always been the case. The government is a huge part of the
economy and risk-free debt is a huge part of liquidity. It is boring but stuff
like the timing of payments matters. Paying taxes is a big, lumpy issue...and
the reason the Fed came into existence was because of big, lump payments
relating to the crop cycle (i.e. money becoming tight every year as banks lent
to farmers...iirc). And before the 1980s (maybe the 70s), liquidity was the
primary concern of policy-makers (you can go through FED minutes in the 1960s
from ALFRED, the main policy tool was free funds).

What happened is nothing to do with the level of rates. It is to do with the
volume (and often the location) of liquidity (location because tax payments
just go on deposit somewhere else, but it still causes a dislocation).

~~~
rolltiide
People just don't like how resources are appropriated as they are subject to a
different work mechanism in exchange for resources and not everyone else is.
These headlines are mainly to trigger that sentiment.

------
igammarays
Another $75B injection planned for tomorrow:
[https://www.ft.com/content/2c11a972-d941-11e9-8f9b-77216ebe1...](https://www.ft.com/content/2c11a972-d941-11e9-8f9b-77216ebe1f17)

~~~
ilaksh
I guess this is a dumb question but can they just keep "injecting"
indefinitely? Do they have a magical Money Tree or something?

~~~
dragonwriter
Look at a US dollar bill and what kind of note it is.

Yeah, the Federal Reserve has a “magical money tree”: the whole reason they
exist is to manage the money supply.

~~~
cowwithbeef
>the whole reason they exist is to manage the money supply.

That's a lot like saying the whole reason google exists is to help people find
information. There are greedier reasons for these organizations to exist.

~~~
dragonwriter
> That's a lot like saying the whole reason google exists is to help people
> find information.

No it's not.

> There are greedier reasons for these organizations to exist.

Any “greedier reason” for the Fed is a particular application of managing the
money supply; it to exists to manage the money supply, independently of
whether it exists to do that for the public interest or “greedier reasons”.

------
benj111
Something I've always wondered about overnight lending. All the money is
basically repayable at one point in time, the start of business in the
morning. What happens if theres a problem? What happens if a banks systems
crash and that money can't be repaid, presumably having knock on impacts on
the next days overnight lending.

I'm not suggesting it would be an end of days scenario, just curious.

~~~
viburnum
Failing a rescue from a central bank, you could have a bank run.

I still don’t know why the ordinary payments system has to be coupled with
hedge funds and derivatives and whatnot. It should be completely separate.
It’s like having your car explode because a cup holder got a crack.

~~~
coliveira
The system is coupled with hedge funds and etc. because the money they use
come from banks. Goldman Sachs and others don't have the money to maintain all
their obligations, it all comes from other banks that loan the required funds.
When there are problems in money part of the banking system, everything goes
down.

~~~
viburnum
Yeah, that’s the problem. They should be separated.

------
lifeisstillgood
Is there a simple model of this - a script, spreadsheet or something - or in
fact is there a open government set of figures showing the situation

I know it's probably well known but i am looking for a modern version of the
old coloured liquids in tubes

------
brianpgordon
> On Tuesday morning, the NY Fed launched what's called an "overnight repo
> operation," during which the central bank attempts to ease pressure in
> markets by purchasing Treasuries and other securities.

It was my (perhaps mistaken?) understanding that the Fed operates an overnight
repo facility regularly - like, every night. It reads like CNN is reporting
this like an exceptional emergency maneuver. Is the newsworthiness in fact
just the size of the liquidity injection, and CNN is a little confused about
what the ON repo does? Or am I mistaken about the Fed making overnight repo
agreements regularly?

------
ohiovr
So much for unwinding the fed ballance sheet.

~~~
cm2187
It's an overnight transaction, it should go away very quickly.

The Fed has been surprisingly consistent in its reduction of QE [1]. There is
no way QE will be drained by the next recession but what is interesting is
that they keep draining even though they are considering lowering rates. I am
surprised it doesn't have a bigger impact on the market given how large of an
impact QE had on the way up.

[1]
[https://www.federalreserve.gov/monetarypolicy/bst_recenttren...](https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm)

~~~
wnissen
I suppose it's not something that the Fed would want trumpeted in every paper,
but thanks for informing me that they were reversing QE. I agree, you would
think that the effects of selling off a half trillion in assets per year since
the beginning of last year would be much more substantial. Didn't they buy up
a whole bunch of mortgages?

~~~
cm2187
I believe their balance sheet is about 50/50 between treasuries and mortgages,
and that they are selling both.

------
joshiefishbein
Originally read this headline as "NYFD rescues overnight lending market with
$53B" and momentarily thought the calendar photoshoots were more than just a
joke.

------
purplezooey
Hey, fiat money. Press a button, money appears. I just hope we can stop the
attempts at politicizing the Fed, else we are doomed shortly.

------
NTDF9
When someone asks how does inflation increase with increasing deficit?

This is the answer. Money printed out of thin air to buy bonds.

Bye bye affordability if this continues.

------
OrgNet
Any source that is more neutral reported on this?

~~~
moonbread
[https://monday-morning-macro.com/2019/09/17/far-too-
little-f...](https://monday-morning-macro.com/2019/09/17/far-too-little-far-
too-late/)

This is the best technical write-up. Most mainstream financial reporting will
focus on explaining repo so hard to get into the details, and the truth is
that 95%+ of those who work in financial services have no idea what the repo
market is.

------
29_29
QE4?

------
Gravityloss
Loud autoplaying video.

------
rolltiide
Just a couple of underestimations, it did its job expediently.

