
Why the Federal Reserve is pouring money into the financial system - joshuafkon
https://www.ft.com/content/345da16e-d967-11e9-8f9b-77216ebe1f17
======
freejulian85
The money absolutely impacts the economy and the individual. If the fed were
not providing this printed money to the banks, the banks would need to do some
combination of the following to increase liquidity:

1) Increase interest rates to attract new deposits

2) Sell assets — such as foreclosed homes now in the banks possession

With house prices at all time highs and interest rates at all time lows, both
1&2 sound great to me and absolutely have a direct impact on me.

~~~
jhayward
> _If the fed were not providing this printed money to the banks_

I'm pretty sure you don't actually mean "printed money", since the Federal
Reserve doesn't do that. No currency was created for this market operation,
just balances in books kept by the Federal Reserve Bank of New York.

~~~
freejulian85
The money which the fed gave to the banks did not previously exist. The fed
increased the balance sheet of the banks to indicate they had cash they would
not otherwise have had. Fits my definition of “printed.”

~~~
joeyrideout
I think a more accurate phrase is "borrowed into existence", which is _worse_
than printing because the balance created charges interest. Printing money
directly rather than borrowing it is less inflationary, because more money is
needed to service debt.

(This is all bad so I may be splitting hairs, but I would advocate for direct
currency printing over this lending scheme if given the chance.)

------
joshuafkon
I thought the _Financial Times_ had a more in-depth analysis of the structural
reasons behind the spike in the REPO market than I've seen elsewhere. I've
seen a few sources point out the tax payment due on the 15th, and the
settlement of a large treasury sale, but as the article says:

"...Analysts say these two things alone should not cause the deep cracks in
the repo market that we have seen this week. The underlying issue is more
structural.

The Fed has been reducing the size of its balance sheet, letting the
Treasuries and mortgage bonds it bought following the financial crisis roll
off. In turn, that reduces the amount of cash reserves banks hold at the
Fed... 'We have had tax payments in the past. What is different this time is
that it has followed a period of quantitative tightening,' said Jon Hill, an
interest rate strategist at BMO Capital Markets. 'Companies sucking cash from
the market was just the tripwire that brought things falling down.'”

~~~
nickles
> The Fed has been reducing the size of its balance sheet, letting the
> Treasuries and mortgage bonds it bought following the financial crisis roll
> off. In turn, that reduces the amount of cash reserves banks hold at the
> Fed.

I'm somewhat skeptical that the reduction in Fed balance sheet is the impetus
for the recent surge in repo rates, especially since the Fed ended its balance
sheet unwind in August.

From August 2014 to January 2018, the Fed held $4.4 trillion in assets [0].
From 2014 to 2016, overnight repo rates remained stable and low [1]. In
December 2015, the Fed began its hiking cycle. From this point onwards, repo
rates began drifting up, consistent with an increasing fed funds rate [2]. It
would appear that the changes in repo rates were not driven by Fed balance
sheet during this period.

Starting in January 2014, banks held $2.4 trillion in excess reserves at the
Fed, peaking at $2.7 trillion in August 2014 [3]. By January 2018, excess
reserves held at the Fed had fallen to $2.1 trillion, independent of any
change in the size of the Fed's balance sheet. In 2016, repo rates remained
steady, despite a $400 billion decrease in excess reserves. In 2017, overnight
repo rates drifted up, despite an increase in excess reserves of $200 billion.
Here, repo rates do not exhibit any obvious impact from fluctuations in excess
reserves.

As Fed balance sheet declined by $700 billion in 2018, excess reserves
declined by roughly the same amount. However, even as Fed balance sheet
continued shrinking in 2019, repo rates held fairly steady, corresponding to
the stable level of the effective fed funds rate.

Given all this, it doesn't look like reductions in Fed balance sheet have been
the sole driver of declining excess reserves, nor does it appear that the
quantity of excess reserves correlates strongly with overnight repo rates.
Furthermore, the Fed announced an August 2019 conclusion of the balance sheet
unwind in July's FOMC statement. Finally, excess reserves held at the Fed are
now 1000x greater than they were in 2007.

In short, the recent spike in repo rates happened despite a massive overhang
of excess reserves and in the absence of a shrinking Fed balance sheet. I
wonder if the decline of the interbank loan market, which serves as a source
of short term funding for banks, is related. At the time the Fed discontinued
reporting interbank loan volume (2018), volumes had declined ~75% from
precrisis levels [4]. Such low volumes were last seen in 1979. This, in part,
explains the large amount of excess reserves held by banks. If they do not
have confidence they will be able to borrow when they need to, they must
maintain such reserves.

[0]
[https://www.federalreserve.gov/monetarypolicy/bst_recenttren...](https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm)

[1] [https://tradingeconomics.com/united-states/repo-
rate](https://tradingeconomics.com/united-states/repo-rate)

[2]
[https://fred.stlouisfed.org/graph/?g=URW](https://fred.stlouisfed.org/graph/?g=URW)

[3]
[https://fred.stlouisfed.org/series/EXCSRESNS](https://fred.stlouisfed.org/series/EXCSRESNS)

[4]
[https://fred.stlouisfed.org/series/IBLACBW027NBOG](https://fred.stlouisfed.org/series/IBLACBW027NBOG)

~~~
yasp
Any idea why the Fed discontinued data series #4 and what a good replacement
for it is now?

------
yasp
How can reserves be too low when there are $1.4 T in excess reserves? How can
repo rates spike to nearly 10% when the interest earned on those $1.4 T
reserves only yields 1.80%?

edit: more questions. As I understand it, the "repo market" is broader than
only banks. Why is it that the Fed performing repo operations will alleviate
the liquidity issue in the repo market, unless it is some such bank borrowing
in the repo market that is the cause of the problem? And given the point about
the size of excess reserves, and the low yield they earn, is there any way for
the repo rate to have spiked unless there were some bank that weren't able to
muster adequate collateral?

~~~
thedudeabides5
These are good questions and not sure I’ve seen good answers out there yet

The rate spiking is indeed reflective of _someone_ needing collateral quickly
and being willing to pay up for it.

Now the fact that it spiked doesn’t mean Armageddon, just check out Chinese
interbank stats to get a sense of how much they can move.

That being said looks like a narrative has formed that it must mean reserves
are “too low” and so, I guess we should print more.

Another perspective is we had a decent amount of monetary tightening, and
tightening are designed to reduce liquidity, especially on the front end.

This is a sign that, that tightening, combined with regulatory pressure on
banks to get out of this market, have indeed reduced liquidity.

Now, no one really wants to make levered entities go under because randomly
repo liqidity dries up, so the answer is _clearly_ to just print more money.

What’s being missed though is that this illiquidity is not a bug, it’s a
lagged feature of monetary policy decisions from 2014-2018.

~~~
elSidCampeador
Obligatory - "That's just, like, your opinion, man"

But yep! I agree with you 100% on this being a result of all the monetary
policy decisions taken over the last 4 years.

------
neonate
[http://archive.is/yScft](http://archive.is/yScft)

~~~
steve_taylor
archive.is seems to be blocked by the Great Firewall of Australia.

~~~
unilynx
Or you're behind the Cloudflare 1.1.1.1 dns?

They're not getting along well:
[https://news.ycombinator.com/item?id=19828317](https://news.ycombinator.com/item?id=19828317)

------
sbmthakur
[https://outline.com/BqFFzM](https://outline.com/BqFFzM)

~~~
neogodless
This link is broken for me. I tried it a few different Firefox containers and
a private window. No dice!

~~~
Qub3d
Turn off enhanced tracking protection[0]. As outline inherently works by
grabbing data off of third-party sites, the new enhanced protection may break
it.

[0]:[https://support.mozilla.org/en-US/kb/enhanced-tracking-
prote...](https://support.mozilla.org/en-US/kb/enhanced-tracking-protection-
firefox-desktop)

~~~
neogodless
Ah that might be it. I think I'll leave it on and skip the article, but thanks
for figuring out why I had the issue!

------
thiago_fm
They can always pump more money to the market in different ways, but what is
clear that is happening there is a shift on the dollar not being the world
currency / international trade currency.

FED will have always more trouble to handle that. What will happen is hard to
say, maybe some crazy inflation, or liquidity crisis... or something I don't
care about. What I care about is that economy and money will be broken for a
while which will make people move away from the Dollar.

~~~
chosenbreed37
> What I care about is that economy and money will be broken for a while which
> will make people move away from the Dollar.

Why though?

~~~
thiago_fm
Because if FED and US can't do a good job to keep their currency and country
running properly, doing austerity when it is needed, not bailing out banks
etc. Nobody will trust that currency anymore.

No country in the world can run a $1 trillion deficit or 5%(?) of their GDP
every year and not have consequences. This might be "okay" now, but this will
create an effect that when people finally start to move away from the dollar,
things will run completely out of control in America.

~~~
meddlepal
Ah so you want to see America collapse? That'll turn out great for everyone
I'm sure.

~~~
drjesusphd
This is nonsense. Predicted is not the same thing as wanting. If the economy
runs on everyone clapping for Tinkerbell, we have more problems.

------
resters
On the question of "Are reserves too low" posed by the article:

Reserves are simply a low pass filter, making it very unlikely that high
frequency events (routine events) will cause a crisis. But they still allow
low frequency events to potentially cause problems.

Since the "cutoff frequency" of the "filter" is determined by the political
process, then to answer the question about whether reserves are adequate we
must consider how effectively the political process addresses these sorts of
issues in general.

Consider the PBGC, the government coordinated insurance system for pension
funds. It is dramatically under-funded, and if more than one or two large
firms with big pension obligations went under, so would the PBGC. What this
means is that it would be up to the political system to bail it out.

Underwriting capital (reserve capital, or capital that is generally kept idle)
is useful for financial contracts because it is far more reliable than the
uncertain outcome of the political system. It is also much faster to access
pre-arranged underwriting capital than it is to wait for the political system
to resolve an issue.

We learned in 2008 that underwriting requirements were too low, and the policy
response was actually to reduce them further, allowing firms to use riskier
assets for underwriting and the government buying some of those assets (QE).

From the perspective of a politician, the response to the 2008 crisis was
superb. The Fed and Treasury teamed up to prevent more widespread insolvency
of financial firms and even automakers. This led to both industries being
increasingly beholden to politicians and the political process in general.

But imagine if the underwriting levels prior to 2008 had actually been
_adequate_ to prevent the cascade of insolvency. There would simply have been
no crisis.

From the perspective of an insurance company or banker, reserve capital is
sitting idle and going to waste. If the US requires more reserve capital, this
gives a competitive advantage to foreign firms whose governments require less
caution. So reducing underwriting requirements is a view supported by economic
nationalists.

So considering that most policy discussion these days is dominated by the
political class and by economic nationalists, of course the conclusion is that
everything is being done in a very smart, sensible way.

In the past, before bailouts were so commonplace, we could expect the firms'
selfish interests to moderate their appetite for risks to the firm's solvency,
but this check is not really a factor anymore.

------
DebtDeflation
[https://www.newyorkfed.org/markets/opolicy/operating_policy_...](https://www.newyorkfed.org/markets/opolicy/operating_policy_190920)

The facility is being extended and will run daily through October 10.

------
thorwasdfasdf
Is there no limit at which point the Fed will stop printing money? In theory,
once all that money printing hits the actual economy and inflation starts
going up, they'll have increase interest rates. I'm not sure I believe that
100%. I wonder how complacent they will be once inflation does start to raise,
and eventually spiral out of control.

~~~
charwalker
Inflation rates under the current administration have been very high relative
to previous years after the 2008 crash. The Obama era Fed struggled to hit
their 2% controlled inflation mark during the economic recovery but it has sat
closer to 3% in recent years. See the chart in the link below:

[https://inflationdata.com/Inflation/Inflation_Rate/CurrentIn...](https://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp?reloaded=true)

------
donclark
Could it be that the system is just too complex, with too many variables -
that nobody can really make sense of the entire world economy? Sure, you can
look at segments and smaller systems and maybe make sense, but are we not
wanting to focus long term (which means the world, not just US)?

------
hw
Here is another good writeup assuming you aren't too familiar with the repo
markets

[https://www.forexlive.com/news/!/lets-talk-about-the-
repofun...](https://www.forexlive.com/news/!/lets-talk-about-the-repofunding-
issue-20190920)

------
ptah
I like the question based structure of this article. it does lack the one
question I have though: "How does it affect everyone else that is not a bank?"

------
andreitp1
You can use Google to bypass the paywall:
[https://www.google.com/search?gl=us&hl=en&pws=0&source=hp&ei...](https://www.google.com/search?gl=us&hl=en&pws=0&source=hp&ei=FdKEXf-
KFsuZkwW4q4XADQ&q=Why+is+the+Federal+Reserve+pouring+money+into+the+financial+system%3F&oq=Why+is+the+Federal+Reserve+pouring+money+into+the+financial+system%3F&gs_l=psy-
ab.3...1181.1181..1912...0.0..0.70.70.1......0....2j1..gws-
wiz.2vjQOkG_nR4&ved=0ahUKEwi_6fn0vt_kAhXLzKQKHbhVAdgQ4dUDCAg&uact=5)

------
NKCSS
I still had some money in USD on my paypal... I think this is a good time to
convert those back to Euro's :)

~~~
ComputerGuru
I wish it were that simple. It’s truly a global economy and between the spike
in oil prices, the looming brexit/not-brexit, the US-China trade war, and
everything else, I think it’s all one big cluster%]+} and it doesn’t make a
difference which of the two currencies you store your money in, long term.

------
known
To reduce OPEC Oil price for Importers?

------
zxcb1
What would the difference be in this scenario with full versus fractional
reserve?

~~~
zxcb1
Please answer instead of downvoting

------
exabrial
Non paywall?

~~~
Yhippa
The web link worked for me.

~~~
exabrial
:( even in Brave browser they caught me.

~~~
mrb
archive.is can bypass the paywall, try
[http://archive.is/PbCtz](http://archive.is/PbCtz)

------
25b183
What happens in USA affects all of us

