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FEDERAL RESERVE

The Fed is extending its overnight funding operations through January 2020

PUBLISHED FRI, OCT 11 201911:00 AM EDTUPDATED FRI, OCT 11 20191:15 PM EDT
KEY POINTS
  • The Federal Reserve will be extending its temporary overnight repo operations through at least January.
  • In addition, the central bank said it will be buying short-duration Treasury bills through at least the second quarter of 2020.
  • Both announcements come as the Fed is looking to address issues in the short-term lending markets.
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What it means when the Fed conducts a ‘repo’ operation
 

The Federal Reserve will be continuing its overnight funding operations through at least January and will start buying Treasury bills next week through the second quarter of 2020, the central bank announced Friday.

The T-bill purchases will be large — $60 billion in the first month despite Fed officials’ insistence that the operation will be an “organic” move to grow the central bank’s balance sheet and the level of bank reserves, as well as to keep the benchmark funds rate within its targeted range. The purchases will involve maturities of between five and 52 weeks.

Following a disruption in short-term lending markets in mid-September that sent interest rates soaring, the Fed began conducting its own operations to provide financial institutions with cash in exchange for ultra-safe assets like government bonds.

Most recently, the Fed said the repo operation would end Nov. 4.

The announcement comes as Chairman Jerome Powell also said that the Fed will be expanding the size of its $4 trillion balance sheet through further short-term T-bill purchases.

Fed officials met by video conference on Oct. 4 to discuss “issues related to the recent pressures in money markets and monetary policy implementation,” according to a news release.

Documents from the central bank state the overnight repurchase operations “at least through January” and will be buying T-bills “at least into the second quarter of next year.”

On the latter operation, Powell has been adamant in pointing out that the T-bill purchases, though aimed at expanding the Fed’s balance sheet and, correspondingly, bank reserves, this should not be confused with the quantitative easing that occurred during and after the financial crisis.

Under QE, the Fed sought to lower long-term rates and push the appetite for risk assets. The balance sheet expansion will be “organic,” Powell has said, and will be targeted at making sure bank reserves are plentiful and that the Fed’s benchmark overnight borrowing rate stays within its targeted range. During the September cash crunch, the funds rate briefly rose 5 basis points above the range.

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And on the repo market. 

 

 

Why is the Fed pumping money into the banking system?

By Natalie ShermanBusiness reporter, New York
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Image copyrightGETTY IMAGESNew York stock exchange
Image captionAll eyes are on the repo market

The US central bank has pumped more than $200bn (£160bn) into the financial system this week - the first time there's been such an intervention since 2008.

The Federal Reserve's aim was to stabilise what is usually a calm part of the market.

Interest rates in the so-called "repo market" had shot up to 10% in some cases - although the cost of borrowing in that market more typically hovers around the benchmark rate set by the Fed - around 2%.

So what happened and should we worry?

First things first: what's the repo market?

Banks, hedge funds and other players borrow money regularly on a short-term basis to ensure their books are in order, no matter what their daily activities.

The borrowers typically offer government bonds or other high quality assets as collateral, which they repurchase, plus interest, when they repay the loan - often the next day.

Those repurchase agreements give the repo market its name.

What happened this week?

This is a huge market, with some $3tn changing hands each day, according to the US Office of Financial Research.

Under normal conditions, interest rates in the repo market are low, since the loans are considered safe and there's plenty of cash on hand.

But this week the cost of borrowing shot up - toward 10% in some cases. And the rate at which banks lend to each other - the Fed's benchmark - exceeded 2.25%, the top of its desired range.

The rise prompted the Fed to take action. Four times this week, it injected money into the market, offering to buy up to $75bn in treasuries or other assets from banks in a bid to boost bank reserves and keep them lending.

Why did the rates suddenly spike?

Strains in the repo market were among the first signals of trouble ahead of the 2008 financial crisis. Back then banks had suddenly become wary of lending, worried there were unforeseen risks associated with assets that had previously been considered safe.

This time, analysts think what's happening is caused by an issue with money supply.

Image copyrightEPAUS Fed chairman Jerome Powell
Image captionThe Federal Reserve has intervened to ensure enough cash is available

Money has been sucked out of the market by two events that happen to have coincided. The first is a tax deadline which means firms need cash to pay what they owe the taxman. The second is the due date for payments on a recent offering of government bonds.

On top of that the Fed has also been steadily reducing the overall supply of money in the market, aiming to get conditions closer to how they were before the financial crisis.

Is that the mystery solved then?

A lot of people still don't think those explanations are enough to explain the scale of the interest rate rise.

"The thing that's really confounding is just how much rates moved in a short time," says Zachary Griffiths, rate strategist at Wells Fargo.

"Everyone's kind of trying to get a firmer grasp... on all the different nuances that could have led to such a big move."

There could be other one-off factors triggering this spike, such as an oil bet that went bad after the attack on Saudi Arabia, says Priya Misra, head of global rates strategy at TD Securities.

But she notes that the repo market also showed signs of stress in April and December, suggesting an underling structural issue - namely that the Fed has gone too far in reducing reserves.

"We are in uncharted waters," she says. "The Fed is trying to figure out the appropriate level of excess reserves."

Should we be worried?

On Wednesday, Federal Reserve Chair Jerome Powell conceded that the Fed had not anticipated such a large spike in interest rates, despite warnings of a possible crunch.

Mr Powell was also quick to talk down concerns that the issue signals a bigger problem or that the bank had lost its grip on its policy.

"We don't see this as having any implications for the broader economy, or for the economic outlook, nor for our ability to control rates," he said.

And the Fed used to conduct these kinds of market operations prior to the financial crisis, without prompting undue concern.

Did the Fed's intervention work?

Rates dropped back following the Fed's action, and so far stock markets and other parts of the system don't appear to have been affected.

But analysts warn that the turmoil is likely continue, saying the end-of-quarter rush to square up company balance sheets could cause more stress.

"Our big takeaway there is, we're going to have to keep an eye on this," says Mr Griffiths.

 

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Just now, dontlooknow said:

because they don't want the money to go to stock buy backs and bonuses for big shots.

hey how much is trump gonna mooch from the gumamint with this?

betcha he gets a lot of free money.

Very good point. The republicans want to just throw money at corporations so they can give huge bonuses and steal the money. 

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hahahahahahahahahaha!! Your SHITSTAIN party just SHIT IN YOUR PLATE and you are gobbling down their TURD!!!
 

Hows not having a JOB to go back to going to SMELL when that TURD LANDS???

 

Nope. YOU STILL love them shitstains shitting all over your house, your job, your life and a BANKRUPT NATION that you can't buy shit because you GOBBLED THE DEMOSHIT TURD !!

 

get used to that STENCH, GOATFUCKER!! YOU EARNED IT!!!

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Just now, dontlooknow said:

hahahahahahahahahaha!! Your SHITSTAIN party just SHIT IN YOUR PLATE and you are gobbling down their TURD!!!
 

Hows not having a JOB to go back to going to SMELL when that TURD LANDS???

 

Nope. YOU STILL love them shitstains shitting all over your house, your job, your life and a BANKRUPT NATION that you can't buy shit because you GOBBLED THE DEMOSHIT TURD !!

 

get used to that STENCH, GOATFUCKER!! YOU EARNED IT!!!

Now from the biggest idiot on the forum. 

 

He gives two shots about normal everyday americans.  All he wants to say is shit stains. 

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Just now, dontlooknow said:

Because we are done with corporate and wall street bailouts.

Very good answer. The democrats are going to make sure the working americans are taken care of before billionaires and big business that can borrow money at near zero or zero interest rates. 

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TARP was about the middle class taxpayers bailing out Wall Street while regular people were losing their homes. Senate Democrats understand that this bailout needs to have something for regular folks too. Workers and Main Street are the priority, not Wall Street. 


Anybody who says that voters will revolt against Democrats for not supporting a Republican handout to Wall Street is mired in fantasy. 

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Just now, dontlooknow said:

TARP was about the middle class taxpayers bailing out Wall Street while regular people were losing their homes. Senate Democrats understand that this bailout needs to have something for regular folks too. Workers and Main Street are the priority, not Wall Street. 


Anybody who says that voters will revolt against Democrats for not supporting a Republican handout to Wall Street is mired in fantasy. 

Yes this isn't about bailout banks. When the largest corporations in this country got their tax cuts they gambled with it on wall street. Time to fight for the working men and women of this country. 

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man on his death bed in S. Florida was told to tell his family goodbye and they heard about this. His doctor said "there is no reason to not try" and within 48 hours, he had NO fever, NO breathing issues, and back on the road to full recovery. ALL from Chloroquine.

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Just now, dontlooknow said:

because they don't want the money to go to stock buy backs and bonuses for big shots.

hey how much is trump gonna mooch from the gumamint with this?

betcha he gets a lot of free money.

Exactly how much is kushner and his daughter plus trump going to give themselves. Very good point. 

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5 minutes ago, dontlooknow said:

So basically the fed has been printing money in layman's terms. 

The Fed Has Pumped $500 Billion Into The Repo Market. Where Does It End?

colinheadshot-90x90.png
JANUARY 20, 2020
The Federal Reserve has funneled roughly $500 billion into the repo market in a program that was scheduled to end in October 2019.

In September 2019, the interest rate for the overnight money market — a short-term lending market where banks borrow cash from each other to meet reserve requirements at the end of a business day — surged to 10 percent.

Banks weren’t willing to lend out capital for the Federal Reserve’s target interest rate of 2 percent. The Fed responded to the cash crunch by financing these so-called repurchasing agreements (repos, for short) directly. It offered the 2 percent interest on these short-term loans (they’re usually paid back in days or weeks) to bring the interest rate down and pump cash into a strapped lending market. It has been offering these overnight loans on a daily basis ever since.

When the Federal Reserve began offering these daily agreements in late September 2019 it was the first time it has intervened in repo markets since the Great Recession. The United States’ central bank has funneled roughly $500 billion into the repo market since then in what was originally pitched as temporary operations that would end on October 10, 2019 — but the daily repo bids are still coming. Currently, there is $229 billion in outstanding repos on the Fed’s balance sheet.

The Fed is even considering lending directly to smaller financial institutions and hedge funds through the repo market — an unprecedented move in the history of the century-old institution. 

With the Fed gripping the reins of this obscure but essential sector of the U.S. financial realm for the first time since the 2007–2008 financial crisis, should the average American be anxious about the state of the U.S. financial market?

“Leverage Is Necessary”

“The key question is … should the average American be worried?” Gang Hu, managing partner at WinShore Capital hedge fund, told Bitcoin Magazine. “If [the Fed] keep going, then they should be worried, but if they didn’t do anything, they should worry more. It’s just, where do they stop? I don’t think anyone knows what the perfect balance sheet size of the Fed is. The Fed is guessing as much as we are.”

To finance these repos, the Federal Reserve buys U.S. treasury bills, mortgage-back securities and other highly liquid securities from the banks for cash. These securities act as collateral for the underlying loan, and the banks buy them back with interest over the course of a few days to weeks — hence, “repurchasing agreement,” or “repo”.

The repo market is necessary for keeping these banks solvent and satisfying their regulated reserve requirements (the amount each bank must keep in accounts at Federal Reserve member branches relative to the size of their balance sheet).

“All the banks are under regulation to control the balance sheet exposure they have,” Hu explained. These balance sheets consist of both cash and debt — any fiduciary obligation involving money. Banks borrow money against their assets (aka leveraging) to make investments and add to their balance sheets and even pay off other debt. So, when they don’t have enough cash in the bank, this can cause liquidity crunches and threaten the constitution of the lending market.

“The system cannot operate without leverage,” Hu said. “There’s simply not enough USD currency to support the number of assets that are floating around in the system. The financial system intrinsically comes with leverage.” 

Hu added that this leverage is essential but can also be dangerous if managed incorrectly

“In a good economy, leverage is the greatest thing ever — you make more money,” he said. “But in the downturn, you induce financial crisis and financial instability. And right now, the financial instability is the biggest concern at this point with the Fed.”

Why Did the Fed Step In?

Ironically, the cash crunch that necessitated the Fed’s repo intervention arose from regulations that are meant to keep cash in reserves to prevent a run on banks or other liquidity crises. 

Reuters, for instance, reported that bankers and analysts believe that J.P. Morgan, the largest bank in the U.S., may have had liquidity to finance these repos itself if it hadn’t withdrawn 57 percent of its cash ($158 billion from the Federal Reserve throughout 2019) and if new regulations didn’t mandate stricter reserve requirements.

Without enough cash in the bank to finance the repos and satisfy these reserve requirements, J.P. Morgan was more reluctant to lend out what it had left. During this time, Hu said, J.P. Morgan had the money, but it couldn’t legally lend it out

“There have been a number of supervisory and regulatory issues raised. We’re looking carefully at those,” Federal Reserve chairman Jerome Powell said in a December 2019 press conference.

The U.S.’s second-largest bank, Bank of America, also drew in cash from their Fed account in 2019 but at a less drastic 30 percent.

As banks withdrew their cash, the Federal Reserve was shedding its balance sheet. Hu said that a cash-strapped status for J.P. Morgan and friends was certainly “one of the reasons” the Fed stepped into the repo markets, but another reason (which is also related to why the banks were drawing on their Fed accounts) may have been that, as the Fed sold off assets on its balance sheet, there’s less cash in the banks and the money market. 

“When the base money continues to shrink with the balance sheet, even while the number of assets [like MBS, bonds, etc.] continues to grow, that means there’s more leverage in the system,” Hu said. “The solution that the Fed came out was to start buying [Treasury bonds], to provide repo to the market. All these actions were aimed to increase the base money in the system.”

This cash is necessary to keep leverage afloat, Hu continued.

“If you’re levered, you have to be levered every day,” he said. “If you have one bad day, you go bankrupt. That’s why in September [2019] people were paying 10 percent [interest for repurchasing agreements], because if you don’t have money, you go bankrupt.”

The Fed May Extend Its Repo Reach

And that’s why the Fed stepped in, not just to control short-term money market rates, but to flush the system with cash to balance out debt obligations. These report markets are vital not only for the lifeblood of big institutions, but for smaller ones, as well.

Per Reuters, “Without reliable sources of loans through the repo market, the financial system risks losing a valuable source of liquidity. Hedge funds, for example, use it to finance investments in U.S. Treasury securities and banks turn to it as option for raising suddenly-needed cash for clients.”

Hedge funds like Hu’s and other small institutions can only participate in the repo market if a bigger institution brokers the transaction, but now the Fed is considering lending directly to smaller institutions like hedge funds.

Hedge funds typically operate on high leverage with the goal of providing steady and significant returns for their investors. If the Fed lends to these offices and other smaller ones like it directly, it would be in a bid to ease leverage in this sector of finance, as well.

“The Fed is not only preserving the reserve [of member banks] but increasing it, but the key is: to what extent?” Hu queried.

 

 

“The Fed has been hesitant to go the last step,” Hu continued, referring to the fact that it hasn’t loosened reserve requirements to allow more leverage from the banks. “They decreased the leverage in the system, but they did not allow the banks to have looser regulation … I think the Fed is reluctant to increase leverage in the system because they understand that leverage goes both ways.”

Where’s the Limit?

And what if it goes the wrong way? That’s the sane question that any American might ask when confronted with the fact that banks have been greased with $500 billion in Federal liquidity to keep financial markets from stalling. So far, the repo operations have somewhat calmed a roiled repo market, but the Fed keeps on lending with a market intervention originally billed as temporary in September 2019. 

The question now is, when is enough enough? Or as Hu put it, “If they overdo it, then we’re going the other way” — economic downturn. 

“If you listen to the Fed, the Fed is aware of this,” Hu said, referring to the gravity of adding several hundred billion dollars into these markets. “If this $500 billion becomes $1 trillion or $2 trillion, then the average American should worry. But now, the Fed’s argument is that we’ve gone too far with shrinking the balance, that since September [2019] we’ve had too little in reserves and that this has hurt the system.”

Dennis Lockhart, former head of the Atlanta branch of the Federal Reserve, likened the Fed’s open market operations to a “trial and error” exercise in a CNBC interview. Lockhart also noted that he doesn’t equate these liquidity injections with quantitative easing — the Fed’s practice of purchasing long-term Treasury bonds to print new cash. 

Quantitative easing, Hu assented, tries to control long-term interest rates with reliable, long-term liquidity; repo market intervention, conversely, controls interest rates for immediate short-term liquidity.

Still, the final effect is the same — the Fed purchases assets to flush banks with cash. And like the Fed’s quantitative easing during the Great Recession (which led to the inflated balance sheet of over $4 trillion we have today), the uncharted territory for these repos is that ultimate question: Where do they end?

Hu believes that they will begin winding down and the market will stabilize around April 15, 2020 — federal tax day. But he said that it will be a “challenge to unwind this thing” and that it will be a painstaking process.

“I trust that they will do it slowly, gradually, because you can’t ask the bank to pay you $100 billion in one day,” Hu said.

With no clear end in sight and billions in liquidity entering a little-known yet crucial market for the U.S. financial system, some Americans might be wondering if and when the dam is going to break. Or how much capital needs to enter the system to keep the leverage from flooding the levee.

“In September [2019], we’ve seen the limit of the system,” Hu said. 

Halfway through the first month of the new year, with the Fed still sponsoring repo agreements, we might now be asking, “Does the limit even exist?”

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4 hours ago, dontlooknow said:

Is he still breathing? Oh he was never a parent, just a sibling or cousin, uncle or aunt, etc.<just being sarcastic since I have no idea who this patrick guy thinks he is outside just another character feeling superior to people honoring real life over reality's promises of better tomorrows..

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20 hours ago, dontlooknow said:

man on his death bed in S. Florida was told to tell his family goodbye and they heard about this. His doctor said "there is no reason to not try" and within 48 hours, he had NO fever, NO breathing issues, and back on the road to full recovery. ALL from Chloroquine.

And it seems Americans are getting sick from taking chloroquine. Trump is no doctor. 

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  • bludog changed the title to DLN Giant Suck Thread in Hell

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