FED reverse repo

[brotherjimbob]

So

Context: For ten plus years the Fed has been buying various assets including US treasury bonds to keep interest rates low and asset prices high.

Banks try to have as much "money" as possible in the highest earning assets it can every day and night. However, they are also required to meet certain regulatory requirements such as a certain reserve ratios. Sometimes banks need to increase their "money" as compared to their assets. Traditionally they do this by entering a repo agreement with another bank, eg. Bank A needs "money" to meet their overnight requirement while Bank B has more "money" than they need overnight. Bank B will lend Bank A "money" in exchange for some interest bearing asset of Bank A. Then Bank A will pay some amount back to Bank B and repurchase the interest bearing asset.

With all the stimulus from covid banks are now swamped with reserves:

Reserves of Depository Institutions: Total

Graph and download economic data for Reserves of Depository Institutions: Total (TOTRESNS) from Jan 1959 to Feb 2022 about adjusted, reserves, and USA.

fred.stlouisfed.org

Thus, theres not really that much usage of this interbank repo market. Banks arent needing "money" to meet their requirements. And so no bank is going to offer an interest bearing asset for "money" they dont need.

Overnight Repurchase Agreements: Treasury Securities Purchased by the Federal Reserve in the Temporary Open Market Operations

Graph and download economic data for Overnight Repurchase Agreements: Treasury Securities Purchased by the Federal Reserve in the Temporary Open Market Operations (RPONTSYD) from 2000-01-03 to 2022-04-22 about repurchase agreements, purchase, overnight, trade, securities, Treasury, and USA.

fred.stlouisfed.org

Except for the Federal Reserve. They will. Thus the reverse repo.

Overnight Reverse Repurchase Agreements: Treasury Securities Sold by the Federal Reserve in the Temporary Open Market Operations

Graph and download economic data for Overnight Reverse Repurchase Agreements: Treasury Securities Sold by the Federal Reserve in the Temporary Open Market Operations (RRPONTSYD) from 2003-02-07 to 2022-04-22 about reverse repos, overnight, trade, securities, Treasury, sales, and USA.

fred.stlouisfed.org

So 'reverse repo' is a misleading label, really?

Better 'Fed Repo'?

That's not how I understood the George Gammon video though (not that I understand this at all)

'Reverse Repo' would be the Fed borrowing overnight from the banks, because the Fed couldn't meet it's obligations, no?

Which actually wouldn't make sense.

So I'm just spreading confusion. Sorry.

So to make it as simple as possible;

- When things are fine, banks lend money to each other overnight to meet short term obligations (Repo')

- In Sep 2019 the system broke-down, as the banks no longer trusted each other to have the funds to honour the debt.

- The Fed stepped in and gave them oceans of printed money. Good for inflation, bad for everyone else.

- Now the banks are flush, and no longer need overnight loans (No Repo).

- The Fed likes printing money, and we all know The Powers That Shouldn't Be love the idea of crazy inflation, so now The Fed are buying bonds from the banks which means more money printing (Reverse Repo).

- People have noticed The Fed has printed yet another $1tn dollars and started to ask questions (Reverse Repo Crisis).

Upshot for me and you... serious inflation incoming. Buy gold, buy silver.

About right?

 

[Dissimilarty]

In a repurchase agreement, the "banks" can be either the lender or the borrower. In a reverse repo, the fed is the borrower and the banks are lenders.

'Reverse Repo' would be the Fed borrowing overnight from the banks, because the Fed couldn't meet it's obligations, no?

No. The fed has two policy goals. Price stability and full employment. Their main tool is interest rate manipulation. The fed doesn't "need" to borrow, rather there reasoning is to drain some of the reserves and put a floor on how far interest rates can fall given all of these reserves.

In Sep 2019 the system broke-down, as the banks no longer trusted each other to have the funds to honour the debt.

I don't believe anyone knows exactly what happened in 2019 or why.

The Fed stepped in and gave them oceans of printed money. Good for inflation, bad for everyone else.

Not really. Again, the Fed basically said to these big banks "In order to keep interest rates where we want them, we will borrow from you at x% if no one else will." Like it or not, this is exactly what the Fed was created to do.

Now the banks are flush, and no longer need overnight loans (No Repo).

Yes, but if I didn't make it clear earlier, this is all linked back to the past 10 years of quantitative easing. Much of banking at this level is really just accounting. If you look at the "Bank Reserves" chart I posted going back for twenty years, you will see them nearly completely stable until 2010ish when the fed started buying these assets. When the Fed buys an asset in the open market they essentially "create" bank reserves, eg. Bank A has $10 "money" and $10 bond. If the Fed buys that bond, Bank A now has $20 "money." And the banking "system" as a whole can't get rid of that $10 "money" by buying anything; ie. Bank A buys $10 bond from Bank B. Bank A now has $10 money and $10 bond, but Bank B has +$10 "money" and -$10 bond. The only way that $10 money goes away is if the fed actually sells the $10 bond back into the open market.

So now the issue the Fed has (keeping in mind their policy goals of Price stability and full employment) is that if they sell these assets back and drain reserves, they will put downward pressure on prices and increase interest rates.

- The Fed likes printing money, and we all know The Powers That Shouldn't Be love the idea of crazy inflation, so now The Fed are buying bonds from the banks which means more money printing (Reverse Repo).

Not really. Again, this is mostly an accounting exercise. The reason for the dramatic increase in reserves post 2020 is the covid stimulus measures.

- People have noticed The Fed has printed yet another $1tn dollars and started to ask questions (Reverse Repo Crisis).

Personally, I see nothing here to warrant calling this a "crisis." It's simply the Fed putting a floor on rates in a novel way because of all their previous novel programs. Absent this, we would expect the floor to be 0%, but they believe some higher rate will better accomplish their mandates (probably exactly because they are at least somewhat worried about inflation).