Fed Drains $351 Billion in Liquidity from Market via Reverse Repos, as Banking System Creaks under Mountain of Reserves, by Wolf Richter

The Fed is reaching the banking system limits of its quantitative easing operation. From Wolf Richter at wolfstreet.com:

This is the first time I’ve seen Wall Street banks clamor for the Fed to back off QE. The Fed is struggling to keep the liquidity it created from going haywire.

In the fall of 2019, when the repo market blew out, the Fed stepped in and bought Treasury securities and MBS and handed out cash via repurchase agreements. When these repos matured, the Fed got its money back, and the counterparties got their securities back. The Fed also did this during the market rout in March 2020. But by July 2020, the last repos matured and were unwound.

Now the Fed is doing the opposite, with “reverse repos.” Repos are assets on the Fed’s balance sheet. Reverse repos are liabilities. With these reverse repos, the Fed is now massively selling Treasury securities to counterparties and taking their cash, thereby draining liquidity from the market – the opposite effect of QE.

This morning, the Fed sold $351 billion in Treasury securities via overnight reverse repos to 48 counter parties, thereby blowing past the brief spike at the end of March 2020, and more than replacing yesterday’s $294 billion in Treasury securities that it has sold via reverse repos to 43 counterparties and that matured and unwound this morning.

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One response to “Fed Drains $351 Billion in Liquidity from Market via Reverse Repos, as Banking System Creaks under Mountain of Reserves, by Wolf Richter

  1. They will will just lower SOFR rate and lower IOER in an attempt to drive cash into the troubled debt market… “ you can lose 1% in a MM and savings account… or… how bout this shiny pile of soon-to-default junk debt?!” That’s the last massive tool in the shed… and it will succeed in pushing saver into risk. It’s the only way out.
    They will not taper and they will not raise rates, you can bet on that.

    Like

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