Wednesday, May 26, 2021

Is The Fed “Stealth Tapering”?

The Fed is between a rock and a hard place.  They know that the torrent of cash they have unleashed will necessarily lead to inflation, most likely much more than their target 2-2,5%, but they are also very weary of overtly easing off their massive QE because a) it will burst the asset bubble and b) drive interest rates up, increasing debt service costs for the Treasury.  Are they doing anything about it? 

Maybe.

The question on everyone’s mind is when will the Fed reverse its radical QE strategy? But, the proper question  may be has the Fed already started tapering, albeit under the radar?

In my previous post I wrote about the Fed’s overnight reverse repo operations that is removing some $400 billion from the system. As of yesterday the amount reached $433 billion, up from $175 billion two weeks ago and nearly zero last month. That’s serious money.  If you’re not familiar with reverse repo, the Fed is borrowing money from banks for one to three days (overnight includes weekends on Fridays) against Treasury collateral. The Fed is accepting all amounts tendered and pays no interest at all (0.00%). And therein may hide the stealthy taper tale..

You see, the Fed isn’t obliged to accept (borrow) any specific amount - or even any at all. It is doing so solely at its discretion - so why is it accepting so much money? Again, it’s entirely voluntary, the Fed is not forcing banks to deposit the money, so no one can accuse the Fed of “active” tapering. Yet...

With markets so overextended and precarious, any overt tapering and/or increase in interest rates would likely lead to a crash as the asset bubble bursts.  The Fed certainly does not want to be blamed for that.  And even more importantly, it does not want to raise rates and put the Treasury in a tight spot with sharply rising debt servicing costs.

On the other hand, the Fed is certainly worried about inflation, no matter what they say (all the time) about “not being worried”.  I mean, c’mon, just the fact that they have to keep on repeating “we’re not worried” means that they ARE worried. So, they have to do something..  something stealthy, so obscure and under the radar that most people won’t notice or be capable of interpreting.

Thus, the reverse repo... it is voluntary, reversible within just one day and at 0% below even Fed funds rates.. The Fed can easily wash its hands of all responsibility and walk away, if need be, But it does the job!  Because when it is all said and done, the system is now drained of $433 billion.  It’s really a matter of watch what I do quietly and stealthily, not what I say loudly and openly.



18 comments:

  1. Great post Hells, thanks for explaining! Though here it's stated that the rate is 0.06%, not 0%...? https://www.marketwatch.com/story/why-demand-for-feds-reverse-repo-facility-is-surging-again-11621904689

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    1. Another source puts it at -0.01% Lol, but recovered to 0.02% https://finance.yahoo.com/news/fed-reverse-repo-volume-sparks-210104409.html

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    2. The Fed reports daily on its operations... it has been 0.00% from the start.

      https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWMORE=TRUE&startDate=01/01/2000&enddate=01/01/2000

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    3. Wow, thanks. But what would then be the incentive at zero? Why bother to send it and not just keep the extra cash sitting around?

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    4. Remember its a reverse repo, ie the banks get Treasury bonds in their accounts, even if only O/N - and longer if they keep rolling day after day. I could see situations where they have uses for them.

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  2. wonderful article Hell... thanks a lot.

    I sort of have the same question as camabron; why would the banks cooperate?

    one idea might be (i know very little about this, feel free to just shoot it down) that the Fed has sort of bought all the treasuries it can buy... ie. there is no short term bond market any more.

    to pretend there is a market, the Fed lends out treasuries and re-buys them, creating the illusion of a functional market that in turn validates a low interest rate... the banks go along with it because they earn a little in the buy-sell spread...

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  3. oh maybe another theory...

    it allows the Fed to control the interest rate, keep it low through bond buying, without adding to the money supply... magic?

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    1. The US and EU bond markets are currently being manipulated by the Fed and ECB, very openly and in a straightforward fashion. The central banks are in the market daily, they are not denying it, in fact they constantly point it out. Therefore, there is no “free” market right now, it’s all smoke and mirrors.

      Are the banks “playing along” with the Fed in the reverse repo? No, I don’t think so. I believe they just don’t want to lend out the extra money to riskier borrowers, so they park it at the Fed.

      Now, if the Fed did NOT accept the money in the reverse repo, banks would likely be forced to lend this extra cash at negative rates, or accept higher risk ( which they don’t want to, apparently). So, bottom line, the Fed is not exactly tapering, but with the reverse repo it is not allowing rates to go any lower AND it is removing liquidity.

      IMHO, that’s a very early signal to the market that real tapering is not too far off in the future..

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    2. Great insight Hells, but instead of getting zero in return, or negative, couldn't the banks just keep the money under the mattress instead?

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  4. Hmmmm... I see, I see... the thing that worries me is that the huge amt of reverse repo may also signal the opposite. If inflation expectations set it, there can be a buying panic... with all the cash stockpiled, everything can go to the moon and beyond...

    But it is good if the Fed is in a mood to taper... changes the maths ... dun fight the fed huh... if only we knew what it is to not fight.

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  5. was thinking some more...

    Hell, I think the Fed can't taper... if they taper, the interest rates go up, everything goes boom downwards...

    if they print, the interest rates stay down, everything goes boom upwards...

    Fed found this magic solution... that makes everything go boom sideways... but they need to incentivize the banks to make it stick ... or find a few more such magic solutions... trust the americans to come up with something like that. love you guys. =)

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    1. As I said, the Fed is between a rock and a hard place... At best, they are in a wait and see (and pray reaaaally hard) mode. One thing is for certain though: they are fast losing their reputation as an independent monetary authority. That's VERY bad for the future, bad for the dollar, bad for the US Empire, bad for the American people.

      Bring back Volcker!!!

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    2. its hard... Volcker was in the old America where people would recognize his actions as that of a great man.

      if Powell did it now, the establishment would blame everything on him. And the people are too stupid to appreciate it. you need to give him a road (story) to change course... and preferably be a hero...

      The Chinese call it letting someone get off the stage.

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  6. hmmm... does not fix it in the long run.... the reverse repo rate will become the new interest rate...

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  7. btw, can the U.S. govt just freeze interest rates through diktat?

    that way, it can stop printing money; from Hell's description, it sounds like the Treasury market is not free anyway...

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    1. Not just the Treasury market... the entire bond market, dollar and euro, all the way from junk corporates to junk government... the entire spectrum... interest rates are a complete “fiction” as in Hans Christian Andersen’s The Emperor’s New Clothes.

      Think about this: bankrupt Greece with a junk rating is borrowing 10 years at 1%, ie less than AAA USA (1.62%).

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    2. yeah, this QE thing really feels like something out of the fairy tales, a dark spell that gives everything you ask for and nothing that you want...

      i will think about it slowly... thanks for the blog.

      Best Regards,
      Chicken

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