From Reuters via Nasdaq, August 2:
NEW YORK, Aug 2 (Reuters) - The trillions of dollars in overnight cash tucked away daily at the Federal Reserve could turn into a major headache for banks that could squeeze their balance sheets and impair their ability to lend.
The Fed's reverse repurchase facility (RRP) has attracted a wide array of market participants, helping mop up excess liquidity in the financial system. Led by money market funds, volume at the reverse repo window has topped $2 trillion for 39 straight days.
The Fed is paying a record reverse repo rate of 2.3% following its 75-basis-point interest rate hike last week. Barclays expects daily reverse repo levels to hit between $2.8 trillion and $3.0 trillion by the end of the year.
Investors are effectively taking deposits away from banks and putting them into government money market funds, which invest mainly in Treasuries and repos. These money funds, in turn, funnel the cash to the Fed's overnight window.
Repo allocations from government money market funds have increased to nearly 40% of their assets currently, from around 30% at the start of the year, Barclays said.
The Fed will shrink its balance sheet by $95 billion per month from September, accelerating "quantitative tightening," which started in June. The concern is that the outflow of deposits from banks into money market funds could reduce bank reserves at a rapid pace that could hinder lending activities to financial markets and the broader economy.
The decline in bank reserves could also lead to a spike in the repo and effective fed funds rate similar to what happened in September 2019 when bank reserves dwindled due to heavy withdrawals for tax payments and settlement of Treasury purchases at auctions. That forced the Fed to provide additional reserves to the banking system....
....MUCH MORE
Previously on our obsession with the events of September 2019:
"Economist Michael Hudson Says the Fed 'Broke the Law' with its Repo Loans to Wall Street Trading Houses"
A Nomura Document May Shed Light on the Repo Blowup and Fed Bailout of the Gang of Six in 2019
"A Closer Look at the U.S. Bacon Situation"
Money, Money, Money: "A Self-Fulfilling Prophecy: Systemic Collapse and Pandemic Simulation"
"The Federal Reserve's Explanation Of What Happened In The Money Markets In September 2019
What seems to have happened was that somebody's derivative book got upside down to the tune of a few trillion dollars (notional, always say notional) and in addition the contagion through the counterparty daisy chain was also in the trillions and well, here's the Fed with their version.
From the Board of Governors of the Federal Reserve System....
....And more to come. We've been picking at this scab for quite a while and the picture puzzle is only now coming together so dribs and drabs.
And how does this ancient history tie into what's going on in 2022?
I have a feeling that lands somewhere in "the nebulous region between mere suspicion and probable cause"(LaFave & Israel on U.S. v. Ramsey, 431 U.S. 606 [1977])that there is some sort of misdirection going on that I'm not understanding.If so, any attempt at analysis of Fed policy and market moves by traditional means, global macro, central bank policy and practice, market internals such as options gamma etc., etc. is just so much blather.And I keep coming back to the 3rd and 4th quarters of 2019 as the period when things were getting very weird.More to come (maybe)
Trouble In Repo Land—The QE Endgame: A Big Problem Is Emerging For The Fed
And Sunday's "The Fed Is About to Ramp Up Balance-Sheet Shrinkage. It May Get Dicey".
