Friday, March 17, 2023

QT, We Hardly Knew Ye: JPMorgan Believes The New Fed Asset Purchase Program, BTFP, Could be Around $2 Trillion

From the Sovereign Wealth Fund Institute, March 16:

FED RESERVE GROWTH?
JPMorgan Believes BTFP Could be Around $2 Trillion

Reserve scarcity in the U.S. banking is creeping up. However, the money supply held by non-bank investors such as asset managers, sovereign wealth funds, pensions, continues to be a source of support for financial assets.

JPMorgan put out a note called “Flows & Liquidity – A Repeat of 2018/2019?” believing that the Federal Reserve’s Bank Term Funding Program (BTFP) is likely to be massive and the max usage could be around US$ 2 trillion. The US$ 2 trillion amount is estimated to be the par amount of vonds held by U.S. banks outside of the five largest U.S. banks. The JPMorgan research team analyzed the uninsured deposits of the six U.S. banks with the highest ratio of uninsured deposits over total deposits. That number came out to be US$ 460 billion. The bigger the usage of the BFTP, essentially it would increase the size of the Federal Reserve, thus creating more liquidity relief for the U.S. banking system.

The Federal Reserve’s Bank Term Funding Program (BTFP) was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging any collateral eligible for purchase by the Federal Reserve Banks in open market operations (see 12 CFR 201.108(b)), such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities. These assets will be valued at par....

....MUCH MORE

If depositors are being made whole on uninsured funds, and depositories can borrow against underwater assets at par rather than marked-to-market prices, then we might as well lift the Fed's policy rate by 2% to get the inflation adjusted real rate up to zero from the current -2% and put a stake through the heart of inflation right now.

On a slightly more politically-realistic note, I'm telling you there is something about the idea of shrinking central bank balance sheets that scares the bejeebus out of the central bankers.

Related:
"The secret to stocks’ success so far in 2023? An unexpected $1 trillion liquidity boost by central banks."
"2023 Is When QT Could Really Begin To Bite"

QF Research has nomenclature concerns:

And 2 of 2.

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