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1/n
Whoa! This is a firecracker. I'll wait for PPT ( @gamesblazer06) and @Stimpyz1 to argue both sides of the argument. Here's my take FWIW.
In Jan 2019 the Fed decided to implement an "ample reserve" regime. This has important ramifications for money markets. As Fed ...
Whoa! This is a firecracker. I'll wait for PPT ( @gamesblazer06) and @Stimpyz1 to argue both sides of the argument. Here's my take FWIW.
In Jan 2019 the Fed decided to implement an "ample reserve" regime. This has important ramifications for money markets. As Fed ...
2/n
... assets
e.g QE, composition of the Fed's liabilities also changes. As TGA balance ($1.6T currently), bank reserves
(currently $3.2T). TGA balance is expected to due to fiscal relief. RRP, a tool for MMFs to invest at a fixed rate, places a floor under ....
... assets
e.g QE, composition of the Fed's liabilities also changes. As TGA balance ($1.6T currently), bank reserves (currently $3.2T). TGA balance is expected to due to fiscal relief. RRP, a tool for MMFs to invest at a fixed rate, places a floor under ....
3/n
... O/N rates. RRP balance is currently very low.
Note that in an "ample reserves" regime (i.e. reserves balances well above what is needed for payment purposes), banks are comfortable (a) investing excess balances when return on HQLA > IOER, and (b) taking deposits ...
... O/N rates. RRP balance is currently very low.
Note that in an "ample reserves" regime (i.e. reserves balances well above what is needed for payment purposes), banks are comfortable (a) investing excess balances when return on HQLA > IOER, and (b) taking deposits ...
4/n
... at rates near IOER. IOW, reserve demand curve flattens out with rates near IOER.
However, when reserves are well beyond what banks require, banks face increasing B/S costs associated with additional reserves (point of "abundant reserve supply"). Now as the TGA ...
... at rates near IOER. IOW, reserve demand curve flattens out with rates near IOER.
However, when reserves are well beyond what banks require, banks face increasing B/S costs associated with additional reserves (point of "abundant reserve supply"). Now as the TGA ...
5/n
... balance draws down (Fiscal measures), reserves are likely to grow, and banks may take actions to limit the growth in reserves (due to NII compression and regulatory costs). How do they do this? They could lower deposit rates as an example. Or reserves can be...
... balance draws down (Fiscal measures), reserves are likely to grow, and banks may take actions to limit the growth in reserves (due to NII compression and regulatory costs). How do they do this? They could lower deposit rates as an example. Or reserves can be...
6/n
... redistributed (FBOs may take up additional reserves) until rates adjust upwards. What has supported rates thus far? Increase in the TGA, elevated bill issuance and banks' comfort with reserve growth up to this point.
Once this reverses, the Fed has two main tools ...
... redistributed (FBOs may take up additional reserves) until rates adjust upwards. What has supported rates thus far? Increase in the TGA, elevated bill issuance and banks' comfort with reserve growth up to this point.
Once this reverses, the Fed has two main tools ...
7/n
... to maintain control over short term rates. IOER and RRP which maintains a floor. The third and perhaps most important tool is Reg relief i.e. extending SLR beyond April. FWIW, I think this is highly likely unless the Fed is ok with MM rates collapsing once TGA ....
... to maintain control over short term rates.
IOER and RRP which maintains a floor. The third and perhaps most important tool is Reg relief i.e. extending SLR beyond April. FWIW, I think this is highly likely unless the Fed is ok with MM rates collapsing once TGA ....
n/n
... unloads and banks start turning away deposits. Also because the Fed will want to defend the floor. Reg relief is critical for this IMHO, by preventing negative rates and Xccy basis from going deep negative.
Caveat: This a novice view so leave @gamesblazer06 to correct me.
... unloads and banks start turning away deposits. Also because the Fed will want to defend the floor. Reg relief is critical for this IMHO, by preventing negative rates and Xccy basis from going deep negative.
Caveat: This a novice view so leave @gamesblazer06 to correct me.
