Zerohedge has once again been ahead of the curve on bourgeoning crisis — this time in regard to liquidity shortages.
20 minutes after today’s repo operation began, it concluded and there was some bad news in it: as we feared, yesterday’s take up of the Fed’s repo operation which peaked at $53.2 billion has expanded substantially, and according to the Fed, today there was a whopping $80.05BN in bids submitted, an increase of $27 billion, or 50% more than yesterday.
It also meant that since the operation – which is capped at $75BN – was oversubscribed by over $5BN, that there was one or more participants who did not get up to €5 billion in the critical liquidity they needed, and that the Fed will see a chorus of demands by everyone (because like with the discount window, nobody will dare to be singled out) to either expand the size of its operations, implement a fixed operation and/or – most likely as per the ICAP note yesterday – transition to permanent open market operations, i.e. QE
Today the Fed slashed rates again by 25bps, injecting liquidity into the system.
Federal Reserve officials responded to this week’s tumult in the short-term borrowing markets by sharply cutting the rate it pays on bank reserves.
The interest on excess reserves now stands at 1.8%, a 30 basis point cut compared to the 25 basis point reduction for the benchmark funds rate.
The IOER, as it is known, as a guardrail for the funds rate, which this week jumped beyond the previous 2% to 2.25% target range. That move came amid a funding crunch in the repo market, where banks to go exchange high-quality assets like Treasurys for the cash they need to conduction operations.
The Fed conducted two repo operations itself this week, the first which resulted in about $53 billion injected into markets, while the second involved $80 billion.
Setting the IOER is a routine part of Fed business, and the central bank has had to make two earlier technical adjustments to the rate when it rose to the high end of the target range.
In this most recent move, the policymaking Federal Open Market Committee explicitly stated it was adjusting the range to “foster trading in the federal funds market at rates well within the FOMC’s target range.” That language was added from previous implementation notes that the committee tags on the end of its main statement.
The committee, however, did not announce more aggressive measures to address the difficulties. Some market participants had expected the Fed might tip its hand to more aggressive rate cuts or expansion of its balance sheet, where it keeps the assets it purchases, such as Treasurys and mortgage-backed securities.
This week’s funding crunch came amid a reserve level that has dipped to its lowest level in eight years. The events pointed to the possibility that the Fed’s estimates of how much in reserves the banks need to operate comfortably is wrong.
Now the knee-jerk reaction is to get bearish AF — because new crisis demands lower prices and panic. However, one could argue that the Fed is addressing these concerns and the market reaction is somewhat milquetoast. Bear in mind, we’re all living on borrowed time and it is the job of the Fed to keep this carnivale going. I do not think, even for a second, we are near the end of our ebullient and big breasted and beautiful bull market.