Monetary Policy & Inflation | US
2019 has seen major reversals by central banks the world over. None, however, are more noteworthy than the Fed’s, particularly as they relate to the recent repo flare-ups due to the system’s liquidity needs.
The Fed paused its hiking cycle early in 2019, delivered token rate cuts, and stopped balance-sheet roll-off (known as QT). Now, the Fed is reinvesting MBS dollar proceeds back into US Treasuries. It has launched the Treasury reserve management (TRM) program – a low calorie organic QE into T-bills to provide reserves to the system. And then there are also the massive repo injections.
Throughout, the Fed has claimed these policy moves are more akin to tweaks than a precursor to an all-out easing campaign. Their goal has been to sustain the recovery and they do not see any major issues with the financial markets. But even if that’s truly what they believe, it’s highly unlikely that the easing put in place so far will suffice to allay either the liquidity needs or the ongoing QT aftershocks.
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Questions from one of the uninformed…
Who needs this liquidity that’s provided by the repo market? Banks can get reserves from other banks or the discount window, right? Why should “we” care about the rate that non-bank entities pay to borrow money on a very short term?
The shadow banking system (which is huge if you include Eurodollar system globally) still remains the marginal price setter for USD liquidity is why we should care. Banks and even central banks are not fully in control.