In my last post, I discussed needing the operations data from the reverse repo from the NY Fed to take a look at the allocations. Benjamin Cole posted in my comment section an excerpt from a story on the $447B reverse repo operation on December 31 which was a start. It seems rather large. But not knowing what to compare it to, I found the page on the NY Fed website that shows the daily amounts in addition to a table showing the daily effective FF rate with the lows and highs for each day.
I have only a couple of hours to write this post before I have to work some overtime. So please forgive me if it’s kind of disjointed.
To get started, I’ll point out that some of these reverse repo deals are announced ahead of time on the schedule. For instance, the operations that took place on from December 18-30 were announced on December 16. However, the schedule does not coincide with the actual number of auctions or actual amount listed on the settlement datasheet. Indeed, the total amount settled through that time period exceeds by a very large degree, the total amount for all three days announced for the ‘auction’ combined. Either I cannot find all of the announcements, there is some information concerning the reverse repo operations that is not shared with the public, or some of the auctions were of the impromptu variety.
For your viewing pleasure (or displeasure), I’ve made a graph of the data as well as providing the table. On the graph, I have normalized the reverse repo data for comparison purposes only. All of the numbers in the table for the reverse repo are expressed in billions of dollars. And this is, of course, a back of the envelope conjecture, far from scientific. Please, take it as it is intended, to quickly eyeball the situation, and to answer two questions: 1) Does the Fed have stable control over the FF rate and 2) are there any safety valves to the reverse repo?
For the first question the inferences are that the Fed probably does not have stable control over the FF rate. On the table, the amounts of the daily settlements for the reverse repo steadily increase, from doubling to nearly quadrupling over the course of the two weeks after the FF rate hike was announced, while the FF rate remains roughly within the band. The highs for each day, however are consistently much higher above the target band than the lows are lower. But it’s interesting when the lowest of the lows occurred – while the repos where building up to their peak on 12/31. It really isn’t any surprise to me then that the world comes back from the New Year holiday to market mayhem.
Of course, this data raises more questions than provides answers. I have a lot of questions. I have a lot of the kind of questions that will end up being the rhetorical sort because there isn’t anyone in the know who will answer questions like, if the effective FF rate was within the band, and on Christmas Eve was way above the band at 0.88%, why did the reverse repo daily settlement amounts quadruple the last week of the year? Were these people so disappointed with what Santa brought them they decided to spread the grinchy ambiance? So we have the answer, I think, to question number two, given that as soon as reverse repo returned to “trend” levels, the markets calm down. There certainly aren’t any safety valves with the reverse repo tool. It appears to be a FFA with Monopoly money.
As I was following this train of thought, it occurred to me that this heavy-handed tool of monetary policy provides the Fed with so much active and direct control over liquidity that it is more of double-edged sword. With great control comes great responsibility, and with the nature of this tool that touches global markets within a matter of hours, deniability for down days or a string of down days, or financial crises completely evaporates.
And really, I can’t think of a better way for that tool and the notion of independent central banks to be retired, especially after the dollar block disintegrates as a result of the arbitrariness of whatever it was that caused the settlement rate to quadruple. The reverse repo is a dangerous tool that is being wielded with impunity – and that simply cannot be allowed to happen.
|DATE||RANGE||STD. DEV.||TARGET RATE 2||Rev. repo|