The Fed is whispering ‘temporary strain’...but the repo market is screaming something far worse. If QE is the next move, what exactly is breaking beneath the surface?
The trust issue you raise is crucial. When the Fed reaches for QE again, markets will read it as a confeson of weekness rather than strength. The repo market spikes tell us counterparty fear is already baked in, and adding more reserves wont fix that psycological problem.
To add other aspects besides the metaphysics of it:
As nonbanks aren't in the slightest affected by reserves, the rate, the quantity, anything else, adding more reserves "won't fix a problem" in the nonbank financial markets, that is, in those spikes above the Interest on Reserves rate.
The spikes have to be repo loans to nonbanks, and *not* to banks, due to the plentiful reserve environment the banks are in above the interest on reserves rate. So it's not that *banks* care about any "stigma" of the discount window 2.0, whether or not that would be the case or not. Weren't JP Morgan and some other big banks a few years back borrowing at this forward repo facility, with no talk of stigma, and making a killing on treasuries or something, and were told to cut it out by the Fed?
But what is instructive is that what did "fix" that average, the Tri-Party General Collateral rate, was the drop in the Interest on Reserves rate, which it seems clear the nonbank financial markets responded to right quick so as to continue to outbid the banks on the bank overnight market, which banks, by the drop in the IOR rate, fall back out of the IOR-induced negative interbank bank liquidity and into the plentiful reserves framework all the way down to the new IOR rate.
The only way out of this will be another plandemic.
The trust issue you raise is crucial. When the Fed reaches for QE again, markets will read it as a confeson of weekness rather than strength. The repo market spikes tell us counterparty fear is already baked in, and adding more reserves wont fix that psycological problem.
To add other aspects besides the metaphysics of it:
As nonbanks aren't in the slightest affected by reserves, the rate, the quantity, anything else, adding more reserves "won't fix a problem" in the nonbank financial markets, that is, in those spikes above the Interest on Reserves rate.
The spikes have to be repo loans to nonbanks, and *not* to banks, due to the plentiful reserve environment the banks are in above the interest on reserves rate. So it's not that *banks* care about any "stigma" of the discount window 2.0, whether or not that would be the case or not. Weren't JP Morgan and some other big banks a few years back borrowing at this forward repo facility, with no talk of stigma, and making a killing on treasuries or something, and were told to cut it out by the Fed?
But what is instructive is that what did "fix" that average, the Tri-Party General Collateral rate, was the drop in the Interest on Reserves rate, which it seems clear the nonbank financial markets responded to right quick so as to continue to outbid the banks on the bank overnight market, which banks, by the drop in the IOR rate, fall back out of the IOR-induced negative interbank bank liquidity and into the plentiful reserves framework all the way down to the new IOR rate.
"I need more Cow Bell" C.W.