Quantitative Tightening Step-by-Step

Published on January 6, 2022 by Free

This post describes the mechanics behind quantitative tightening (“QT”) and reviews the prior QT experience. In our two-tiered monetary system, it is helpful to view QT through a framework that takes into account the perspectives of Banks (those who have a Fed account) and Non-Banks (those who don’t have a Fed account). Mechanically, QT reduces the level of cash held by Banks (reserves) and changes the composition of money held by Non-Banks (more Treasuries and

Continue Reading

$2 Trillion Pandemic Savings

Published on November 15, 2021 by Free

There are around $2 trillion in pandemic savings held by American households that have yet to be spent. Despite a brief recession, fiscal stimulus supercharged American incomes the past year by maintaining wages through the PPP program, topping off incomes with stimulus checks, and boosting unemployment benefits. At the same time, Americans consumed less than usual as lockdowns limited spending opportunities. As noted by Clarida in two recent speeches (here and here), Americans have accumulated

Continue Reading

China Repo Facility

Published on August 16, 2021 by Free

The new FIMA Repo Facility helps patch up a weakness in the Fed’s global dollar safety net. Since the GFC, the Fed has assumed the role of lender of last resort to the off-shore dollar banking system through it’s FX Swap Facility. Foreign central banks (“CBs”) could borrow from the Facility and use the proceeds to backstop the dollar needs of banks within their country. This helps prevent dollar panics abroad, which would affect the

Continue Reading

Negative Net Yields

Published on April 5, 2021 by Free

Money is being poured into the system, and it has no where to go. The ON RRP is the escape valve, but it is fixed at 0% when money market fund (“MMF”) management fees are around 0.2%. The stars are aligned for continued flow into the money fund space, pushing front end rates towards 0% as it ultimately flows down the ON RRP drain. The Fed will continue to pump $120b/month into the banking system,

Continue Reading

Negative Bill Yields Are Coming, Here are the Policy Options

Published on March 1, 2021 by Free

It’s likely that bills will trade negative in the coming days as Treasury pays down existing bills, thus reducing their supply by a few hundred billion (see this previous post for more context). In this post I will discuss why large paydowns would push bill yields negative, the mechanics behind how IOR/ON RRP adjustments work and whether they make sense now, and other potential policy options to keep bill yields positive. It does not offer

Continue Reading

Quantitative Easing Step-by-Step

Published on September 19, 2020 by Free

This post describes the nitty gritty of what happens when the Fed purchases Treasuries. I will go into detail on the balance sheet implications for each participant, which will vary depending on whether the market participant is a bank or a non-bank. The bank/non-bank distinction matters because non-banks do not have Fed accounts and thus cannot hold reserves. The Fed only does QE trades through Primary Dealers, who generally are not banks (they are broker-dealers)

Continue Reading

What Determines the Level of Bank Reserves

Published on September 7, 2020 by Free

The level of commercial bank reserves is determined by the size of the Fed’s balance sheet, and the proportion of reserves that end up in the Fed accounts of banks. When the Fed purchases securities or makes loans, it creates reserves out of thin air to fund them. A $100 purchase of Treasury securities results in the creation of $100 in reserves. A $100 FX Swap loan also creates $100 in reserves. Reserves can only

Continue Reading

Two Tiered Monetary System

Published on August 29, 2020 by Free

We have a two tiered monetary system, where one type of money is used when transacting with the Fed and between commercial banks (reserves), and another type of money is use when transacting with everyone else (bank deposits). This note explains the two types of money, and how they interact with each other. Fed Reserves Reserves are an unsecured liability of the Fed that can only be held by entities with an account at the

Continue Reading

The Mechanics of Quantitative Easing and M2

Published on August 25, 2020 by Free

In recent months M2 has exploded higher by almost 3 trillion, generating enormous market chatter. This note briefly describes the mechanics of how Fed actions has led to a spike in bank deposits, which in turn has led to a large increase in M2. Note that M2 is largely comprised of different types of bank deposits, including demand deposits, savings deposits and time deposits. I’ll first go over the basic principles of central bank and

Continue Reading

Site Footer