No Signs of Scarcity

Published on June 3, 2024 by Premium

The Fed's most recent Senior Financial Officer Survey clarifies a couple of important signposts that will guide the Fed in managing the end of quantitative tightening. The SFOS is a periodic survey of bank executives on how they manage their reserve levels. The most recent survey revealed the spreads to interest on reserves required by banks to substitute reserves for comparable assets, an action commonly associated with reserve scarcity. The survey also shows which markets

Continue Reading

The Sequence

Published on April 1, 2024 by Premium

The decline in RRP balances looks to slow in the coming months, which suggests the upward pressure in money market rates necessary to end QT will not appear until early 2025. Chair Powell strongly hinted at an imminent QT taper, but noted that QT would continue until signs of reserve scarcity emerge. Fed officials widely look to upward pressure in overnight rates as a key indicator for scarcity. The sequence from 2018 was first an

Continue Reading

Normalizing Composition

Published on March 4, 2024 by Premium

Governor Waller kicked off a post-QT discussion by proposing to increase the share of bills in the Fed's Treasury portfolio, a significant change that in effect extends QT beyond its official end date. Fed holdings of bills have varied significantly over the years, from a third of their Treasury portfolio pre-GFC to below 5% today. Waller suggests that the shift would reduce Fed operating losses and offer more flexibility in the event of future asset

Continue Reading

Passing the Buck

Published on January 29, 2024 by Premium

The Treasury has an opportunity to lobby the Fed for an earlier QT taper by both rapidly draining the RRP and pushing up repo rates through further increases in net bill issuance. While Congress determines the size of the fiscal deficit, the Treasury and Fed together determine the supply of duration to private investors. The Fed has increased the overall level of issuance to private investors through quantitative tightening, but Treasury has cushioned the market

Continue Reading

The QT Debates

Published on January 16, 2024 by Premium

Fed officials are planning to taper QT, but have expressed a range of views that place a taper anywhere from this quarter to much later. In the absence of a rise unemployment, the path of QT will be guided by the amount of liquidity in the financial system. However, Fed officials have expressed disagreement on which components of liquidity to emphasize. They have focused on RRP levels, reserve levels, or the consolidated level of the

Continue Reading

Neutralizing QT

Published on October 30, 2023 by Premium

The rapid decline in the Fed's RRP facility has not impacted financial conditions, but will eventually provide a modest degree of easing in the coming months. RRP balances have declined by almost $1.1t since June largely due to significant bill issuance, which financed a $800b increase in the Treasury General Account. The balance of the decline went into commercial banks and vanished through QT. With net bill issuance set to increase, the RRP may approach

Continue Reading

Hiking at $60b a Month

Published on February 13, 2023 by Free

QT is incrementally improving the transmission of monetary policy by increasing the share of financial assets sensitive to the Fed’s policy rate. Although the policy rate is approaching 5%, trillions of bank deposits continue to offer around 0%. QT strengthens the transmission of policy by mechanically replacing bank deposits with policy rate sensitive Treasuries, and by forcing banks to compete more aggressively for deposit funding. Both outcomes raise the interest rate on assets held by

Continue Reading

Come Hell or High Water

Published on January 23, 2023 by Free

Governor Waller suggests two significant changes to the Fed’s QT framework that effectively removes all obstacles to an extended QT. First, Waller suggests that the $2t in RRP balances should be consolidated with bank reserves when thinking of bank liquidity levels. This indicates that the Fed would be comfortable with bank reserve levels dropping below the roughly estimated $2.5t minimum level. Second, Waller appears to be open to maintaining QT even if policy rates are

Continue Reading

Trapped Liquidity

Published on December 19, 2022 by Free

A change in the underlying plumbing of the financial system is making it unlikely that QT can run its expected 2+ year course. An ideal QT would drain liquidity in the overall financial system while keeping liquidity in the banking sector above a minimum threshold. That is only possible if the bulk of the liquidity drained is sourced from the $2t RRP, which holds funds owned by money market funds. MMFs could facilitate QT by

Continue Reading

Solvency Constraints

Published on October 10, 2022 by Free

The dollar rally may be set to continue as limits on quantitative tightening bind other central banks before it binds the Fed. The tail risks of QT have first appeared in the gilt market, where significant price volatility prompted official intervention. What appears to be a liquidity issue will ultimately become a financial stability issue as investors discover their “safe assets” are not safe. These concerns may prompt a policy response similar to that seen

Continue Reading

Site Footer