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

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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

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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

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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

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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

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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

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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

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The Reserve Gap

Published on September 6, 2022 by Free

A rapid decline in the level of bank reserves would be an obstacle to QT that may prompt action from the authorities. An aggressive QT was premised on first draining the large RRP balances, but the monetary plumbing suggested that was never likely. Banks can easily maintain their own reserve levels, but their own target levels are significantly below those of the Fed. This implies that bank reserve levels will likely fall below the Fed’s

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The Marginal Buyer

Published on August 15, 2022 by Free

Treasury buybacks would be a powerful tool that could ease potential disruptions arising from quantitative tightening. The Treasury hinted in their latest refunding minutes of potential buybacks, which is when Treasury issues new debt to repurchase old debt. Buybacks can be used to boost Treasury market liquidity, but more importantly also allow Treasury to rapidly modify its debt profile. By issuing bills to purchase coupons, Treasury could strengthen the market in the face of rising

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Turbo Tightening

Published on May 31, 2022 by Free

The money supply is set to contract just as investors are clamoring for cash to hide from declines in both equities and bonds. A combination of increasing MMF allocation to the RRP and QT may drain ~$1t of bank deposits by the end of the year. The Treasury’s decision to further cut bill issuance will keep money market rates very low and likely push the RRP to over $2.5t by the end of the year.

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