Bank Led QE, And The End Of QT? · Rebel Economist (Free)

Bank Led QE, And The End Of QT?

At the end of the quarter June 30th, banks went to the Fed and swapped assets for $11b, increasing Fed liabilities and increasing the supply of reserves.

There are other signs of tightening liquidity, but this was a shock as nothing like this has happened in the last 5 years. There was one day I think in 2022 where banks borrowed maybe $2.9b from the Fed? (It’s in the video). Most days in the last 5 years banks borrow nothing from the Fed, they only borrow from each other using overnight repurchase agreements, pledging bonds overnight to borrow enough reserves to complete payments or meet regulatory requirements overnight. Swapping assets for reserves provides banks liquidity.

Banks settle roughly $3T in reserve transactions a day, so $11b from the Fed is not a huge number, but it means that banks could not find enough reserves in the market to borrow from each other, so they had to pay more and go to the Fed.

Banks can borrow what they need from the Fed, supply is unlimited at the Fed funds rate, but banks charge each other less (SOFR), and no bank wants to go to the Fed to swap assets and borrow to increase bank liquidity, there is a stigma for the borrowing bank..

People wonder what is the minimum number of reserves needed to run the financial system. The Fed has expanded their Balance Sheet using Quantitative Easing and during Covid it reached $9T. The Fed has been trying to reduce their BS since through Quantitative Tightening, and after selling more than $2T in assets and allowing maturing securities to roll off their BS, it appears the Fed may have hit their lower limit. On June 30th, banks expanded the Fed’s BS by swapping $11b in assets for new reserves, and this may signal to the Fed that they need to stop QT, and start easing. This may put pressure on the Fed to cut rates quicker than they had anticipated.

I am posting a link to a great video that explains more, but the market is wondering what this means, and how the Fed will respond.

Anybody here tracking this?

What do you think it means?

https://youtu.be/YTpoLxAX-_U?si=23urDiMjQ2m0xyrl

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