Tuesday, December 31, 2013

Another Fed trick (because excess reserve deposits are apparently not enough)

I previously noted the multi-trillion dollar parking of money by the Federal Reserve via excess reserves. That worked ok for awhile to pull money out of the productive economy but apparently it's not enough. A new facility started up mid 2013 called "Fixed Rate Reverse Repo" and between now and January 2nd 2014 it's soaking up almost $200B in excess liquidity. That's money that would otherwise go to create companies, finance economic activity, and create jobs. For some reason the old standby of putting this money in short term commercial paper is just not appealing anymore.

But is this complicated financial instrument really the same as allowing bankers to get risk free money by not investing in the productive economy? The Federal Reserve says so. The NY Fed explains:

In many ways, an ON RRP facility would operate similar to the way the Federal Reserve’s payment of interest on excess reserves works for depository institutions.
The link above has all the details on how the facility works.  The history is relatively brief with a technical report being presented in the July 2013 meeting and a shakedown run scheduled for September 2013. That run handled $60B, but the year end flow into the facility dwarfs it with over 3x the quarterly flow.

ZeroHedge calls this the WTF chart of the day. I have to agree.