Federal Funds Sold and Securities Borrowed or Purchased under Agreements to Resell

When the government runs a budget deficit, it borrows by issuing government bonds. The additional debt leaves major traders — middlemen on Wall Street who buy government securities and sell them to investors — with increasing amounts of collateral to use in the repo market. Fed officials concluded that the dysfunction of the very short-term loan markets could be due to the excessive contraction of their balance sheets and responded by announcing plans to purchase government bonds worth about $60 billion worth about $60 billion per month in the short term for at least six months. essentially increasing the supply of reserves in the system. The Fed went out of its way to say it was not another round of quantitative easing (QE). However, some in financial markets are skeptical because QE has eased monetary policy by widening the balance sheet and new purchases have the same effect. The Federal Reserve sets a target interest rate or range for the federal funds rate; it is periodically adjusted according to economic and monetary conditions. Liquidity Coverage Ratio (LCR) and banks` internal stress tests. The CRL requires banks to have sufficient cash and cash equivalents to cover short-term and enforceable liabilities. Some observers have pointed out that the LCR leads to an increase in the demand for reserves.

However, past and current regulators point out that it is unlikely that the LCR has contributed to the volatility of the repo market, as government bonds and reserves for the definition of high-quality liquid assets are treated identically in the regulation. Moreover, since the crisis, the Treasury Department has held funds in the General Treasury Account (TGA) with the Federal Reserve rather than in private banks. As a result, when the Ministry of Finance receives payments, such as corporate tax, it withdraws reserves from the banking system. The TGA has become more volatile since 2015, reflecting the Treasury Department`s decision to hold only enough cash to cover a week of outflows. This has made it more difficult for the Fed to assess the demand for reserves. Federal funds, often referred to as federal funds, are excess reserves that commercial banks and other financial institutions deposit with regional Federal Reserve banks; These funds can then be lent to other market participants who do not have sufficient liquidity to meet their credit and reserve needs. Loans are unsecured and are issued at a relatively low interest rate called the federal funds rate, or call currency rate, as this is the period for which most of these loans are issued. Jamie Dimon, president and CEO of J.P. Morgan Chase, points out that these limitations are a problem. In a phone call with analysts in October 2019, he said: « We believe the ash is needed as part of the resolution, recovery and liquidity resistance tests. And that`s why we couldn`t move it to the pension market, which we would have liked to do.

And I think it`s up to regulators to decide that they want to recalibrate the kind of liquidity they expect us to keep in that account. The short answer is yes – but there is considerable disagreement about the magnitude of this factor. Banks and their lobbyists tend to say that regulations were a more important cause of the problems than the policymakers who enacted the new rules after the 2007-2009 global financial crisis. The intent of the rules was to ensure that banks had enough capital and liquid funds that could be sold quickly in case they got into trouble. These rules may have led banks to hold reserves instead of lending them in the repo market in exchange for government bonds. The Fed also conducted daily and long-term repo operations. Since short-term interest rates are closely linked, volatility in the repo market can easily trickle down to the federal funds rate. The Fed can take direct steps to keep the key interest rate within its target range by offering its own repo operations at the Fed`s target rate. When the Fed first intervened in September 2019, it offered at least $75 billion in daily repo and $35 billion in long-term repo transactions twice a week. As a result, it increased its daily loans to $120 billion and reduced its long-term loans.

But the Fed signaled that it wanted to handle the intervention: Federal Reserve Vice Chairman Richard Clarida said, « It might be appropriate to gradually move away from active repo operations this year, » as the Fed increases the amount of money in the system by buying Treasuries. . . .