Federal Reserve Asset Purchases Have Resumed
newyorkfed.org/markets/pomo/operationsPosted Oct 16, 2019, 3:50 PM UTC · locked
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$7.5 Billion purchased after $32.5 Billion submitted.
The temporary open market operation was also over subscribed this morning at $75 Billion.
Still appears to be a lack of funding available in the banking system.
Would you say that, long-term, this is exacerbating the problem?
It seems that if the Fed didn't step in and let the rates temporarily increase, banks would alter their behavior and value liquid assets more highly. They'd hold more of them in the future to avoid having to pay 7-8% (or whatever the increased rate would be) over night.
But by giving the banks high volumes of cheap rates, banks will continue to chase yield at the risk of liquidity, because the liquid utility of 'cash' has lost its value.
And I might be wrong here, but I believe that at a macro level there's also diminishing returns on treasury securities (the higher the demand for govt. debt, the lower the rate/interest the govt. has to pay). If that's true, the banks are not even getting decent returns on these assets, they just know there's no risk to holding them instead of cash (because the Fed bails them out with high levels of OMOs), and would rather get 1-3% than nothing. This compromises the stability of the system for essentially no gain. But I might be way off here.
The outcome of this type of monetary policy is completely unknown. Every major central bank in the world is doing the same thing at this point.
Japan has been doing this for almost 20 years now, their Debt/GDP ratio is ~300% and it has not seemed to impact their economy in a significant negative manner. If that's the measuring stick, the US and Europe could continue this type of policy for a decade with no negative consequences.
Mathematically, it should have all failed already. But modern economies don't really seem to care about math anymore.
Personally, I believe any type of broad economic failure will be driven by a loss of trust/confidence in institutions. Most likely, a revolt against either Central Banks or some major sovereign. You are kind of starting to see this with what is going on in Hong Kong, but China could swallow up Hong Kong tomorrow and the world would go about its business, in this current climate.
what does all yhis mean?
I meant what does it mean when there is a lack of funding from the fed reserve?
It means there aren't enough liquid dollars in the banking system to facilitate smooth operation.
Banks usually have most of their "money" wrapped up in various il-liquid assets. Liquid dollars, that you can think of as pure cash, are needed to maintain general operations. Like keeping water flowing through pipes, that's why it's called "liquidity".
There isn't a lack of funding directly from the federal reserve, there is basically an imbalance somewhere in the system resulting in this lack of liquidity. The Fed has recently decided to execute temporary and permanent asset purchases, aka Open Market Operations, to alleviate this imbalance. These Open Market Operations are the Fed printing new money either in the short term (temporary operations) or long term (permanent operations), aka injecting new liquid dollars.
The “B Security” description means what exactly