The Tide Turned In April
Should we care about $1.6 #TRILLION in the Fed's Reverse Repo facility? YES!
The Federal Reserve stimulates the financial system with two main tools: 1) cutting interest rates or, 2) adding cash to the financial system by buying bonds and increasing bank reserves (better known as quantitative easing or QE).
There is another Fed program called the Reverse Repo facility, but let's call it what it really is: The Bank and Money Market Fund Cash Deposit Account at the Fed. If you are an institution and have excess cash, you can deposit it at the Fed and earn 15 bps. Today this program holds over $1.6 trillion dollars!
So, if the Fed is providing cash of $120 billion/month in QE and the Banks and Money Markets are redepositing cash at the Fed, isn't the NET cash flow to the financial system already declining?
Ok, I admit that for the finance guys in the audience, this is not an apples-to-apples comparison of how the plumbing really works, but I think it's even WORSE. You see, QE bank reserves are not easily lent out; they aren't real cash, yet REAL cash is leaving the financial system for the Fed's Reverse Repo facility.
Did the liquidity tide turn in April? What do you think?
Robert Lloyd, CFA®
Chief Investment Officer
Lloyds Intrepid Wealth Management
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