Not much attention is being paid to what’s happening with the Fed’s reverse repo facility, which has been the main source of liquidity for the financial system and source of demand for the flood of Tbill issuance from the Treasury this year.
Great summary Geo. Ironically, Fed and the authorities in general have created multitude of these new facilities to reduce the various tail risks in market since GFC. They did it to suppress vol so as to increase risk taking (lending, animal spirits etc). Fed swap lines to other central banks are similar instruments. But due to all these additional facilities removing or reducing various tail risks, this time around they are finding that when they want to reduce risk taking (lending to broader economy, or asset market buying by financial players), it’s become harder to put the brakes on the economy.
Great summary Geo. Ironically, Fed and the authorities in general have created multitude of these new facilities to reduce the various tail risks in market since GFC. They did it to suppress vol so as to increase risk taking (lending, animal spirits etc). Fed swap lines to other central banks are similar instruments. But due to all these additional facilities removing or reducing various tail risks, this time around they are finding that when they want to reduce risk taking (lending to broader economy, or asset market buying by financial players), it’s become harder to put the brakes on the economy.
Becoming more and more relevant as we approach March
Thank you for the explanation!