Thread by @Trinhnomics

The whole repo thing got people excited. Since that is the case & we got Fed (and Bank Indonesia tomorrow), let's talk about how central banks influence the price of USD.

If u type FED GO into bloomie, u see the below 👇🏻. Please tend to talk about Fed Fund target range 2-2.25%

Note this is just a target & so if the effective rate is a weighted median of UNSECURED borrowing in USD by depository institutions & other institutions OVERNIGHT. So the rate u see on Bloomberg etc is a volume-weighted median. See below for lower & upper bound. 46bn for 16 Sep👇🏻

Note that to the right of this the @NewYorkFed publishes target range, meaning it targets unsecured overnight borrowing to be MAX 2.25% & injects liquidity when needed. Top 1% on on 16 Sept was 3% & low 1% was 2.1%

When this reaches the top end, it means demand for $ is strong👈🏻

@NewYorkFed Interest rates = PRICE OF MONEY. When the price is high, then it indicates DEMAND IS HIGH, for whatever reason. It could be seasonality factors, then that is going to fade when the short-term liquidity squeeze abates. If it is structural then the Fed would need to inject more.

@NewYorkFed Other than the spike of interest rates, you can also see the PRICE OF USD going higher. Where? In the price of the USD vis a vis other economies. The DXY index is mostly floaters (57.6% EUR, 13.6% JPY, 11.9% GBP, 9.1% CAD, 4.2% SEK, 3.6% CHF) & it's up.

Means demand for USD up👈🏻

@NewYorkFed Back to the Fed, the Fed has what people call open market operations where it influences the price of money. Obvious this is not the only thing it does. Notice a bunch of diff ways to influence like interest rates in Fed window below & we'll talk about all at some pt. So repo

@NewYorkFed Repo, unlike fed fund effect rate, is a COLLATERALIZED interest rate market & banks & institutions use this to fund short-term (people write about overnight regarding latest) using assets they have (govies, etc).

Overnight repo did that 👇🏻(demand for $high). The FEd steps in

@NewYorkFed How does it do that? See that Fed window earlier, do u see the temporary open market operations (OMO). Ok, this is what it does.

The NYFed says it will LEND 75bn for those that qualify & the kind of collateral it'll accept (treasury, agency, MBS).

This happened👇🏻& 53.15bn lent

@NewYorkFed After 53bn injection, repo rate went to zero (buys assets & gives $ at a price).

Let's zoom out a bit to talk beyond the short-term liquidity squeeze & focus on Fed balance sheet, which is 3.817trn down from peak of 4.56trn or -743bn

Fed has lots of USTs & MBS & reserves 👇🏻👇🏻

@NewYorkFed This is what the aggregate Fed balance sheet looks like in terms of REDUCING THE ASSETS IT OWNs or otherwise known as QUANTITATIVE TIGHTENING.

This is the reverse of what it did last night - by selling assets to the market, it takes $ from the system. How much? Well -743bn 👇🏻👇🏻

@NewYorkFed You may ask, well, well, well, what is it SELLING or shall I say not owning anymore (basically it allows bonds to mature & don't buy more, this is part of its gradual reduction of reinvestment policy).

In terms of UST, reduced owning -365bn 👇🏻👇🏻👇🏻

@NewYorkFed What about mortgage backed securities??? Yep, the Fed bought a bunch of this stuff after the crisis & at peak owned 1.783trn & now only 1.49trn or -293bn reduction

👇🏻👇🏻👇🏻

@NewYorkFed Let me put the whole picture together for u & this is a bit of Fed history in 1 chart here.

After the financial crisis, the Fed LOWERED RATES TO ZERO (white line show upper bound at 0.25% & lower bound 0%).

And it also BOUGHT ASSETS through what we call QUANTITATIVE EASING 👇🏻👇🏻

@NewYorkFed The PRICE of money went to ZERO (interest rate). The assets it bought went from 0.89trn to its peak at 4.56trn (US economy got 4.56trn of cash on top of zero rates).

Notice that President Obama had easy money both his terms.

JYEL raised rates 25bps in 2015, 25bps 16, 75bps 17

@NewYorkFed On top of that, quantitative tightening did not start to REDUCE THE BALANCE SHEET until Jerome Powell's term on Feb 2018, who is appointed under the current president.

So the -743bn of reduction & also rates going 1.75% to 2.5% & now 2.25% happened mostly during 2018 & H1 2019👇🏻

@NewYorkFed This brings me to today & also tonight at 2am (can't bring myself to say morning):

Markets expect the Fed to cut rates by 25bps & also more in December by 25bps. This takes the upper bound to 2% tomorrow & 1.75% end 2019.

Why? Many reasons. But let me quickly name them...

@NewYorkFed *As the Fed reduces ownership of assets & takes USD from the system
*Price of USD (rates at 2.25%) HIGHER than other econs as they CUT RATES & so demand for USD strong too
*USD too strong so global lending 📉(risk taking📉)
*US govie issuance 📈further squeezes liquidity
So what?

@NewYorkFed Some like Dudley wrote an op ed that is WIDELY CRITICIZED & so much so he wrote another op ed thinks that the Fed should NOT CUT & even HIKE to stop Trump prevailing in 2020. The job of the Fed is to SMOOTH the business cycle & maintain stability (CPI & employment). JPO will cut!

@NewYorkFed As expected- Fed slashed rates by 25bps but dissension makes people feel was a hawkish cut. Dropped rate on excess reserves to 1.8% vs 1.85% that would have been expected. Reverse repurchases to 1.7. Lower end of corridor cut was 30bps & upper 25bps

Let's talk about this!

@NewYorkFed Right now, the Fed has an upper bound target of 2% (remember this is a target not policy) & lower of 1.75%. How does it achieve this?

Talked about repo, which is short-term collateralized lending (days). Meaning, the Fed GIVES MONEY & takes ASSETS at a rate. Upper bound =lending

@NewYorkFed The reverse of this is REVERSE REPO or RRP which is the Fed SELLS assets & TAKES MONEY.

This is an equivalent of WITHDRAWING MONEY or DEPOSIT RATE for qualifying institutions.

RRP is 1.7% so dropped by 30bps last night 👇🏻

@NewYorkFed Lowered the interest on reserves: 1 is the required reserve or known as IORR & the other is excess reserves IOER. Both rates are at 1.8% now & that is a DEPOSIT RATE because u get that much for parking funds. That was 2.1% yesterday & 30bps cut so Fed gives less incentive to park

@NewYorkFed This is what we call a corridor and this corridor just got WIDER! Why? Spread was 25bps before & now 30bps. The ECB has a massive corridor (lending is 0.25% & deposit -0.5% w/ tiering for deposit so effective deposit higher than nominal). Let me show u how this works in practice!

@NewYorkFed The term for the repo & reverse repo yesterday was just 1 day so very short-term.

OK, for reverse repo or otherwise as collateralized DEPOSITS was USD18.9bn (treasury) & rate was 2% (will be lowered by 30bps to 1.7%)

The repo, or lending rate, was higher at 2.2% for Treasury👇🏻

@NewYorkFed Note that this is VERY VERY SHORT-TERM (1day) & is just to ease liquidity conditions & to influence SHORT-TERM RATES.

This is different than quantitative easing (QE) because the Fed outright buys assets (treasury, mortgage backed securities) & to influence LONGER-TERM RATES. Key