New York Fed Again Upsizes Liquidity Plans for Turn of the Year

> is it possible that the institutions borrowing these funds are actually using those funds not for relatively low-risk purposes (e.g., paying taxes), but instead to trade "overnight"?

Yes. That's the purpose. You want banks repo'ing Treasuries so they don't dump them (or their mortgages) to pay taxes (or employees or creditors). Repos finance the asset side of the borrower's balance sheet. Tying fungible dollars to specific liabilities is a losing game.

And if someone wants to repo Treasuries to take a new risk position, that's fine. The cash is still injected into the money market through the acquisition of the position. That's the point of the Fed's repo operations.

Note that hedge funds aren't at the Fed's repo desks. They're at the banks'.

> this is just more QE

Repo pre-dates QE. And the Fed supporting money markets goes back to its founding purpose. QE was novel in its scale and the assets it supported, not its act per se.

Except it's not all overnight now.

>"The $2.93 trillion that the New York Fed will funnel to Wall Street over the next month consists of up to $120 billion each weekday in overnight loans through January 14 and $440 billion in term loans ranging from 3-days to 32 days."

So 100bn a night, these figures are about a third higher than what was happening before when it was 75bn (IIRC)?

It’s odd to me the overnight market has contracted to the point this extra liquidity is needed.

I’m not particularly concerned about Fed’s overnight loans since I believe they probably technically make a small amount of money off interest.

What’s curious is why the overnight market has become so expensive at the intrabank level?

On one hand it could be a positive result of greater capital requirements due to post 2008 regulations. Alternatively banks could be holding greater amounts of assets in less liquid forms such as properties or perhaps stocks?

Perhaps the high stock market has increased banks asset sheets causing greater liquidity requirements reducing their ability to lend?

I’m very much not particularly well informed here, but if that’s the case, this doesn’t really feel so much like news as the Fed just performing it’s mandates as expected?

Clearly you could read the headline as sensational. However, if you look at the fed balance sheet, it has increased significantly recently. [1] The increase in the balance sheet has been in overnight or short term repos. The question remains whether this will result in a longer term FR policy. That is, even though the maturity of the loans are overnight, if the policy remains for years than the cumulative effect is that the the longer term balance sheet has increased.

[1] https://www.federalreserve.gov/releases/h41/current/

>If I lend my friend $10 every day for lunch and he pays me back the next day and this happens 5 days in a row in what context would it make sense to say I have lent him $50 dollars?

In a sense, kind of. If your friend is expected to be able to pay for his own lunch (because it's costly to keep covering for him) and only very sporadically need to borrow from you (because e.g. he forgot his wallet), and suddenly you find yourself doing it every day for several days at a time...

Then yes, it's worse than your friend having to "borrow $10 [once]" from you, even if it's not as bad as him having a $50 shortfall (esp since he does pay you back).

It also means your friend is making a systematic error he's not correcting, and you should probably start charging him more to, in effect, carry his money for him. If you don't, you're enabling his dependence.

Similarly, banks are expected to only very sporadically need liquidity directly from the Fed. If they need it over such long intervals, that's bad, and the daily amount borrowed, by itself, understates the significance. It also feels like the Fed isn't doing its job if the banks aren't paying (and savers aren't receiving) a premium for such an unusually scarce service.