$1.6 Trillion Reverse Repos
Reverse repos are when the Federal Reserve (Fed) needs a loan and uses US government bonds/securities (that they had originally bought from big banks) as collateral to take an overnight loan from big banks. The next day, the Fed pay off the loan with interest (presently .05%) and gets the US government bonds back.
Per the Federal Reserve Economic Department’s website,[1]
“Temporary open market operations involve short-term repurchase and reverse repurchase agreements that are designed to temporarily add or drain reserves available to the banking system and influence day-to-day trading in the federal funds market.
A reverse repurchase agreement (known as reverse repo or RRP) is a transaction in which the New York Fed under the authorization and direction of the Federal Open Market Committee sells a security to an eligible counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future. For these transactions, eligible securities are U.S. Treasury instruments, federal agency debt and the mortgage-backed securities issued or fully guaranteed by federal agencies.
For more information, see https://www.newyorkfed.org/markets/rrp_faq.html”
The Fed does not need to engage in reverse repos to get a loan because the Fed can print money whenever they want; so, they are only doing reverse repos to keep big banks from investing their money in the rest of the economy and thus inflating prices.
The big banks largely got their money from the Fed to begin with because it is illegal for the Fed to buy bonds directly from the US government. The Fed instead buys the US government bonds from big banks (primary dealers) who may just so happen to be Federal Reserve member banks.[3][4]
The Fed is causing the inflation to begin with by printing money to buy government bonds (and mortgage backed securities) so that Americans remain solvent, as most depend on the government for their income (welfare, employment, or stimulus). The Fed will continue to buy the bonds as the lender of last resort, which also keeps interest rates low.[2]
Then they’ll probably try to use reverse repos to mop up the extra money to keep scarce goods from being expensive.
Then print money to bail out America, continuing the cycle.
Or the government could cut spending and let interest rates rise…
The Fed is stuck between a rock and a hard place: Either the Fed prints money, keeps asset prices high with lower interest rates, and risks making the dollar worth less, or it raises interest rates, dries up the supply of affordable loans, and causes defaults on a record scale.
When the author first wrote about reverse repos on June 10, 2021, the record at the time was less than $600 billion. Now (Sept 30) the record is $1.6 trillion.[5]
Reverse repos were only created in 2013.[6]
To infinity and beyond!
[1]https://fred.stlouisfed.org/series/RRPONTSYD
[2]https://www.hamiltonmobley.com/blog/iorr-ioer-and-ffr
[3]https://www.federalreserve.gov/faqs/money_12851.htm
“The Federal Reserve Act specifies that the Federal Reserve may buy and sell Treasury securities only in the ‘open market.’ The Federal Reserve meets this statutory requirement by conducting its purchases and sales of securities chiefly through transactions with a group of major financial firms--so-called primary dealers--that have an established trading relationship with the Federal Reserve Bank of New York (FRBNY). These transactions are commonly referred to as open market operations and are the main tool through which the Federal Reserve adjusts its holdings of securities. Conducting transactions in the open market, rather than directly with the Treasury, supports the independence of the central bank in the conduct of monetary policy. Most of the Treasury securities that the Federal Reserve has purchased have been "old" securities that were issued by the Treasury some time ago. The prices for new Treasury securities are set by private market demand and supply conditions through Treasury auctions.”