The Scary Fed Number Everyone Is Talking About

‘To taper or not to taper? That is the question!’ Or is it? While there appears to be a nuanced, public debate occurring about whether or not the Federal Reserve should remove its stimulus and along what timeframe, it appears that the taper efforts have already begun.

There’s been a lot of chatter in recent days about the volume of reverse repurchase agreements (RRP) at the Federal Reserve’s open market deck in recent days. In fact, just yesterday, we saw the highest volume of RRP at the Fed’s open market desk, just north of $450 billion, since December 30, 2016 ($468.36 billion).

Even in the post-Global Financial Crisis era, these kinds of volumes are fairly unusual considering it’s neither the last day of the month nor the last day of the quarter.

Should traders be worried? The answer might be both yes and no.

FEDERAL RESERVE OVERNIGHT REVERSE REPURCHASE AGREEMENTS CHART (MAY 2016 TO MAY 2021) (CHART 1)

The Scary Fed Number Everyone is Talking About

WHAT IS A REPO? WHAT’S A REVERSE REPO?

In simple terms, the Fed’s open market desk conducts repo agreements to facilitate its QE program – to add liquidity to the system. Reverse repo agreements are the opposite of QE: the Fed is draining liquidity from the system.

Here are the technical definitions, per the New York Fed. “In a repo transaction, the Desk purchases Treasury, agency debt, or agency mortgage-backed securities (MBS) from a counterparty subject to an agreement to resell the securities at a later date…repo transactions temporarily increase the quantity of reserve balances in the banking system.”

Reverse repos are the opposite: “In a reverse repo transaction...the Desk sells securities to a counterparty subject to an agreement to repurchase the securities at a later date at a higher repurchase price. Reverse repo transactions temporarily reduce the quantity of reserve balances in the banking system.”

PERSPECTIVE #1 – NO PROBLEM HERE

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