As Foreign Central Banks Quietly Park $250 Billion In Cash At The Fed, A Mystery Emerges
by Tyler Durden
ZeroHedge.com
02/22/2016
When the Fed unveiled its reverse repo program several years ago, it was meant to be a means for the Federal Reserve to soak up excess liquidity from domestic financial institutions when the Fed eventually proceeded to hike interest rates, as it did in mid-December. However, one look at the chart below shows something odd: while the liquidity which the domestic financial sector parked at the Fed clearly spikes at quarter and year end, this has been solely for window dressing purposes to make bank and money market balance sheets appear strong than they are for regulatory purposes, overall usage of the Fed’s domestic reverse repo has actually declined since the Fed’s rate hike.
There has been much confusion why this is, with experts such as Wedbush’s Scott Skyrm scratching their heads and deciding that there continues to be a substantial mismatch between what the prevailing liquidity level should be at a Fed Funds rate of 25 – 50 bps, and what is actually taking place in the open market if such a thing even exists. The implication is that banks continue to find better uses for their cash than giving it to the Fed to receive the guaranteed rate which on the domestic facility is about 0.25%.
However, while use of the Fed’s domestic reverse repo program has declined in recent weeks, an unexpected market participant has taken the place of domestic financial entities: foreign central banks.
As the chart below shows, the Fed’s offshore peers have been aggressively parking their overnight deposits at the Fed’s reverse repo facility designed for “foreign official and international accounts”, one which was has been around in some iteration ever since the 1970s, and whose usage has soared by $50 billion since the Fed’s rate hike and by a whopping $150 billion since the beginning of 2015.
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