Why Did The Fed Inject Banks With A Record Amount Of “Other” Cash In The Past Week?
by Tyler Durden
Update: as some claim, the “other” reserve move may have been sourced to satisfy GSE demands. That would be ideal and would indicate that FR banks are transferring excess reserves to fund GSEs consistently (and would also provide some curious accounting dynamics in the Fed’s balance sheet). However, there is one small glitch. As a reminder, Fannie tapped the Treasury for $7.8 billion in Q3, while the quarterly Freddie Mac injection amounted to $6.0 billion. In other words the combined $13.8 billion cash draw need would almost explain the $88 billion weekly shift… if only it weren’t for the other $74.2 billion. Furthermore, the balance is not explained by debt maturities or other transitory weekly cash needs. In fact, the YTD cumulative delta in the “Other” category is $115 billion, well above what the GSEs have publicly indicated they have received from the Treasury.
For all its obscurity, the Fed’s balance sheet is relatively simple: on the right there are the liabilities such as currency in circulation (which is relatively flat at around $1.1 trillion but rising slowly (for now) every week), and excess reserves, at $1.5 trillion, or the money that is “parked” with banks and is the topic of so much consternation: will it ever spill out into the broader economy, won’t it, and if not why not, and if yes, will it cause hyperinflation, and other such tangential ruminations. Then on the left we have the assets, or the “stuff” that backs the currency in circulation and excess reserves, such as Treasurys and MBS, which total $2.6 trillion, and which are the primary variable in every Large Scale Asset Purchase episode also known as Quantitative Easing: should the Fed “print”, or said otherwise, “purchase” assets, then the excess reserve number goes up first, with a hope that it will slowly spill over into currency in circulation and other broader monetary aggregates. Lastly, there is also the Fed’s capital account or “shareholder equity” for purists, but since the Fed can never in theory be undercapitalized by conventional definitions, this is merely a placeholder. Another broad way of looking at the Fed’s assets is “factors that supply reserve funds” or “source of cash”, and liabilities as “factors that absorb reserve funds” which is, logically, “use of cash.” The key assets and liabilities noted above are the major components of the “flow” – they move glacially up and down, and are priced in well in advance of such moves. It is the marginal, or far small numbers that matter, and that fluctuate materially from week to week, that are not priced in, and are thus market moving. One such curious liability which we pointed out recently is the Fed’s reverse repo agreements with foreign banks: in the week following the MF Global bankruptcy these soared to a record $124.5 billion. Basically, foreign banks scrambled to procure a record amount of US Dollars while repoing Treasurys and who knows what else with the Fed, an indication that other conventional liquidity conduits had frozen in the days following the Halloween MF massacre. Since then the Fed’s Reverse Repo balance has moderated to more normal levels as Treasurys have gone out of repo with the Fed. Yet something more troubling has just been spotted. In today’s one-day delayed issue of the Fed’s H.4.1, literally the very last number on the very last subpage in the weekly update reveals something quite disturbing. Namely the Fed’s “other” non-reserve based factors absorbing liquidity. And specifically, the actual number, which rose by an unprecedented $88 billion in one week to an all time high of $115 billion for the week ended November 23!