Forward Guidance
The Fate Of The Fed's Balance Sheet | Lou Crandall & Joseph Wang on Draining of Reverse Repo (RRP) Facility, Timeline of QT Taper, and 2024 Tax Refund Data
Mar 8, 2024
Discussions on the decline of Fed's balance sheet and basis trade, Lou's accurate prediction on BTFP renewal, insights on QT tapering, money market data indicating QT continuation, exploring US fiscal spending impacts
52:07
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Quick takeaways
- Money fund investments in the private repo market significantly contributed to the decline in the Fed's reverse repo facility reserve balances.
- The Federal Reserve's Bank Term Funding Program (BTFP) is set to expire in March 2024 due to increased loans and tighter terms, influenced by dealer inventory levels.
Deep dives
The Trends in the Drainage of the Fed's Reverse Repo Facility
The decline in the Fed's reverse repo facility was expected to be driven by the Fed's balance sheet and an increase in the supply of treasury bills. Surprisingly, money fund investments in the private repo market significantly contributed to the decline. The rapid growth in money fund investments diversified away from the Fed's facility, affecting reserve balances. As cash flows back into the banking system, reserve balances have increased beyond target levels, leading to a continued runoff of the facility.
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