I’m curious why you describe the unsecured/fed funds system as unstable. Seems like the secured system is less so, especially since the 2008 crisis was a function of declining collateral values. The Fed described the floor system as easy to manage but it has proven rickety. Sep ‘19, Mar ‘20 point to a fragile system requiring constant, dramatic intervention to maintain. By contrast, the unsecured federal funds system maintained by a corridor worked pretty well. See Bill Nelson’s “I don’t know why she swallowed the fly”
It seems like whatever the banking system turns to as a “safe” bet inherently becomes unsafe because anything that a failing system uses will eventually weaken as a result of the failing system itself
Conks, assuming we get through the debt ceiling without a US default, what's your guess as to what the TGA gets built up to as a steady state, and how long do you think it takes to get there?
Hey Conks, I'm only commenting four months late so I hope you will see this reply. But it seems like what might break the lower bound and compel the Fed to act would be a sudden global demand for dollars? As I understand it, rates are inversely related to demand (price), and so just as in September 2019 when inactivity in repo lending drove rates through the ceiling, in this case "over-activity" would drive rates down to below the floor? And it could only be the over-activity of foreign participants?
I'm also curious who these global participants without access to dollars are? I thought there were many foreign banks who participated in ON RRP with the Fed.
it is mostly foreign entities without access to the RRP, primarily offshore money market funds which hold a lot of dollars, also foreign banks who rely on correspondent banking.
So it seems like what might break the lower bound and compel the Fed to act would be a sudden global demand for dollars? As I understand it, rates are inversely related to demand (price), and so just as in September 2019 when inactivity in repo lending drove rates through the ceiling, in this case "over-activity" would drive rates down to below the floor? And it could only be the over-activity of participants without RRP access?
Not an expert but this is not a zero sum game or push this button this happens, more like push this button and 2-3 dynamics change, Soooo....I wander if/when they try to fix that "Lo'r Jaw" they loose the long end?
I’m curious why you describe the unsecured/fed funds system as unstable. Seems like the secured system is less so, especially since the 2008 crisis was a function of declining collateral values. The Fed described the floor system as easy to manage but it has proven rickety. Sep ‘19, Mar ‘20 point to a fragile system requiring constant, dramatic intervention to maintain. By contrast, the unsecured federal funds system maintained by a corridor worked pretty well. See Bill Nelson’s “I don’t know why she swallowed the fly”
hmm, i meant more that it became unstable/unusable and so they switched
i agree that it is STILL unstable
badly worded on my part!
It seems like whatever the banking system turns to as a “safe” bet inherently becomes unsafe because anything that a failing system uses will eventually weaken as a result of the failing system itself
Hope that makes sense
Conks, assuming we get through the debt ceiling without a US default, what's your guess as to what the TGA gets built up to as a steady state, and how long do you think it takes to get there?
$500-$600B in a quarter
Not criticizing btw. I really appreciate your work.
So well researched. Excellent work.
Thanks!
Hey Conks, I'm only commenting four months late so I hope you will see this reply. But it seems like what might break the lower bound and compel the Fed to act would be a sudden global demand for dollars? As I understand it, rates are inversely related to demand (price), and so just as in September 2019 when inactivity in repo lending drove rates through the ceiling, in this case "over-activity" would drive rates down to below the floor? And it could only be the over-activity of foreign participants?
I'm also curious who these global participants without access to dollars are? I thought there were many foreign banks who participated in ON RRP with the Fed.
Just trying to grasp the mechanics of it. Thanks!
it is mostly foreign entities without access to the RRP, primarily offshore money market funds which hold a lot of dollars, also foreign banks who rely on correspondent banking.
So it seems like what might break the lower bound and compel the Fed to act would be a sudden global demand for dollars? As I understand it, rates are inversely related to demand (price), and so just as in September 2019 when inactivity in repo lending drove rates through the ceiling, in this case "over-activity" would drive rates down to below the floor? And it could only be the over-activity of participants without RRP access?
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Not an expert but this is not a zero sum game or push this button this happens, more like push this button and 2-3 dynamics change, Soooo....I wander if/when they try to fix that "Lo'r Jaw" they loose the long end?