Wednesday, September 30, 2009
Will The Fed Unwind Its Enormous Balance Sheet Via Reverse Repos?
A few days ago at Econbrowser, Jim Hamilton showed the latest Fed balance sheet and quoted scattered reports that Bernanke and the Fed are contemplating the use of "reverse repos" to unwind the Fed's balance sheet, which has been about three times its normal size since last September, "Federal Reserve reverse repurchases". The balance sheet was initially ballooned by such entities as the TAF and the CPLF, which picked up all kinds of things, from banks and whatnot in the US economy to something like $600 billion in euro-junk. However, there has been a noticeable shift since January, with that stuff getting unwound, and the main item keeping the balance sheet thick with liabilities being a massive increase in repurchase (repo) agreements. Indeed, this has long been the main tool by which the Fed has engaged in open market expansion operations. The new report is that they are hoping to drain these through reverse repos, but are hoping to do so without "tightening." Hmm, we shall see...
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4 comments:
I need to correct this. It is the mortgage backed securities account that has zoomed, but they want to scale this back by doing the reverse repos. However, that is going to be hard to pull off without pushing up interest rates, at least somewhat.
Does "mark to market" apply to repos? If so, how would the balance sheet look?
Shag,
I don't think that is a big issue here. Repos tend to stay pretty close to what they are supposed to be.
The bigger problem is the MBSs the Fed is holding and has been piling up in huge amounts. They have publicly announced that they are going to stop acquiring those of the next half year or so, and this reverse repo story seems to be their mechanism for trying to start unloading them, which could prove to be not so easy.
Was much easier getting all that horrific euro-junk off the TALF books than it will be this, which remains tied ultimately to the housing market finally finding a solid bottom and the financing for the housing sector finally getting going again on its own. For the last year, essentially the Fed has been single-handedly propping up the financing of what housing market there has been in the US. Not easy to get out of that.
I am thinking of what the Fed pays for the repos. Does the Fed pay (1) market or (2) the transferor's basis (assuming the transferor has not marked to market)? If (2), does that become the Fed's balance sheet value for the repos even though market value at the time is a lot less? Even if (1), over time that market value may decrease before the Fed sells the repos. In other words, does the Fed's acquiring and then selling the repos result in losses?
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