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Fed/Treasury covert tightening alert: $200 Billion in liquidity to be withdrawn over next 8 weeks
On the heels of the surprise discount window rate hike late last week, and on the eve of Bernanke’s Congressional testimony, speculation abounds as to the when and where of the next round of tightening. We need look no further than the US Treasury press room, as it has announced today a revival of sorts for its Supplementary Financing Program (SFP).
Remember the SFP? It’s back, though it really never went away. Originally created in September, 2008 to provide a pool of funds that could be drawn upon by the Fed in emergencies without adding to excess reserves (before the Fed had the power to pay interest on excess reserves), the SFP hit its peak amount in November, 2008 at $558.9 billion. Thereafter, it was quickly drawn down to about $200 billion by February 2009, where it remained until Treasury ran into debt ceiling issues in September and announced it would be wound down to $15 billion. In fact, by January 6, 2010, only $5 billion remained.
Today, Treasury announced as follows:
February 23, 2010
TG-560Treasury Issues Debt Management Guidance on the
Supplementary Financing ProgramWASHINGTON –The U.S. Department of Treasury today issued the following statement on the Supplementary Financing Program (SFP):
“Treasury anticipates that the balance in the Treasury’s Supplementary Financing Account will increase from its current level of $5 billion to $200 billion. This will restore the SFP back to the level maintained between February and September 2009.
This action will be completed over the next two months in the form of eight $25 billion, 56-day SFP bills. Starting tomorrow, SFP auctions will be held each Wednesday at 11:30 a.m. EST, unless otherwise noted.”
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We speculated after the September 2009 wind down announcement that it (1) would provide another $185 in liquidity for risk markets as the cash management bills that financed the program were not rolled over and returned to primary dealers, and (2) would increase demand for short term bills. Since the process will now be reversed, it is reasonable now to believe the outcomes will be reversed as well. Indeed, as Zero Hedge noted in a similar story earlier, demand is already disappearing from indirects in short term bill auctions.
With the brunt of the $200 billion cash management bill sales expected to be picked up primary dealers, this will have the same effect as adding up to $200 billion to bank nonborrowed excess reserves (NBER) on deposit with the Fed. As bank NBER is just north of $1 trillion, a 20% increase over eight weeks in the amount of non-borrowed money locked up at the Fed is material. At a time when Agency and Agency MBS are drawing to a close, and with M2 money supply flat, this de facto tightening move is a bit alarming.
Further, using the 13 week T-Bill rate of 0.1% as a proxy for the shorter duration 56 day (8 week) bill, it yields less than half the 0.25% paid by the Fed on excess reserves. Accordingly, even if existing excess reserves are used to finance the SFP, resulting in a net wash in money locked up at the Fed, the marginal profit provided by this carry trade and so needed by the large banks will be materially diminished. Under the same net wash scenario, this move could also be a precurser (test run?) for the term deposit facility proposed by the Fed.
For anyone who doubts the intent of these actions, we need only revisit the original press release by Treasury:
September 17, 2008
Today, the Treasury Department announced the initiation of a temporary Supplementary Financing Program. The program will consist of a series of Treasury bill auctions, separate from Treasury’s current borrowing program, with the proceeds from these auctions to be maintained in an account at the Federal Reserve Bank of New York. Funds in this account serve to drain reserves from the banking system, and will therefore offset the reserve impact of recent Federal Reserve lending and liquidity initiatives.
As the Fed now has myriad tools to offset the reserve impact of liquidity initiatives and is unlikely to restart such initiatives in the near term, this is purely and simply a reserve draining mechanism that will at best erode bank profits and, at worst, shrink an already precariously perched money supply. We will analyze Fed statistics over the coming weeks and update as to which is the more likely scenario.
It’s important not to become too bearish in the short term on long term news, especially on a net down day in equities. For those that subscribe to our daily reports, this does not affect our view that the US Dollar is topping this week and due for a modest 38% to 50% correction of the recent up leg. A concurrent equities rally would still accompany, but we are now less confident in its ultimate potential.
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My two cents: The Fed is worried about inflation expectations (witness the IMF announcement of restarting gold sales, the discount rate hike and now this), and for good reason--the boys still have oil floating around on tankers to jack up the price, and the resulting inflation expectations are reflected in the persistent demand for gold, despite the credit deflation that exists in reality.
The Fed is going to deal with this, because Bernanke is even more scared of high oil prices than he is of deflation--and rightly so. That is a tax on the economy with virtually no resulting benefit.
Bernanke wants to print, but only until he gets caught. Then he has to make a show of dealing with the resulting inflation, and the only way to make a proper show is to get a result from the markets.
There will be one announcement after another until some of the speculative eagerness is gone from the oil and gold markets. Then he will be back to printing until the next time he gets caught.
FWIW, EB, I got a fresh buy signal on the $ today. I think we've got another leg in the works.
That's what makes horse races. DXY did look strong today. My original call was for the top to be in last Friday, or a quick spike up to the 50% retracement of the entire down leg this week before heading down. If it does not happen soon, I will be wrong on this one.
Looks like we're gonna whip inflation now after all. That last paragraph is a mystery to me, too. Mebbe stems from the need to reconcile prior forecasts with current developments -- sometimes it sucks being a guru, doesn't it?
Yep. See comment above.
I think this is a distraction; the real magic is definitely not happening on the U.S. Treasury's PR website. Barry O'Potus, The Beard, and Turbo Tax Tim all crave inflation, and all we have so far is prestidigiflation.
Jesse's Take
Even more than a stealth bailout, this is starting to smell like 'a money machine.' Money machines are what Bernanke euphemistically called 'a printing press.' What is odious about this particular printing press is that the output is being given directly to a few big banks by a private organization which they own.
I believe that it is still illegal, by the letter of the statutes, for the Fed to directly purchase Treasury paper. But in this case, the Fed is buying Treasury paper with money supplied by the Treasury. Since the paper is passing through the marketplace, and the Primary Dealers are taking their commissions, it may be in conformance with the letter of the law. But it looks like it violates the spirit of the law.
And given that in many cases the Primary Dealers are the principal beneficiaries of the subsidy programs, selling their toxic debt to the Fed at non-market prices, this starts to appear like a right proper daisy chain of self-dealing and fraud.
isn't Jesse saying the opposite of this article? i'm confused. Jesse is saying the fed is injecting liquidity. This article says the Fed is withdrawing liquidity
This is good stuff. Thanks.
I fail to see how a liquidity withdrawal will facilitate a dollar decline or an equities bull. But these days, up is down and down is up. WFT? But since "excess reserves" seem to be parked there for the duration, I suspect the net effect of this stunning news to be approximately zero, right on par with raising the FF rate 1/4%.
Noah, I am w/you what the hell difference does it make?.
The banks are just sitting on it anyway.
Folks are dummer than rocks in D.C.
IF Obama really wanted to shine, he would do what it takes to get folks back to work, easy as pie.
STFU, and put your OFFICIAL plan into writing.
And then STFU.
People will NOT hire, add space, or inventory, unless they know how "BIG O's" plans are going to bite their ass.
So far, it's like the kid everyone hated, when we were kids, ONE dude had the Ball,if he got pissed he took the ball home, and game over.
Big O, is playing the same damned game.
So if the primary dealers play chips are to returned back to the casino boss Burnanke does this not mean less money on the gaming tables & therefore a scramble for real dollars!
Dollar call was made independently earlier this week and is a short term call based on overbought status. Long term, still up.
If another $200 B is drained from the economy, net effect will be felt. If it's merely transferred from excess reserves, might only be a blip.
The SFP...Visualized
http://av.r.ftdata.co.uk/files/2010/02/Super-Treasury-Brothers.jpg
Funny. Here it is inline: