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Fed May Have To Drain As Much As $1 Trillion In Liquidity To Push Rates 25 bps Higher

Tyler Durden's picture


It's 2:00:01 pm and the Fed has just announced it will hike rates by 25 bps while using very dovish language to convey that just like "tapering was not tightening" in 2013, so "tightening isn't really tightening", and unleashing a massive buying order.

So far so good. But the real question is what does this mean for post-kneejerk market dynamics, and the one most important variable of all: liquidity.

The all too crucial, and overdue, answer to this question will be delivered when the Fed releases its "implementation note" concurrently with the FOMC statement which should explain all the nuances of just how the Fed will adjust the IOER-Reverse Repo piping that will be crucial to pull of the rate hike in practice, something which has been stumping 

Two weeks ago, we cited repo-market expert E.D. Skyrm who calculated that moving general collateral higher by 25bps would require the Fed draining up to $800 billion in liquidity: "In 2013 on my website, I calculated that QE2 moved Repo rates, on average, 2.7 basis points for every $100B in QE. So, one very rough estimate moved GC 8 basis points and the other 2.7 basis points per hundred billion. In order to move GC 25 basis points higher, in a very rough estimate, the Fed needs to drain between $310B and $800B in liquidity."

That may be conservative.

According to Citigroup's latest estimate, the liquidity drain could be substantially greater. Here is the take of Jabaz Mathai

There will be a separate document from the NY Fed with details around the operational aspects of the liftoff. Of primary interest will be the size of the overnight reverse repo facility that the Fed will put in place to pull short rates higher. We don’t think it will be unlimited, but a size large enough that will keep short rates from falling below the 25bp floor – and the size could be as high as $1tn.

Putting this liquidity drain in context, the entire QE2 injected "only" $600 billion in liquidity in the span of many months, suggesting that as of tomorrow, the Fed may drain as much as 166% of its entire second quantitative easing operation overnight.

Whether that liquidity is inert and can be easily released by banks, and more importantly, non-banks without resulting in any additional risk tremors is the first $640 billion question that the Fed is facing. The second, third and fourth? Assuming a linear relationship and another 3 rate hikes until the end of 2014, this means that by the time short term rates hit 1%, the Fed may have soaked up as much $4 trillion in liquidity. Here one thing is certain: a $1 trillion drain may not have a material impact when starting from a $2.6 trillion excess reserve base. $4 trillion, however, will leave a mark (the Fed's entire balance sheet is $4.5 trillion) especially once the market starts to discount just how the rate hike plumbing takes place.

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Wed, 12/16/2015 - 11:58 | 6930589 hedgeless_horseman
hedgeless_horseman's picture



Buy The Fucking Drain?

Wed, 12/16/2015 - 12:00 | 6930608 knukles
knukles's picture

Hah ha ha ha ha haha   That's gonna hurt them 0% financed deals, Me Wall Street, no?

Wed, 12/16/2015 - 12:09 | 6930677 Hitlery_4_Dictator
Hitlery_4_Dictator's picture

The thing about lying and talking out of both sides of your mouth is you eventually can't keep the charade going any longer. The day comes when it no longer works and the truth comes out. The truth always wins in the end. Today is that day for the Federal Reserve.

I really wish the best to everyone here at ZH, because we called it, we felt it, we KNEW it way back in 2009 / 2010. Soon, we will be proven right, it will be easy for all to see - it's going to be hard not to gloat, and it would be prudent not to. Will we be targets by hate filled sheeple who are jealous.  They called us crazy, foolish, doomers, haters. I think we are just common scene thinkers who value truth, justice and facts.  

When Janet has to reverse course and announce QE4 and the subsequent reversal of the so called, "tightening", watch out. The dollar is going to roll over hard and it won't be gradual. Good luck yellen and the sheeple, you sure are going to need it because your luck just ran out, that manipulation is about over. No matter what Yellen does, even if she keeps it at zero, it's effectively over. We knew it.

Wed, 12/16/2015 - 12:19 | 6930744 LawsofPhysics
LawsofPhysics's picture

That which cannot be sustained, won't be.  Do those ivory tower eCONomists still believe in infinite eCONomic growth in a closed system with finite resources?

good luck with that!

same as it ever was...

Wed, 12/16/2015 - 12:20 | 6930752 CPL
CPL's picture

We all know where they are going to remove that "liquidity".  They are going to empty the pensions like they have been doing.

Wed, 12/16/2015 - 12:24 | 6930769 LawsofPhysics
LawsofPhysics's picture

Yeah, let's see how that goes down.

Wed, 12/16/2015 - 12:34 | 6930821 Save_America1st
Save_America1st's picture

Bail-Ins, bitchez...it's going to happen eventually.

Get your shit outta the bankster system now while you still can. 

Wed, 12/16/2015 - 12:36 | 6930837 Manthong
Manthong's picture

That’s Gonna Leave A Mark

Wed, 12/16/2015 - 13:16 | 6931059 Amish FinEng
Amish FinEng's picture

Old Yellen's not going to harm anyone. She's a nice old granny type. She's not going to hurt you....

Wed, 12/16/2015 - 12:53 | 6930946 KnuckleDragger-X
KnuckleDragger-X's picture

We hear a giant flushing sound in the bond market, so lets wipe out a huge pile of liquidity...this will be interesting........

Wed, 12/16/2015 - 12:20 | 6930750 Banker Buster
Banker Buster's picture

Good post Hitlery

Wed, 12/16/2015 - 12:32 | 6930809 Wannabe_Oracle
Wannabe_Oracle's picture

Everything is fine, settle down people - CNBC said so.


"If the Fed is raising rates, it's a sign of a healthy economy and that's ultimately good news. Maintain that long-term perspective," McBride advised.

Wed, 12/16/2015 - 12:35 | 6930830 Seasmoke
Seasmoke's picture

Yes the end of the fraud may be here today. But they got an extra 6 years out the lies and manipulation. It was a no brainer. On their part. I'm sure they wish they could get another 6 years. But doesn't look possible. So finally maybe truth will be making a comeback. I look forward to it. But I will not gloat. 

Wed, 12/16/2015 - 12:14 | 6930712 Baby Bladeface
Baby Bladeface's picture

Drain that much will require minimum two or three flushes.

Septics tank that much liquidity can accommodate?

Wed, 12/16/2015 - 13:22 | 6931081 Amish FinEng
Amish FinEng's picture

"Why don't we confiscate some GOLD to help the FED during their times of trouble"

Wed, 12/16/2015 - 12:26 | 6930781 FireBrander
FireBrander's picture

"I think credit availability remains quite constrained," Yellen said. "And I think we are seeing quite a bit of reluctance given the job market … for young people to buy homes."


> 1 Trillion+ Dollars in Auto Loans!

> 1.2 Trillion Dollars in Student Loans!

> 14 Trillion Dollars in outstanding mortgage debt!

With a lot of that being Subprime...and she thinks "Credit is Constrained"?

Local furniture shop is offering 0% to finance a fucken couch valued at $499 or more!..and there are LINES at the stores finance office!

Holy Fuck! Someone please ask her to define "Unrestrained Credit"?


Wed, 12/16/2015 - 13:24 | 6931091 Amish FinEng
Amish FinEng's picture

We offer $100 credit if you finance with 0% APR, and we offer free delivery too. You can't get better furniture than Amish Built!

Wed, 12/16/2015 - 14:01 | 6931276 jerry_theking_lawler
jerry_theking_lawler's picture

Americans credit lines have outpaced their cash flows....this will not end well at current levels of credit/income. If more credit is put into their hands it gets even worse.....this will not end well.

Wed, 12/16/2015 - 12:07 | 6930663 slaughterer
slaughterer's picture

Does anybody here sort of find Yellen, dare i say, sexy?  Ok, her pussy is maybe for the Gartman-esque lard-ass 50+ crowd no doubt.  But I bet if you put it in her, warm and KYed, it might actually feel fine.  

Wed, 12/16/2015 - 12:09 | 6930676 OregonGrown
OregonGrown's picture


Wed, 12/16/2015 - 14:08 | 6931308 pods
pods's picture

Fuck it, I upvoted him.  
You hear someone start a conversation like "I once slept with a grandma that looked like Moe" and you are tuning in.


Wed, 12/16/2015 - 12:20 | 6930753 lunaticfringe
lunaticfringe's picture

Dude, you need to see a shrink chop,chop.

Wed, 12/16/2015 - 13:35 | 6931136 Amish FinEng
Amish FinEng's picture

I was thinking 'slaughterer' is Donald Trump. It would take a sick fuck like Trump to think sexy thoughts about Grandma Yeller.

Wed, 12/16/2015 - 12:34 | 6930823 Wannabe_Oracle
Wannabe_Oracle's picture

You're not funny at all.

Wed, 12/16/2015 - 12:56 | 6930967 Uncle Sugar
Uncle Sugar's picture

Huma and Hildabeast up voted you

Wed, 12/16/2015 - 13:22 | 6931083 flyingpigg
flyingpigg's picture

What I find sexy about Yellen is the gold chain around her neck. Don't look at what the central bankers say, look at what they do....

Wed, 12/16/2015 - 14:14 | 6931355 markar
markar's picture

it's gold plated tungsten

Wed, 12/16/2015 - 13:31 | 6931118 EINSILVERGUY

Im in the over 50 crowd and I wouldn't touch that with your junk

Wed, 12/16/2015 - 14:13 | 6931343 mtndds
mtndds's picture

Dude.....  That comment is just wrong.

Wed, 12/16/2015 - 12:11 | 6930682 BullyBearish
Wed, 12/16/2015 - 12:11 | 6930688 TheBeatles
TheBeatles's picture

EurGold are selling all of their 1oz silver coins for just €12!


These include:

1oz Silver Vienna Philharmonic 2015.

1oz Silver American Eagle 2015.

1oz Silver Canadian Maple Leaf 2015.

1oz Silver Perth Mint Kookaburra 2015.




Silver 1oz Vienna Philharmonic 2015 Master Box (500pcs) - €7,859.69.



Silver 1oz American Eagle 2015 Master Box (500pcs) - €7,949.17.



Silver 1oz Canadian Maple Leaf 2015 Master Box (500pcs) - €7,775.52.



All major credit cards accepted. Sale ends 31st December 2015.

Wed, 12/16/2015 - 12:36 | 6930839 Save_America1st
Save_America1st's picture

Gee, just 8 weeks on ZH and now trolling your 12 euro silver scam????  You've already been busted for this just a couple months ago dude.  Get lost scumbag.




Don't buy anything from these assholes or you'll lose whatever you paid and will have no way to get it back.  You have been warned.

Hopefully the Tyler's ban these fuckers from the site quick.

Wed, 12/16/2015 - 13:37 | 6931158 Strelnikov
Strelnikov's picture

What?  I can't trust The Beatles?

Wed, 12/16/2015 - 12:41 | 6930873 SillySalesmanQu...
SillySalesmanQuestion's picture

We all live in a troll free community
A troll free community
A troll free community

Wed, 12/16/2015 - 12:23 | 6930762 Consuelo
Consuelo's picture

Buy the $$$Liquid Plumber...



Wed, 12/16/2015 - 12:29 | 6930794 Perimetr
Perimetr's picture

Hey, they can sell some of the trillions of $$ of US Treasury notes they have been buying, right?


Wed, 12/16/2015 - 12:08 | 6930601 OregonGrown
OregonGrown's picture

bu bu but...... 

Jason Bateman is giving us the thumbs up, while fixing the plumbing.... ALL IS WELL!

Wed, 12/16/2015 - 11:59 | 6930606 Serfs Up
Serfs Up's picture

Or the Fed might just decide to raise the rate on the excess reserves trusting that self-interested banks will not lend money over night to each other if they can get a better rate from the Fed.

No drain, and more ultra-risk-free money to the big banks.  What's not to like?

Wed, 12/16/2015 - 12:01 | 6930610 Lady Jessica
Lady Jessica's picture

Trying to implement the unimplementable?

Wed, 12/16/2015 - 12:03 | 6930626 GrowerJohn
GrowerJohn's picture

I'd say there's a 99% chance they won't raise the interest rates.

Wed, 12/16/2015 - 12:06 | 6930655 Lady Jessica
Lady Jessica's picture

That's my hunch too.  [But what would I know, I'm just some necromancess from another galaxy].

Wed, 12/16/2015 - 12:08 | 6930673 gatorengineer
gatorengineer's picture

sufficient EM headwinds and commodity issues to delay a rate increase into q2 2016.....

Now is that a BTFD moment? dunno

Wed, 12/16/2015 - 14:15 | 6931356 mtndds
mtndds's picture

Hell, I think they will raise rates just to show they can and they spin off some bullshit remark about how good it is to do so and then the DOW +400.  I hope I am worng.

Wed, 12/16/2015 - 12:01 | 6930613 maneco
maneco's picture

D-Day for Fiat Credit System: https://youtu.be/v_5QBJx0Im8

Wed, 12/16/2015 - 12:01 | 6930618 firstdivision
firstdivision's picture

They will announce a rate hike with a massive side helping of PPT buying.  Sell the fucking and GTFO.

Wed, 12/16/2015 - 12:30 | 6930800 Lost in translation
Lost in translation's picture

I took your advice, sold it all last week, and bailed https://www.youtube.com/watch?v=jmZ0fJC5lwQ

Wed, 12/16/2015 - 12:02 | 6930619 Dr. Engali
Dr. Engali's picture

A trillion here, a trillion there and soon you're talking about real (well as real as digital can get) FRNs.

Wed, 12/16/2015 - 12:03 | 6930625 wmbz
wmbz's picture

So, don't raise rates that'll fix it, right!

Super FUBAR!

Wed, 12/16/2015 - 12:03 | 6930630 Spungo
Spungo's picture

We should pass the Affordable Stocks Act that forces everyone into the stock market.

Wed, 12/16/2015 - 12:07 | 6930658 Hitlery_4_Dictator
Hitlery_4_Dictator's picture

They did, it's called MyIRA

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