Dumping yet another liquidity cold shower in the aftermath of today's less than dovish Humphrey Hawkins speech by Bernanke (and sending precious metals even lower, albeit briefly), is the Fed's resumption of even more purely optical liquidity extractions, however symbolic, in the form of reverse repos, after the NY Fed just completed [4]the first such operation since the dark days of summer 2011. As a reminder, the last time the Fed did these was back in August 2011 [5] which cemented the market's plunge as it gave the market the impression that at least superficially no more money was coming in (intuitively it makes no sense to have Reverse Repos running at the same time as incremental liquidity), even as the reliquification baton was quietly being passed to the ECB. Today, reverse repos resume, as the Fed pays Primary Dealers an annualized rate of 0.17% in exchange for lending out $100 million in Treasurys. Will this continue? It depends entirely on what the economy, pardon, the Russell 2000 does. After all, that is the third and only mandate of the Fed that matter. And if the market considers this an indicator that QE3 really is delayed indefinitely, the FRBNY will mostly likely be forced to reassess.
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