"Fed Wishes It Had Shut Down Reverse Repo Which Is Making The Bank Run Worse... But It Didn't, And Now It's Too Late"

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by Tyler Durden
Monday, May 01, 2023 - 12:30 AM

By Eric Peters, CIO of One River Asset Management

“The Policy on Counterparties for Market Operations has been updated to clarify that, in addition to implementing monetary policy, broader policy goals including fostering financial stability and ensuring bank safety and soundness, are considered when reviewing a prospective or existing counterparty,” wrote the NY Fed on their website.

And of course, on the surface, that’s the most boring quote I’ve ever opened with. Truly. But how about this?

“SEC registered 2a-7 funds that, in the sole judgement of the New York Fed, are organized for a single beneficial owner, or exhibit sufficient similarities to a fund so organized, generally will be deemed ineligible to access reverse repo operations.”

More boring. For sure.

They concluded with this beauty: “These updates are intended to clarify the New York Fed’s existing counterparty management practices and do not impact the participation of current reverse repo counterparties.”

My favorite word here is “clarify,” which suggests their policy was misunderstood. In fact, it was perfectly understood.

So understood that the Fed needed to clarify to investors that accelerating the banking crisis is in nobody’s interest, especially not the Fed.

But to appreciate such subtleties you must waste decades of the most productive years of your life reading these intentionally mind-numbing statements. Like I have. Do it long enough, you succumb to Stockholm Syndrome.

So, to save you a life of torture, let me translate: The Fed introduced the reverse repo policy (RRP) in 2014 when they lost control of market operations at the zero lower bound. But after losing control of inflation, they hiked interest rates so fast it sparked a bank run.

Now, investors are pulling cash from banks to buy money-market funds that invest in risk-free high-yielding reverse repos.

This exacerbates the bank run, and contracts credit in the economy. Which scares investors into selling risk assets to park more cash in reverse repos.

And our central bankers wish they’d seen this coming and shut the program years ago. But they didn’t and it’s too late. So instead, they “clarified” their intent, and will probably build another complex program on top of something that should no longer exist. And/or slash interest rates. In the hope of regaining control.

Even as it slips away.