A chronicle of repurchase agreements (RP) and other paradoxical property ownership contracts - www.omo.co.nz
Prior Session Total - Net Add/Drain TIO Outstanding1
Coupon/Bill passes adjusted for fractional reserve multiplier effect from January 05 2005
The Open Market Operations during 2005 annual report.
NB 02/16/06: As detailed in the report above, autonomous factors ($33.0 Bn) including currency demand did not exceed all the permanent purchases ($24.825 Bn) conducted ted by the Federal Reserve in calender year 2005. The currency-adjusted system factor has, therefore, been set to zero as of January 9-11 2006. I choose this date despite excluding two early coupon passes as the SA and NSA currency totals were approximately equal after the Christmas demand distortions.
————————
As of 3/22/06 Federal Reserve conducts permanent open market operation - buys $1.228 billion 2006 TBills to settle March 23.
Since January 11 2006 a total of $13.995 billion coupons and bills have been purchased on an outright basis. Latest Fed FR Note statistics confirm that forty three percent of the combined amount is above the autonomous need to offset NSA currency demand. Due to the multiplier effect of direct permanent reserve injections into the banking sector, approximately nine times this amount ($54.378 billion - adjusted for NSA currency demand - see table below), has been available for credit creation purposes on top of temporary OMO and TIO stimulus.
SOMA Growth Adjusted For M1 Currency Demand (Billions) Date System Factor SA+/- System Factor NSA+/- 03/22/2006 3.914 4.814 1/11/06 to Date ————————
Government debt issued to finance the deficit is the very fuel necessary to enable the growth of the monetary base via permanent open market operations, conducted by the Fed. Credit bubbles are built on such foundations.
Notable in this respect, and brought to my attention by the estimable Tom Yarnall, is the fact that sweeping retail customer deposits to nonreservable accounts has left most banks with virtually no economically binding reserve requirement. (Bennett, Peristiani 2002). Moreover, "... required reserves are down so much that many depository institutions now regularly meet their reserve requirements incidentally as a consequence of holding vault cash for business purposes." - James A Clouse, FRBNY.
So, the 9x multiplier with its basis in the 10% statutory obligation -- and once factored with currency-adjusted FRB outright purchases -- is really a rather conservative means of determining possible credit money growth, i.e. it could be much more than graphically recorded above
Click here to read an egregious excuse for previous over injection actions by the Fed. It was another election year after all.
Tom Yarnall had this to say:
The Monetary Letter - 24 February 2003
The New York Fed's collection of annual open market summaries is an invaluable resource, the thorough study and comprehension of which can provide a better understanding of the day-to-day implementation of monetary policy and furnish a study template for examining central bank operations as a reflection of US financial market activity.
————————
In the US summer of last year the weekly credit money observation detected the Fed in the marketplace under other than ordinary circumstances, and narrowly prior to a significant stock market bottom.
The following is the manner in which the New York Fed, in its annual Summary of Open Market Operations, released to the public a few weeks ago, http://www.ny.frb.org/markets/omo/omo2002.pdf, explained the extraordinary amount of outright purchasing in the July-October period of last year.
"Historically, the annual growth in the SOMA has closely tracked the growth rate of F.R. notes. In 2002, however, at year-end the par value of the SOMA stood at $628 billion, a record $54 billion higher than one year prior, compared to an expansion of only $43 billion in F.R. notes. This divergence occurred largely because of a significant levelling off of reserve drains from autonomous factors in the middle of the year, which was initially interpreted as an anomaly and so it did not lead to an immediate halt in outright purchases, but which persisted over the second half of 2002. As is presented below in the discussion of temporary operations, the expansion of the permanent SOMA beyond the growth in F.R. notes led to a sizeable reduction in the level of outstanding long-term RPs."
[George, I believe the answer to the question you posed several months ago lies in this official summary. To wit, the effect of outright purchasing by the central bank is indeed both considerable and lingering.]
Chief among the autonomous factors detailed in the 2002 and prior annual OMO summaries is currency demand.
More from the annual summary:
"During the second half of the year, the net drains of Fed balances caused by autonomous factors stalled. Initially, this behaviour was interpreted as transitory, thus outright purchases continued to expand the permanent SOMA. However, upon the Desk's realisation that the change to the behaviour of autonomous factors was persisting, the long-term RPs were quickly reduced, ...."
Would not the rate for Fed Funds be affected? And, would that not be a signal sensitive to such an error?
I would think that such a mistake would cause a noticeable shift in the funds rate toward lower; although, not were the money being applied to other than ordinary purposes, and a source that is essentially consuming the funds as quickly as they are provided. From the dealer's account straight to the stock market, perhaps.
The Fed's domestic trading desk dropped outstanding RP by roundly $15 billion but, meanwhile, credit money growth had enabled a fractional and theoretical bank credit expansion of more than $100 billion. However, in the virtual absence of a reserve requirement, and during a period when the vault cash normally used to meet the required reserve level is experiencing a growing surplus (see below), the expansion is limited more by asset ratios, risk weightings and other supervisory measures. The expansion could, therefor, be quite larger than the 9x factor normally applied.
It was reported here throughout the aforementioned period that no explanation would suffice to excuse the Fed's conduct in this aspect of its policy implementation, that the US central bank was doing much more than just supplying reserve funds.
To further explain the role of the autonomous factor, eighty percent of banks are no longer economically bound by the reserve requirement. They meet the statutory obligation through (vault/ATM) cash management. And, during the above-mentioned period, the chief autonomous factor affecting reserve balances (currency demand) had weakened considerably. Some readers may recall the emphasis this page placed on the currency decline as it began.
Furthermore, the Fed had recently implemented a program to dissuade banks from frequently returning cash to depositories only to order more in turnaround fashion. Therefor, I deem the Fed knowledgeable of the flow of currency to and from their regional facilities, the complexion of public demand for currency and any consequent shift in growth.
Essentially, the US central bank would have us believe it is of sufficient technological advancement to operate the system under the most dire circumstances (e.g. 9/11), yet it had no idea that currency demand was declining, so it continued to conduct coupon passes.
No, thank you.
©2004 Open Market Operations Limited. All rights reserved.
OMO Matters
US Federal Reserve Reference Publications
"The market for repurchase agreements on US government securities is of vital importance to the New York Fed, and the whole Federal Reserve System, because it is where virtually all of our monetary policy operations are conducted."- Peter Fisher, Manager, System Open Market Account - 15 January 1997.
"Open market operations are not another weapon in the Fed's arsenal, but the only weapon in its arsenal." - Monetary Trends, St Louis Federal Reserve, August 2003.
Repurchase Agreements with Negative Interest Rates - FRBNY - A primer detailing how short sales of Treasury securities can lead to protracted RP fails and consequently negative rates to address capital requirement issues.
Reserve Bank of Australia repo eligible, basis swapped, foreign issued AUD debt - read here.
OMO-Repo Misuse - Letters to Hon. Dr. Michael Cullen, N.Z. Minister of Finance.
Repo Transaction Accounting. Letter to Mr A Orr, RBNZ.
IMF Repo Accounting Examples, Full Article
Credit Creation, Letter to Iris Claus and Arthur Grimes.
NZ Debt Management Office Uridashi issue and associated EuroKiwi letters to Hon. Dr. Michael Cullen, N.Z. Minister of Finance.