Tuesday, January 12, 2021

US debt ceiling may affect markets long before it is reinstated

 

Fed seems to be solely concerned about losing control of the short term interest rate to the downside during this pending 6 month transition of the TGA balance to a level over $1.5T lower than present...


The amount of cash that the Treasury currently holds is around $1.73 trillion, but it will need to whittle that down over the next seven months to the level it was at when the last ceiling suspension took place -- around $118 billion.  

The central bank has already hinted that it could intervene should reserves flood the market. Lorie Logan, executive vice president at the Federal Reserve Bank of New York, said in a speech last month the central bank is prepared to tweak its interest on excess reserves rate if downward pressure on rates were to emerge.

The minutes from the central bank’s December 15-16 meeting, due for release Wednesday, may offer some further insight into how policy makers are thinking about a possible adjustment to IOER.

Besides the Fed taking action, Crandall said there are a few things Treasury could do, such as reduce the amount of weekly cash management bill offerings beginning in February and cut the outright size of the bill auctions in the second quarter.




5 comments:

Andrew Anderson said...

said in a speech last month the central bank is prepared to tweak its interest on excess reserves rate if downward pressure on rates were to emerge.

"Bank reserves" are simply fiat account balances at the Central Bank where the account owners are banks. Such accounts are inherently risk-free so positive* interest on them constitutes welfare proportional to account balance, not according to need.

* actually non-negative given overhead costs and a zero maturity wait premium.

Matt Franko said...

Not a technical description AA... all figurative language in your description...

You’re trying to analogize reserve assets of a member institution to those of a depositor... it’s not technically accurate and not necessary if the person you are trying to explain it to is properly trained and qualified ...

Mike Norman said...

Why do they have to "whittle it down" to pre-Covid levels? (i.e. TGA.)

Matt Franko said...

Mike apparently the “debt ceiling!” suspension includes a condition that directs Treasury to return the TGA balance to the same amount it was on the day the ceiling was suspended... this article says that level is 118b....

Prevents Treasury from increasing issuance by Trillions and bankrolling it in the TGA in advance of the expiration of the suspension...

So as it stands now (ofc could change) TGA has to come down by 1.5T and Fed is going to add 120b per month for same 6 months so Reserve Assets should increase by 2.2T over next 6 months... so reserves right now 3.2T so should be 5.4T in mid summer... if they do what they currently saying they are going to do... which ofc is not always the case... and should be over 6T by year end...

Matt Franko said...

Two more CMBs announced today again out of nowhere:

https://www.treasurydirect.gov/instit/annceresult/press/preanre/2021/A_20210112_2.pdf

https://www.treasurydirect.gov/instit/annceresult/press/preanre/2021/A_20210112_4.pdf

$55B more pop-up issuance so they apparently still are trying to at least manage the decline in the TGA... if they didnt do these then TGA would reduce $4$...

All they have to do if they want the TGA to come down is not do these previously unscheduled CMB offerings... my question is why are they even doing them?