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The Fed continued to pump full blast, adding a net of $3.5 billion on top of yesterday’s, jam of $12.50 billion. Today’s $16 billion repo will expire on Thursday, leaving a total rollover of a gargantuan $46 billion rollover. It has now taken two days of huge adds to keep the Fed Funds rate near the target of 4.75%. Click here to download complete report in pdf format (Professional Edition Subscribers).Try the Professional Edition risk free for thirty days. If, within that time you don’t find the information useful, I will give you a full refund. It’s that simple. Click here for more information.

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  1. eh

    I disagree with some of your assumptions.

    You suggest that the Fed is pumping to aggressively maintain its target rate, but the TOMO shows that not a lot of liquidity was required to defend the 4.75% fed funds rate for Treasury bills.

    Most of today’s pumping was in mortgages and agencies, which has little to do with a 4.75% fed funds rate using top-quality collateral.

    If anything, propping up questionable collateral seems like an attempt to provide liquidity to the market rather than to defend the rate. If I was more pessimistic, I’d say they were trying to manage the spreads of questionable collateral over Treasuries, but that market is too big for them to control.

    All in all, just more liquidity that has nothing to do with defending the funds rate, IMO.

  2. Lee Adler

    What you are saying isn’t much different that what I have been writing. Rates are simply the price of liquidity. There are two aspects that can be measured, price and quantity. Of course the rate on Treasury collateral is lower than agency and MBS, but they are all functions of the problem that I have been anticipating and writing about on a daily basis in this report over the past month or so, i.e. that a true shortage of cash, (more properly a solvency issue) would begin in mid October.

    The Fed added $16 billion in liquidity in the past two days and the Fed Funds rate is at 4.75. Where would the rate be if it hadn’t added $16 billion? Well, we don’t know. What we do know is that it took $16 billion just to keep it at 4.75. And if I am correct, it’s going to take a whole lot more than that to keep it there in the days ahead.

    The Fed is only replacing liquidity that has been destroyed, fictitious capital that has been outed, so to speak. Again, if I am correct, the Fed will be adding a lot more in the days ahead to counter a severe and growing cash shortage. So on the surface, it will certainly appear that the Fed is adding liquidity, while the truth will be that they are simply trying to temporarily replace what is hemorrhaging out of the system in the hopes that the players will be able to replenish.

    This certainly isn’t a good thing nor is it bullish if the issue is one of solvency. Sooner or later a whole bunch of stuff will need to be liquidated to pay the bills.

    This is an issue that I will continue to cover regularly and in depth in the Daily Fed Report.

  3. Lee Adler

    That’s interesting. Those numbers seem huge and the biggest submissions were mortgage backed. I don’t track the submissions, however, and without a history I’d be hesitant to draw conclusions from it. Does it indicate the stress I’ve been expecting? Perhaps. But I would expect it to show up more in the rate, and the necessity of the Fed to pump, not drain as it did today.

    Let’s see what happens tomorrow and Monday.

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