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The Cases of The Disappearing Fed Funds Market and the Reappeared Half Trillion

This is an excerpt of a Pro Trader Weekly Macroliquidity service update. Macroliquidity Pro Trader weekly subscribers (or Professional Edition), click here to download complete report in pdf format.

The Fed’s liabilities fluctuated wildly last week while total assets were little changed. The wild changes in liabilities were a direct result of the Fed actually supporting, promoting, and encouraging banks to dress up their quarter end balance sheets.

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What a sordid spectacle. It confused many observers into thinking that something drastic was going on in the financial system. It was actually just a Fed shell game of moving bank deposits from regular reserve deposits to the Fed’s Reverse Repo Accounts, and then back, over a couple of days between the end of the third and beginning of the fourth quarter.

There has been essentially no change in the total size of the balance sheet since QE officially ended a year ago. And there will be no material change going forward until the Fed either decides to start shedding assets (not gonna do it) or until it restarts QE (somewhat more probable than shrinking the balance sheet).

Meanwhile, loan growth in the US continues to surge. Repo loans to non banks bounced back after what looked like a breakdown. Interbank Fed Funds continue to disappear. The interbank repo market is now down to just $42 billion outstanding, down 90% from the peak level hit in 2008.

Due to the presence of massive excess reserves, the Fed will not be able to control rates through the traditional means of adding or draining small amounts of reserves in a tight reserve market. Those adjustments are reflected in the interbank Fed Funds market, which has virtually ceased to exist in the presence of so much excess cash in the system.

That was the old way. The new way is… Well, there is no new way. The Fed has made up several fantasies that it will be able to control rates through RRP and IOER interest rate increases when the need arises. We’ve addressed that elsewhere. It’s complete fantasy.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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