The Fed Has Gifted Wall Street Banks More Than $25B in Free Money Since Starting "QT" in June
The Fed's IORB and ON/RRP constitute yet another stealth Wall Street bailout unsanctioned by Congress and ignored by Wall Street-owned corporate media
Regardless of how you debate the mechanics of money printing, the Fed has virtually unlimited amounts of U.S. dollars at its disposal. Indeed, in just 2 years, the Fed more than doubled its balance sheet of assets to around $9 Trillion USD through massive “Quantitative Easing” asset purchases. Suffice it to say, the Fed isn’t exactly hard up for cash.
At the same time, the Fed is happy to hold massive quantities of cash deposited with the Fed by Wall Street. And it pays above-market rates on the cash it doesn’t need. First, the Fed pays the “interest rate on reserve balances” (IORB) maintained by or on behalf of eligible institutions in master accounts at Federal Reserve Banks (see the Fed’s IORB FAQ here).
The Fed decided to create an artificial “ample reserve” regime by flooding the system with cash. This helped push bank reserves to more than $4 Trillion. And bank reserves are still extremely elevated, at more than $3 Trillion.
The Fed has also been steadily raising the IORB it pays to banks every time it hikes the federal funds rate. The current IORB rate is 3.15%. Try finding that kind of return on cash deposits at your bank!
But wait, there’s more. The Fed also runs something called the overnight reverse repurchase agreement facility or ON/RRP for short. The Fed explains that “when the Federal Reserve conducts an overnight RRP, it sells a security to an eligible counterparty and simultaneously agrees to buy the security back the next day.” It is really a fiction wherein Wall Street money market funds are able to park cash risk-free at the Fed in return for a juicy “reward rate.”
The Fed, in its infinite wisdom, has deemed it appropriate to set the RRP reward rate at only slightly less than the IORB rate. It currently stands at a still well above-market 3.05%. As Wall Street on Parade has explained, “The Fed Is Subsidizing the Money Market Funds Operated by Larry Fink’s BlackRock as BlackRock Manages a Big Part of Jerome Powell’s Wealth.”
The Fed’s generous and growing reward rate has sparked truly staggering ON/RRP levels, now consistently raking in more than $2 Trillion every night. Back in 2015, shortly after the Fed created the RRP, it warned against its misuse: “[A] permanently expanded role for the Federal Reserve in short-term funding markets could reshape the financial industry in ways that may be difficult to anticipate and that may prove to be undesirable.” But far from exercising caution, the Fed has continued to encourage even riskier use of ON/RRP. For example, in September 2021, it *doubled* the per-counterparty limit from $80B per night to $160B!
The Fed is effectively encouraging Wall Street to park more cash in repos than reserves. Especially considering the fact that, unlike the changes to the SLR ratio, the Fed has utterly failed to reverse ZERO reserve requirements put into effect way back in March 2020. And Wall Street is happy to oblige.
In the coming weeks, we hope to work with others on exact calculations of the running totals paid out to Wall Street. A cursory back-of-the-envelope calculation for just the past four months or so from June 1 (when the Fed’s supposed “Quantitative Tightening” began) to today, however, suggests that amount is well in excess of $25 Billion. Maybe that doesn’t sound like a lot of money anymore, after the Fed has thrown trillions around so haphazardly. But that’s still a lot of no-strings-attached free cash for doing absolutely nothing, especially when banks pay far less to depositors or investors in MMFs.
It wasn’t so long ago in the early days of the COVID shutdowns that the airline industry received a $25 Billion bailout from Congress. The media actually covered that one with a critical eye and rightfully so. So why is it that the Fed can shovel more than $25 Billion to Wall Street banks in a few months with virtually no pushback? At a time when the banks supposedly have “ample reserves” and no need of subsidies. At a time when inflation is at generational highs. At a time when Wall Street just paid its executives the largest bonuses IN HISTORY.
The current state of affairs is truly insane. Far more attention must be paid to what the Fed is DOING, not what it is saying. Wall Street is busy trying to cry uncle and demanding the Fed pivot before “something breaks.” But in reality, Wall Street has been getting bailed out since before COVID (like with the Fed’s $48 TRILLION repo cash loans) and it’s never stopped. Enough is enough.
-#OccupyTheFed
*It should go without saying that everything Occupy The Fed writes is for informational purposes only and represents the writers’ opinions based on publicly available information. Nothing we write is ever intended as, nor should it be relied upon as, investment advice. The best investment advice in this Golden Age of Fraud seems to be based on inside information from government officials, so who are we to compete with that.
Excellent again. Keep the faith. With Social Security inflation at 8.7%, the Greek Chorus of voices demanding a Fed “pivot” becomes ever more strident. Self-interested folks who could care less about the 99% suffering from inflation? Certainly not.
Very well said.