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Everyone knows The Price is Right rules … closest bid, without going over.
It’s the same with overnight repo.
The Fed pumps another $75 billion into financial markets, continuing capital-injection plan [Business Insider]
The Federal Reserve on Wednesday sold another $75 billion in market repurchase agreements, or repos, in a continued effort to calm money markets and bring interest rates within its intended range.
The round was oversubscribed, as banks requested nearly $92 billion in overnight repos, signaling strong demand for the asset.
The bank began a streak of repo offerings last week, marking the first time such assets were sold since the 2008 financial crisis. The central bank said the offerings would continue through early October.
Well, everyone else has given their take on the recent dislocations in overnight repo markets, so here’s mine.
Overnight repo is where the interest rates that central banks SET meet the interest rates that real economic actors USE.
And when the setting of those interest rates is no longer connected to ANYTHING about the real economy …
When central bankers are cutting interest rates even as growth is robust, unemployment is at 50-year lows, and the stock market is near all-time highs …
When, to coin a phrase, They’re. Not. Even. Pretending. Anymore. …
I think this spike in demand for overnight and short-term financing is a direct result of real economic actors trying to figure out what it MEANS when interest rates are a symbolic communication to markets rather than a clearing price of money in the real world.
I know what it would mean to me.
It would mean that I want the cash, not the securities, and I’d be willing to pay up to get it.
But if the real world price of overnight money is higher than what central bankers SAY is the real world price of overnight money … well, that breaks the world.
So it can’t happen. So no matter how much demand there is for the cash instead of the securities, the Fed will provide as much cash is necessary – truly, as much cash is necessary – to satisfy that demand at the price that the Fed SAYS is the right price of overnight money.
It’s not a crisis per se. There is literally no limit to the liquidity – i.e. cash – that the Fed can and will provide. But it is absolutely indicative of a profound shift in the Common Knowledge – what everyone knows that everyone knows – regarding the Fed and monetary policy.
And that shift will change everything. Not tomorrow. Not the next day. Not in the form of a market “crash”. But it will change everything.
See, it’s not just Powell and Draghi and the rest of the mandarin crew who are no longer pretending that monetary policy has any impact on the real economy.
It’s us, too.
Everyone now knows that everyone now knows that central banks are powerless to impact the real economy, but are the only thing that matters in the market economy. Everyone now knows that everyone now knows that the setting of the price of money is now a disembodied symbol of governmental will, all-important to the market economy and utterly … utterly! … ignored and immaterial to the real economy.
This is the new common knowledge about central banks and monetary policy … omnipotent in market-world, powerless in real-world.
Dislocations in the overnight repo market are the first place this new common knowledge is shaking the foundations of our political/economic world. It won’t be the last.
With the 2020 election – no matter who sits in the White House – the Fourth Horseman rides into town. And there won’t be a damn thing the Fed or the ECB can do about it.
The Long Now is going to get a LOT worse before it gets ANY better.