The Impulses of Lunar Fed Policy Under Repo Madness
This week, while you were busy working, Jamie Dimon, CEO of JP Morgan Chase, took time out from rubbing elbows with fellow movers and shakers at the World Economic Forum in Davos, Switzerland, to share his trepidations:
“The only thing I have trepidation about is negative interest rates, QE, and the diversion between stock prices and bond prices and yield and stuff like that…. I think it’s very hard for central banks to forever make up for bad policy elsewhere, that puts them in a trap. We’re a little bit in that trap today with rates so low around the world.”
Fair enough. Though Dimon, in what we presume was an inadvertent omission, failed to share that his firm may have recently walked the Federal Reserve into an elaborate policy trap. Now the Fed’s stuck. JP Morgan’s thrown away the keys. And Dimon’s reaped a significant windfall.
If you recall, between Monday night and Tuesday morning September 16/17 the overnight repurchase agreement (repo) rate hit 10 percent. Short-term liquidity markets essentially broke. The Fed had to intervene in the repo market, via overnight repo operations, to push the repo rate back below 2 percent.
Since then, overnight repo operations by the Fed have become a near daily occurrence. What’s more, these daily operations have ballooned to the order of up to $120 billion and are being maintained indefinitely.
On Tuesday, for example, the Fed created $90.8 billion out of thin air. Of this, $58.6 billion was added to the overnight repo. The remaining $32.2 billion was added to the 14-day repo. Then, on Thursday, the Fed created another $74.2 billion out of thin air. Of this, $44.15 billion was added to the overnight repo, and the remaining $30 billion was added to the 14-day repo.
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