Open Market Operations experts, anyone?

[blazespinnaker]

I am looking at http://www.ny.frb.org/markets/index.html and I'm going through a history of the open market operations.

I noticed that Since the beginning of the year, the fed has been purchasing (not selling) coupons/bills/and tips.

Buying bonds will increase their price (by increasing demand) and therefore lowering their yield.

However, the fed has been tightening the fed funds rate.

Question: is the fed keeping the funds rate from going too high? The market wants it to go to higher but by buying they keep it down at their target?

http://www.ny.frb.org/markets/omo/dmm/fedfundsdata.cfm

If so (I'm no fed expert!) isn't this a policy of easing and not tightening as they are pretending?

[blazespinnaker]

One possibility, of course, is that the treasury is selling into the market and the fed is buying the debt to bring it in alignment with the target rate.

In this case, the money supply increases faster as the treasury over borrows and then the fed over injects cash into the money supply.

If the treasury sold fewer bonds, then the fed would not have to buy as many in order to reach the target rate.

In this way, it seems to me, that the treasury is growing the money supply as well .. not just the fed. Well, at least, the fed isn't raising the fed funds rate as fast as it should in order to keep the money supply more stable.

And how do repos fit into this?

[bart]

If so (I'm no fed expert!) isn't this a policy of easing and not tightening as they are pretending?





My take - yes.

I put up a very abbreviated Fed watch page a while back on my site - check the Securities Lending chart for a confirmation of what it appears that they're doing right now. The Excess/Total reserves chart is also illustrative.

http://www.NowAndFutures.com/fed_watch.html

[blazespinnaker]

Can we put some more details to this?

My take is that the fed isn't inflating the money supply but is actually working with the treasury to inflate the money supply.

How exactly is the repo market going up when the repos are temporary? I saw some longer term repos .. are those 'not so temporary'?

How *exactly* (like, give me links to trades and what not) is the fed inflating the money supply?

[bart]

Yes, the Fed does work with the Treasury in the sense that they buy and sell Treasury bonds. One of the ways the Fed creates money is via monetizing the debt - a fancy way of saying that the Fed buys bonds and in the process literally creates money out of thin air. You can track this portion by looking at the SOMA chart on my fed watch page or directly at the SOMA page on the Fed's web site (also linked on my Fed watch page).

The Treasury also prints the currency and makes the coins, but the actual printing of new currency is done via authorization from the Fed (I don't have a link to this but just google it). The Treasury does print replacement currency for bills and coins with excess wear on it own. But the Fed is the senior member by far between the Treasury and itself in creating money.

You have most of it with repos - they are created both in temporary (overnight up to 65 days if memory serves) and permanent form. Temp repo data is available at http://www.ny.frb.org/markets/omo/dm...?SHOWMORE=TRUE and permanent repo data is a bit hidden but is in publication H8 in lines 11 & 13 at http://www.federalreserve.gov/releases/h8/.

As an aside, the publication of the old system repos which was more helpful as a Fed proxy has been discontinued as best I can tell - it had a balance in the trillions when it was discontinued in March.

To the best of my knowledge (excluding temp repos noted above and Securities Lending data at http://www.ny.frb.org/markets/seclen...Historical.cfm ), the Fed does not publish individual trades so I can't point you to them.

As far as how *exactly* the Fed is inflating the money supply, that's a subject that could easily fill entire books... and has. The best I can do is refer you to a section on my FAQ page which lists all the ways of which I'm aware that the Fed and banking system create money - http://www.NowAndFutures.com/faq.html#money_created - and encourage you to do your own due diligence. Also be as careful as possible to define and understand the terminology as you go along - I found and find the words themselves to be quite a minefield of difficulty and barrier to better understanding.

[blazespinnaker]

Thanks bart, you are by far and above the most knowledgable person I have run across in terms of discussing this.

One thing though.. you said the fed "buys and sells" treasuries. This is the fed line, but it doesn't seem to reflect reality.

As far as I can tell, the fed does *not* sell treasuries, or if they do, it's pretty darn rare.

My assumption (I thought I read somewhere) is that they just retired the treasuries that they do purchase.

Another part of this conversation is the reserve, I noticed that that they are decreasing the reserve requirements in each year for the last 4 years I think. Is this having an impact as well?

[bart]

My pleasure blaze, and please do pass it along. The more folk that have better understanding of this stuff, the better.
It was very difficult to get the understanding I have so far - the raw and truthful data is very difficult to locate and then put together... and then communicating it clearly is another challenge that I face daily with the stuff on my site.

You are of course generally correct about the buying & selling of Treasuries by the Fed. The balance of the System Open Market Account (SOMA) very seldom drops. But they do actually sell Treasuries in daily operations to help control how much liquidity they think is needed in the system, and if I hadn't stated it then someone could have gotten after me, and been correct. Its one of the downsides of 'net boards and short messages - its impossible to cover all the areas in full detail.

As far as retiring the Treasuries, I honestly don't know but my strong suspicion is that they would do it very infrequently if at all. They're much more likely to just roll them over.

On reserves, the applicable chart is Excess/Total reserves on the same page - that reflects the *relative* lie about credit being tightened by the Fed, and also your observation about reserve requirements having been consistently lowered. If memory serves, reserves are only required after $8 million in checking deposits today and the percentage required after $8 million and up to the next break is not exact;ly high (3%?).