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luke gromen:
In the short run, the SRF (especially when paired with the FIMA swap lines) will likely give the Fed flexibility to withdraw some liquidity via Tapering QE (the headlines) while simultaneously maintaining the ability to add back liquidity as needed to keep markets stable (the fine print).
In our view, the Fed’s SRF announcement above is likely to continue to be good for both “risk on” assets and for Fed credibility – the Fed will be able to say it’s tapering, without actually withdrawing liquidity. Taper will likely only be optics/semantics.
As this becomes better understood by markets, we would expect markets to react accordingly (indeed, we think part of the reason BTC has been acting so well, and why gold bounced so hard off its sell-off two weeks ago is because markets are beginning to sniff this out.) We also think the establishment of SRF will likely prove positive for the other sectors we continue to favor – industrials, commodities, big tech, niche real estate.
- The Standing Repo Facility (SRF) all but takes the “USD Super-spike” scenario off the table, as it makes USTs and USD cash fungible to eligible counterparties; this is all the more true for the FIMA swap lines, as they effectively do the same thing for foreigners.
- If the Fed Tapers with the SRF in place, it means the banks can buy USTs, and use the SRF for USD liquidity when needed, and then also use the Fed Reverse Repo facility (RRP) to keep bank reserve levels below regulatory limits. In plain English, it will mean the Fed will effectively be tapering only on a nominal basis – the liquidity injections will still be happening into the system, just in a more circuitous route.
- Here’s the critical part: Anything they accept as SRF collateral is effectively the Fed buying that asset…i.e., “Standing QE as needed” without calling it “QE.”
In the short run, the SRF (especially when paired with the FIMA swap lines) will likely give the Fed flexibility to withdraw some liquidity via Tapering QE (the headlines) while simultaneously maintaining the ability to add back liquidity as needed to keep markets stable (the fine print).
In our view, the Fed’s SRF announcement above is likely to continue to be good for both “risk on” assets and for Fed credibility – the Fed will be able to say it’s tapering, without actually withdrawing liquidity. Taper will likely only be optics/semantics.
As this becomes better understood by markets, we would expect markets to react accordingly (indeed, we think part of the reason BTC has been acting so well, and why gold bounced so hard off its sell-off two weeks ago is because markets are beginning to sniff this out.) We also think the establishment of SRF will likely prove positive for the other sectors we continue to favor – industrials, commodities, big tech, niche real estate.
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