secondSince mid-June, the Bank of America has kept 700 billion U.S. dollars or more in cash in a special facility of the Federal Reserve. U.S. Federal Reserve: At the end of July, the investment amount exceeded the trillion mark for the first time. Since then, the daily trading volume has only remained slightly below that level. Considering that the special tool has not been used for almost a year before the end of February, and then very cautious, the development of this usually neglected corner of the financial world is even more eye-catching.
Since 2013, the Federal Reserve has provided so-called overnight reverse repurchase agreements or reverse repurchase transactions to banks to absorb their liquidity. Banks take over government bonds and mortgage bonds from the central bank as collateral. The Fed offers this option to hedge its own monetary policy. The Fed’s quantitative easing bond purchases are flooding the financial market with at least US$120 billion in monthly liquidity. Through this tool, the Fed is trying to offset the additional liquidity, so as not to undermine key interest rate policy and push short-term interest rates below zero.
May be as high as 2 trillion US dollars
In mid-June, the Federal Reserve raised its investment interest rate from 0% to 0.05%, triggering an investment boom. This time point was chosen because banks face additional challenges in adapting to liquidity. Short-term Treasury bonds issued by the US Treasury Department are decreasing. These services provide an alternative way for banks to safely store liquidity. But the Ministry of Finance was legally forced to reduce its cash reserves and reduce its own bond issuance to avoid violating the debt limit.
Congress has not yet been able to reach an agreement on raising the debt ceiling, and now is forcing Treasury Secretary Janet Yellen to take preliminary measures to ensure the government’s solvency in the coming weeks. The result is more mobility for parking. Analysts predict that the scale of daily reverse repurchase transactions this year may increase from US$1.3 trillion to US$2 trillion.
John Canavan, an analyst at the Oxford Economics Institute, believes that this development confirms a trend that has existed for years: banks are more willing to store funds safely rather than invest in research or productive asset classes. This trend can also be seen in the stock repurchase program. Nonetheless, he expects that after Congress has reached an agreement on the debt limit, the reverse repurchase transaction will be eased soon after the Fed shuts down its bond program at the latest. He expects it early next year.
