Why is it said that further strength in risk assets does not necessarily depend on the Fed cutting interest rates?
Why doesn't the strength of risk assets depend on a Fed interest rate cut?
“Repurchase Market” will become the front line of liquidity.
By @concodanomics, currency policy analyst
The reduction of liquidity in the global market has begun, and tens of billions of reserves will leave the system. However, this reduction may not only fail to curb risk assets, but may also lead to a contraction in the hidden market, making the Federal Reserve’s implementation of loose policies again without turning to, and the liquidity of the repurchase market will play a key role.
Recently, we have witnessed the impact of “temporary policies”, that is, the silence and inaction of the Federal Reserve in tightening policies has caused the financial machine to push up risk assets. The “TGA Supplement” failed to end the most annoying bull market in history-the market needs more tightening policies.
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The US government is replenishing its bank account (TGA) to pay bills, while reducing the Federal Reserve’s balance sheet through QT (quantitative tightening). If the subsequent reduction of reserves is too severe, the Federal Reserve may encounter an unexpected surprise in the most critical financing market…
The repurchase market is the lubricant of the US empire’s financial engine. Without it, dollar liquidity will become dull. The bundling of the Treasury cash market and futures market through arbitrage transactions (such as futures basis) is just one of its many functions.
But more importantly, the repurchase market has made “mortgaged” dollar loans prosper globally. It looks complicated, but in fact it is just a market that matches cash lenders (such as money market funds that must invest in ordinary dollars) with cash borrowers (such as hedge funds that must provide funds for leverage positions).
When Conk’s repurchase market Conga was revealed, everything became clear. The repurchase market is a chain composed of market participants who hope to profit by collecting spreads above financing costs. Cash lenders provide loans to “complex” borrowers through dealers, and dealers charge intermediaries for the spread.
In a typical “conga dance”, money market funds (MMFs) provide loans to the major dealers of the Federal Reserve, and these dealers’ task is to allocate cash to other parts of the repurchase market.
Then, the major dealers try to profit by borrowing these funds into the “dealer-to-dealer” market and charging higher spreads. Smaller securities dealers lend cash to customers in the “bilateral” (dealer-to-customer) market and charge higher fees…
At least, the repurchase market should work like this. However, in recent events, the increase in market complexity and even excess liquidity have become problems. But ironically, this will provide leaders with a specific “non-quantitative easing” tool to stimulate the market, namely “repurchase market redemption”.
In September 2019, the “repurchase market crisis” (repocalypse) appeared in our sight. The monetary market interest rate even exceeded the Federal Reserve fund rate (the key policy interest rate of the Federal Reserve). The Federal Reserve’s response marked the beginning of the transition from “surplus collateral” to “surplus cash” system.
After trying to reduce its balance sheet through the first official QT (quantitative tightening), the Federal Reserve made a 180-degree turn and restarted QE (quantitative easing), injecting reserves into the banking system to bring interest rates back to the range, and since then the cash flood has begun.
Then, after the “repurchase market crisis” and a subsequent round of QE only a few months later, the COVID-19 market panic appeared. In unprecedented uncertainty, the Federal Reserve injected huge reserves to stem the liquidity shortage in every critical market from foreign exchange swaps to euro dollars.
The Federal Reserve’s monetary policy eventually eased the financial panic, but QE still continues. By 2021, the reserves have become more abundant. However, the cash flood did not stop at the central bank of the United States. By the end of 2021