Fed Prints More Billions
The Federal Reserve's balance sheet has increased by $400 billion in the past two weeks due to loans and repos, while reverse repos have reached a new high of $2.65 trillion, leading to concerns over continued tightening of liquidity in the banking sector.
The Federal Reserve has seen almost two-thirds of its monetary tightening erased in just days, as its balance sheet increased by $400 billion in the past two weeks, including $100 billion added since last week. The central bank made approximately $36 billion in loans and $60 billion in repurchase agreements, or repos, in the past seven days. Repos are a mechanism whereby the bank exchanges dollars for securities, including government bonds and mortgages. Meanwhile, reverse repos, where the Fed is given dollars in exchange for bonds and other assets it holds, have reached a new high of $2.65 trillion, with around $200 billion in reverse repos added in the past week.
The Fed's recent announcement of the bank term funding program (BTFP) values assets, such as bonds, at the price they were bought, rather than their current price, potentially allowing insolvent entities to receive money from the Fed. This program comes as the Fed faces increasing concerns over the vulnerability of the financial system due to elevated valuations for some categories of assets, particularly in the commercial real estate sector, as well as the susceptibility of some non-bank financial institutions to runs, and the effect of large, unrealized losses on some banks' securities portfolios.
The minutes of the Fed board meeting in February revealed a significant deterioration in bank assets, with banks reporting expectations of a further deterioration in the quality of household loans in 2023, particularly for consumer loans. The San Francisco Federal Reserve Bank had reportedly issued a series of formal warnings to the Silicon Valley Bank's leaders, urging them to address serious weaknesses in operations and technology, and had highlighted a critical problem with the bank's tracking of interest-rate risks. The bank ultimately filed for bankruptcy and remains in receivership by the Federal Deposit Insurance Corporation.
Despite the Fed's efforts to inject liquidity into the banking system through loans and repos, the balance sheet's overall increase is due to market participants taking money out of banks to hold it at the Fed, causing concern over continued tightening of liquidity in the banking sector.
