Reverse Repo Facility

[imoldernu]

Never heard of it... but it sounds interesting at least as far as any movement of a trillion dollars could be interesting.

No direct, immediate effect, but possibly an increase in bank savings rates, as some funds leave banks to go into the Federal Reserve.

US banks braced for large deposit outflows - FT.com

Moderator ok to Delete... the website turns to "pay" after one view...

Similar info here:http://www.moneynews.com/Personal-Fi.../25/id/584964/

[M Paquette]

Using this facility in a time of low liquidity such as late 2008 was would be a Bad Idea. Fortunately, the Federal Reserve did exactly the opposite and collected illiquid assets in exchange for liquidity.

This just sounds like a method they are looking at to reduce market liquidity at some point where excess liquidity poses a risk; that is, when the Fed decides to raise short term interest rates. I don't anticipate an outbreak of idiocracy in the Fed Board of Governors that would have them try this during another liquidity crunch like late 2008.

If they start putting Brawndo in the vending machines, though, let us know.

[MichaelB]

Every time I see the term "Reverse Repo" the film "Repo Man" comes to mind.

Repo Man (1984) - Original Theatrical Trailer in HD - YouTube

[imoldernu]

Quote:

Originally Posted by M Paquette Using this facility in a time of low liquidity such as late 2008 was would be a Bad Idea. Fortunately, the Federal Reserve did exactly the opposite and collected illiquid assets in exchange for liquidity. This just sounds like a method they are looking at to reduce market liquidity at some point where excess liquidity poses a risk; that is, when the Fed decides to raise short term interest rates. I don't anticipate an outbreak of idiocracy in the Fed Board of Governors that would have them try this during another liquidity crunch like late 2008. If they start putting Brawndo in the vending machines, though, let us know.

The proposed FED action is not clear. The downside worry is that instability in the market could combine with unstable bank liquidity to exacerbate the intended positive effect of the fed funds rate on interest rates. As the Fed Fund Rate nears zero, its' usefulness in helping the economy becomes nil.

As such, not likely that the Repo Facility will be implemented in a major way, but that does not bode well for the long run. Today's (Thursday July 31) market drop does not reflect any of this, but longer term, the worry remains.

This blog, explains the possibilities to some extent.
Fed Worries About Effects of Its New Interest Rate Tool on Markets - Real Time Economics - WSJ

edited to add new article on bond rates... which you probably already knew...

The Perils of Bond Funds in a Rising Interest Rate Environment - US News

[imoldernu]

This may be off topic on the specific matter of RRF, but it fits in with the actions of the FED and the potential effect on the markets.

This article suggests that a good job report or improvement in the economy could negatively affect the market, should the FED take this as a signal to raise the discount rate. Counter intuitive, but could be a consideration for investors.

Strong jobs report could be next source of market fireworks

Quote:

Already markets are beginning to find dark clouds in what were once silver linings. Stocks fell sharply Thursday in part on the idea that an improving economy and pickup in inflation could push the Fed to raise interest rates more rapidly than expected. Economists expect to see 233,000 nonfarm payrolls and unemployment at 6 percent when the report is released at 8:30 a.m. EDT. That is down from the 288,000 jobs added in June and an unemployment rate of 6.1 percent. "If we really got a hot wage number and both the unemployment rate goes to a five handle, I think there's a possibility people will move up their rate hikes expectations by year-end," said James Paulsen, chief investment strategist at Wells Capital Markets.

Current (July 31) business news pundits suggest just the opposite. That an improving economy will stabilize the markets.