Transcription
Emergency afternoon update. It gets even worse.
Another $30 billion got tapped in the afternoon repo operation at the Fed, bringing today's grand total emergency liquidity needs to a staggering $50 billion. So, I wanted to provide an emergency update this afternoon, uh, Friday afternoon.
There are actually two different SRF or standing repo operations at the Fed. There's the morning operation, which we covered in today's earlier video, which was already a pretty notable $20.35 billion that got tapped from the SRF or the standing repo. Again, what this is is a Fed facility that provides dollars to the banking system, uh, specifically to primary dealers and banks. And we noted $20.35 billion for the morning session. That was quite notable. In fact, it was a record high since this became a standing facility.
Well, we got an afternoon update, an afternoon session here operation at the SRF, and it was another $30 billion, bringing the grand total for today to $50.3 billion. Now, it was already notable at $20.3 billion, but now that it is $50.3 billion, it is starting to become even more noticeable.
Now, uh, it should be noted that the reverse repo operation today had a surge. So normally this has been fairly empty. Remember, you can think of the reverse repo as a storage tank for excess dollars. It was a way to sterilize excess dollars to prevent them from going into the economy and causing inflation. That is the way to think of the reverse repo. You can also think of the reverse repo as a Fed facility for excess dollar liquidity. And the standing repo, which we are looking at here, $50 billion, this is a Fed facility when there is a scarcity or a shortage of actual dollar liquidity.
So the two of them combined, we can look at here, we can look at the reverse repo minus that standing repo. So again, reverse repo, storage tank for excess dollars, a facility for abundant, overabundant liquidity. And standing repo is a facility, of course, when there is a shortage of dollars in the financial system. And of course, we can see the spread is basically at zero.
Now, this has dipped negative, uh, in the past couple weeks, and we've done, uh, various videos covering, uh, those dips, indicating, of course, a shift in the regime from abundant liquidity, where, for example, this was up at $2.5 trillion, meaning there were $2.5 trillion more in the reverse repo than there were being used in the standing repo. And again, the standing repo was basically never used because, again, there was abundant liquidity.
So what we're talking about here is not a cataclysmic, uh, shortage of liquidity. It is certainly notable, and it is worth certainly an afternoon update. Uh, but it is not a cataclysmic sort of shortage because you have to look at the reverse repo as well, which, again, $51.8 trillion. So the two of them largely cancel out. But it should be noted, if you've been watching the channel, there have been a couple times where this has actually dipped negative. This reverse repo minus standing repo has actually gone negative over the past couple weeks, uh, on multiple occasions, again, indicating a shift from abundant liquidity in the system into one of a shortage of liquidity.
And of course, if we look at SOFR spreads, that coincides with a dramatic vertical rise in SOFR minus the reverse repo. Now, as a reminder, what that is, we're looking at the difference between two interest rates. SOFR being the actual cost of money, the supply and demand of dollars relative to the supply and demand of collateral for these overnight repo transactions, these overnight dollar loans. That is what SOFR represents. Reverse repo award rate. That is a static interest rate set by the Fed. As you can see, it doesn't change except when the Fed makes an interest rate decision. Same thing goes, by the way, for IORB or interest on reserve balance and the discount window rate.
Again, as a reminder, the reverse repo, what that is saying is the Fed going, "No matter how overabundant dollars get, we will always buy them at this price." And that's the floor. The discount window rate is the exact opposite. That is the Fed saying, "No matter how scarce dollars get, we will always sell them at this price." And by doing that, they can set a corridor.
Now, the effect of federal funds, that is an unsecured repo market, and that is, uh, dangerously close to the upper bound for the, uh, Fed funds. Now, for the Fed funds, uh, the Fed would like to use IORB and reverse repo as their barriers, as their ceiling and their floor. And what we can see is the Fed funds has actually been ticking higher. You can see that in the purple line here, relative to the floor, relative to that reverse repo interest rate. Again, indicating the same thing that SOFR has been indicating, which is that the actual liquidity conditions are scarcer than the Fed would like.
And of course, again, when SOFR is above the discount window rate, what that is indicating is that the Fed is starting to lose control over that overnight cost of capital. And by the way, we can see that has happened quite frequently over the past two weeks. Six days out of the past 13 days, about half the time, SOFR, the actual cost of capital, the $3 trillion overnight repo market that is secured by collateral, the actual interest rate for those overnight dollar loans is above the Fed ceiling for 50% of the days.
Now, again, I want to go back to, uh, the chart that I had provided earlier in, uh, today's, uh, video, in the morning video. Here is SOFR minus the discount window rate. Uh, this is compiled straight from data from the Fed and Excel. And as we can see for, uh, the past four days, we can see that SOFR has been above the discount window rate. And of course, if we look at the 99th percentile of SOFR minus that reverse repo rate, it has been going vertical over the past two days. So there's certainly a, a shortage, a scarcity of dollar liquidity in the system.
SOFR again, if you are the only firm on Wall Street that has a hundred billion dollars, everyone is coming to you because month-end and there's window dressing or a tax deadline or whatever the case may be. Uh, firms need operational cash. You are the only firm on Wall Street with a hundred billion. Well, you get to charge a very high price. That is what SOFR is reflecting. And again, uh, when it is above the Fed ceiling, that is starting to indicate that the Fed is losing control over the overnight cost of capital in this $3 trillion per day, uh, repo market.
Now, here, by the way, I wanted to include, I forgot to include this in the morning video, but this is what, uh, the likely response would be. So, I included, uh, the top four, uh, headlines that crossed the wire from the Fed, uh, uh, Federal Reserve member Logan. The top four I had included in the morning video, but I had forgotten to include the most important, which was the last one. So, uh, what she said is, "If the recent rise in repo rates turns out not to be temporary, the Fed would need to begin to buy assets."
Now, of course, uh, I updated the line down here. We can see the standing repo, $50.3 billion. That is the highest going all the way back to June of 2020. And of course, it coincides. If that was happening on its own, uh, there might not be cause for concern. But it is happening at the same time that SOFR minus the reverse repo, that SOFR, Fed funds rate, the unsecured, uh, overnight lending market, much smaller but still notable. Fed funds has been moving higher despite Fed rate cuts, and of course, SOFR has been moving higher relative to the reverse repo, relative to IORB, and above the discount window, as we established.
Now, what does it look like if this, if this gets really, really bad? Well, it turns into the repo rate crisis like in 2019. In September 2019, SOFR went about 900 basis points above the Fed funds on an intraday basis. Uh, it is nowhere near that bad now, but it is starting to become alarming, as you can see. So SOFR minus the reverse repo, taking a 10-day moving average, we can see that has gone straight vertical.
So we are certainly getting into a situation where abundant liquidity is over, and we are entering a regime of scarce liquidity. And of course, that prior chart, we can see this coincides with bank reserves, uh, uh, plummeting, going from about $3.4 trillion just a couple weeks ago when we started covering, uh, this particular topic, to just $2.8 trillion. So, the Fed is flirting dangerously close with an accident or some sort of financial crisis. So, uh, I think that they might need to keep an eye on this.
Now, of course, some of this might calm down. We'll have to wait for next week. Some of it might calm down, uh, after the end of the month and the window dressing and all the liquidity needs. We're going to have to wait a couple days to see how this ends up shaking out. But again, if you look at the long-term trend of SOFR minus reverse repo, that has been going vertical, going all the way back to July when we first started to cover this. So, this is not a newfound phenomenon that is just happening on October 31st.
So anyways, hopefully that was helpful, and I will catch you in the next.