Seeking Alpha

Federal Reserve Watch: Fed Continues To Buy U.S. Government Securities Outright

|
Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: John M. Mason
John M. Mason
Banks, long-term horizon
Summary

With the "repo" crisis behind it, the Federal Reserve is reducing the amount of repurchase agreements on its balance sheet in an orderly fashion maintaining market stability.

The US Treasury Department has substantially increased its General Account balances, and the Fed has supported this increase by purchasing US Treasury securities outright.

Even with substantial amounts of money moving in and out of these accounts, the Fed is conducting these operations, maintaining calm and quiet financial markets.

The Federal Reserve continues to add more US government securities to its securities portfolio and these have been bought outright.

In the last banking week ending February 12, the Fed's holdings of US government securities rose by $14.7 billion. (These and all other data on the Fed's balance sheet can be obtained from the Federal Reserve's H.4.1 statistical release, "Factors Affecting Reserve Balances" found here).

Since January 1, 2020, the Fed has added $113.7 billion to its securities portfolio.

And, since September 11, 2019, the week before the Fed began using repurchase agreements, the Fed has added $341.4 billion to its holding of US government securities.

Note that over the time period since September 11, the Fed has also let $98.1 billion run off from its holdings of mortgage-backed securities.

The net impact on the Fed's balance sheet was a $243.3 billion rise in the total securities portfolio.

The interesting thing, to me, about this runoff is that the General Account of the US Treasury Department increased by $220.7 billion during the same time period.

Why it is of interest to me is that when the Treasury Department moves funds to its General Account at the Fed, that removes reserves from the commercial banking system.

When the Federal Reserve adds securities to its portfolio, it adds reserves to the banking system.

To have these two accounts move such large amounts is unusual in normal times, but to have the amounts be so close in volume to one another makes one wonder whether or not the two movements were in some way tied together.

Now this was during the same time that Fed officials were addressing the disturbances in the "repo" market. At one time, the Fed's asset item for repurchase agreements reached a high of $255.6 billion, on a Wednesday when the dollar balances for the day are reported.

Right now, the balance of these repurchase agreements on the balance sheet is $164.4 billion.

Note, though, that the amount of repurchase agreements on the Fed's balance sheet has dropped by $91.2 billion since January 1, 2020.

Why this number is interesting is that the Fed's balance of reverse repurchase agreements has dropped by $112.9 billion since January 1, 2020.

Again, these numbers are remarkably close to one another.

In fact, the closeness of these numbers causes me to wonder about how they all might be tied together.

It appears that the Federal Reserve made it through the fall into January and determined that the "repo" crisis was over.

All-in-all, the Federal Reserve seems to have done an excellent job in dealing with the repo situation and moving on to the next item on its agenda.

So, the repurchase agreements that the Fed used during the crisis needed to be reduced. So, why not reduce accounts on both sides of the balance sheet that were of a similar nature and a similar maturity.

So, repurchase agreements, an asset that supplied reserves to the banking system, were reduced, as were reverse repurchase agreements, a liability that removed reserves from the banking system, which were also reduced by a relatively similar amount.

Now comes the increase in the General Account of the Treasury Department. Now, these funds usually increase toward the end of the year as funds build up in Tax and Loan Accounts at commercial banks, and as the Treasury begins to spend the funds, they are moved to the Treasury's General Account, where the Treasury Department writes checks.

But the General Account, which was built up between September 11, 2019, and January 1, 2020, has been reduced only slightly since the first of the year.

The question is why are these accounts remaining as large as they have?

And since this movement seems to have been supported by outright purchases of open market securities, one gets the idea that the Treasury is planning to keep the General Account at higher balances, at least through April tax time.

Usually, deposits build up in the General Account toward the end of a calendar year and then allowed to drop off in the early months of the new year, before building them up again as April tax time approaches.

That doesn't seem to be happening this year.

So, why are these accounts being maintained at these large amounts this year?

Is there something that is going on in the effort to resolve the whole problem that arose in the "repo" disturbance? We don't know, but the effort of the Fed to support the build up in the General Account seems to be very intentional.

Whatever, the Fed appears to be acting very deliberately, and therefore, it is also interesting to see how closely the volumes connected with the General Account and those of the securities portfolio have been.

We need to keep our ears open to learn what it is that Federal Reserve officials are doing.

Given how they handled the "repo" situation in the fall, one expects that the Fed actions are very reasonable and meant to keep financial markets calm and quiet.

One additional piece of evidence that speaks to the calm and quiet markets, the effective Federal Funds rate continues to run at 1.58 percent, the level that the Fed has been achieving since the last interest rate change.

Fed Chairman Jerome Powell continues to inform us that the Fed is watching the international situation, the rising value of the US dollar, the economic and political issues of Europe and the Chinese virus spread, as possible areas that might have to be responded to. But, so far, his remarks have just been of the "for-your-information" kind.

Hopefully, that is where it will stay.

Conclusion: The Fed is still on top of things, financial markets remain calm, and international monies continue to have high trust in the United States. What more can we ask for at this time?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.