When the Fed's balance sheet exploded after Lehman in 2008, the same thing happened In 2008 they had a program to PREVENT this from happening, the US Treasury would issue T-Bills with the sole purpose to 'sterilize' the Fed activities (The so called "Supplementary financing program"). A while after Lehman blew up they stopped that all of the sudden (and they never released any press released about it), I was pretty vocal on this forum saying that the Fed was doing that and not communicating to the market (namely, unsterilized programs that increase excess reserves and thus the money supply, M2). They are doing the same now, in a much smaller scale but they are doing it
These Fed operations that increase excess reserves will only not impact the money supply (and other things like stocks, consumer goods, etc) if 100% of the reserves the primary dealers get stay with the Fed. But why would that be the case? In 2008 they created a program with the sole purpose of draining these reserves out, because they know these PDs will not keep 100% of the funds with the Fed. Some will buy bonds, some will buy stocks, some will buy god knows what else
This is part of the problem with using debt based instruments to control rates of consumption there are too many consequences, it also interferes with the risk element of pricing the cost of borrowing. A much better job without the consequences can be done through alterations in pension saving. I have put a list of the advantages of using pension saving as an economic control rather than interest rates as an economic control below. Copyright © 2007 Peter Morgan Morganist Economics. BENEFITS OF NOT USING INTEREST RATES TO CONTROL INFLATION. (1) INTEREST RATES ARE USED TO CONTROL THE AMOUNT OF LIQUIDITY IN AN ECONOMY BY INCREASING AND DECREASING THE COST OF BORROWING BY RAISING THE BASE RATE OR REDUCING THE BASE RATE RESPECTIVELY. THIS MECHANISM REQUIRES DEBT AND MUST HAVE A HIGH LEVEL OF DEBT FOR THE INTEREST RATE ALTERATIONS TO HAVE A STRONG IMPACT ON THE LEVEL OF LIQUIDITY TO DEFLATE OR REFLATE THE ECONOMY. AS THIS MECHANISM IS DEPENDENT ON DEBT IT IS A REASON FOR GREAT CONCERN NOW THAT THE AVAILABILITY OF CREDIT IS DIMINISHING. IT IS ALSO IMPORTANT TO NOTE THAT CREDIT ONLY HAS TO BE TIGHTENED TO HAVE DEVASTATING CONSEQUENCES ON THE ECONOMY DUE TO GREATER ALTERATIONS IN INTEREST RATES BEING NEEDED TO HAVE THE SAME DESIRED RESULT WHEN THERE IS LESS DEBT IN COMPARISON TO WHEN THERE WAS MORE DEBT. FOR EXAMPLE IF HALF OF THE LOANS IN THE COUNTRY DEFAULTED A 2 % INCREASE IN THE INTEREST RATE WOULD BE NEEDED TO HAVE THE SAME RESULT AS A 1 % INCREASE WOULD HAVE HAD BEFORE THE DEFAULTS OCCURRED. UNFORTUNATELY IF THE RATE IS NEEDED TO BE INCREASED BY A GREATER AMOUNT IT WILL CREATE EVEN MORE DEFAULTS AND WILL RESULT IN FURTHER DEFAULTS TRIGGERING A CONTINUED REDUCTION IN THE EFFECTIVENESS OF INTEREST RATES TO CONTROL THE ECONOMY. (2) IF INTEREST RATES ARE NO LONGER USED TO CONTROL INFLATION THE INTEREST RATE WILL BE BASED ON SUPPLY AND DEMAND AND WILL STABILIZE, THIS IN TURN WILL STABILIZE THE CREDIT MARKET AND EASE THE CREDIT CONDITIONS THE COUNTRY IS FACING AT THE MOMENT. THE INFLATION TARGET AND THE CREDIT TARGETS NO LONGER CONFLICT WITH EACH OTHER AS THEY ARE NOW NO LONGER LINKED BY THE INTEREST RATE AT LEAST NOT AS A DIRECT FUNCTION FOR ECONOMIC CONTROL. THIS WOULD EASE THE CONDITIONS IN THE ECONOMY SIGNIFICANTLY. (3) & (4) IF INTEREST RATES ARE NO LONGER USED TO CONTROL INFLATION THE ALTERATIONS IN THE INTEREST RATE ARE LESS LIKELY TO BE AS EXTREME DUE TO NOT HAVING AS MUCH PRESSURE TO MOVE TO CONTROL THE AMOUNT OF LIQUIDITY TO ALTER INFLATION. AS A RESULT THE MARKET AND THE ECONOMY ARE FAR MORE STABLE AND DO NOT CREATE THE PRESSURES ON OTHER SECTORS OF THE ECONOMY, FOR EXAMPLE BOND PRICES HAVE A NEGATIVE CORRELATION WITH THE INTEREST RATE. (5) IF INTEREST RATES ARE NO LONGER USED TO CONTROL INFLATION THE TOOLS THAT ARE USED TO CONTROL OR ALTER THE INTEREST RATE NO LONGER HAVE TO BE USED. THERE ARE THREE MAIN TOOLS THAT THE BANK OF ENGLAND USES. NUMBER ONE, OMO’S OR OPEN MARKET OPERATIONS. NUMBER TWO, THE RESERVE REQUIREMENT THAT BANKS CAN HAVE IN THEIR DEPOSITS. NUMBER THREE, THE DISCOUNT RATE OF BONDS. THE TOOLS EFFECT THE ECONOMY AND CAN HAVE A NEGATIVE EFFECT AS WELL AS POSITIVE. BENEFITS OF USING THE CURRENT PENSION REBATE OR PENSION SAVING TO CONTROL THE ECONOMY AND HOW TO COMPENSATE FOR THE DOWNSIDES. (6) & (7) A LARGE NUMBER OF BUSINESSES REQUIRE FUNDS THAT PENSION INVESTMENT MAKES AVAILABLE. IT COULD CREATE ROOM FOR GREATER EQUITY CAPITAL IN THE MARKET AND IF THAT IS INSUFFICIENT GOVERNMENT SUBSIDIES COULD BE USED, THIS IS IMPORTANT AT THE MOMENT AS CAPITAL IS NEEDED DUE TO THE PROBLEMS IN THE SUBPRIME MARKET. (8) ONE METHOD OF INCREASING SHORT TERM CREDIT IS FOR CORPORATIONS TO USE PENSION SAVINGS FOR BORROWING, THIS IS DONE AT THE MOMENT WITH SASS - SMALL SELF ADMINISTERED SCHEMES. THEY USE THE PENSION SAVINGS OF DIRECTORS OR MANAGERS TO INVEST IN THE COMPANY TO LET IT GROW, THIS COULD BE EXTENDED TO ALL STAFF. THERE ARE SOME CONCERNS ABOUT DEFAULT OF THE CORPORATION AND THE IMPACT THAT WOULD HAVE ON THE PENSION IF THIS TECHNIQUE WAS USED, BUT IF THE STAFF’S PENSION IS BASED ON THE BUSINESS IF THE CORPORATION DEFAULTS PENSIONS WILL BE LOST COMPLETELY. (9) & (10) PENSIONS INCREASE SAVING AND ALSO INVESTMENT GIVING BUSINESSES GREATER OPPORTUNITY FOR MORE BORROWING AND AS A RESULT REDUCES THE COST OF CREDIT. BUSINESSES CAN NOW RUN SMOOTHLY AND COVER OPERATING COSTS WITHOUT HAVING HIGH INTEREST PAYMENTS AND IT HELPS DECREASE THE STRAIN OF THE CREDIT CRUNCH.
Since the Fed's balance sheet changed direction September 2019 it has expanded by $400B, yet excess reserves is only up by $200B. Excess reserves data appear to lag the balance sheet data by a few weeks but still. A lot of the Fed new money creation does not appear to be deposited to earn the IOR at the Fed. Its leaking out This seems to be the Fed's intention, if they wanted to prevent short-term rates from spiking (the repo crisis) why not just offer unlimited funds and repos at their targeted rates? Why would any bank borrow/repo overnight from another bank at higher rates when it would be cheaper to do it with the Fed?
Lehman "only" needed $275 billion in repo to survive....if Lehman happened today, the Fed wouldn't hesitate to for a second to bail them out. Amazing how normalized all of this monetary insanity has become in the last decade.
The best bet is to just ride the wave. For experienced traders, the next few years should see gobs of money almost literally falling from the sky, as trillions of dollars chase all asset yields towards zero in a thunderous stampede. After last year's capitulation, the Fed is utterly trapped and will have no choice but to support the stock market more and more openly - they're already talking about implementing an explicit "yield cap" i.e. unlimited bid price floor on Treasuries. It raises the question of what you do with the gains when every single possible investment has a real yield of zero or less, but...
If you want to know what can make markets move especially for traders look at pension reforms and corporate bonds. There is a link between the too and they can help to eliminate risk. See the link the article below. http://morganisteconomics.blogspot.com/2019/11/money-migration-low-fed-interest-rates.html