Making Sense

The FOMC policy is out of the way. Let's recap the Fed Rate decision, key pointers from the Post Policy Conference and what I'm think about the Fed Policy going forward. Interest Rates were left unchanged 5.25% - 5.50% The Summary of Economic Projections showed 2024 GDP Growth being revised higher while U/R was revised 10 bps lower and Core PCE Inflation was revised 20 bps higher while leaving the FFR projections unchanged at 4.6%. Interestingly, the projections for 2025 and 2026 FFR were both revised 25 bps higher and a 10 bps increase to the longer run neutral rate. The longer run neutral rate was revised higher for first time since June 2022 - Is it a tacit acknowledgement by the Fed that Neutral Rates have moved higher as markets have been talking about it all along. There are 9 officials who see longer run FFR above 2.5% compared to 2 in the June 2022 policy. Refer to the table below for forward and long term projections. Interesting in the table above is the Implied M...

For the week ended 29 March 2023, Federal Reserve released the report on Factors affecting reserve balances. This report has gained particular significance post the collapse of SVB Bank. The report offers insights into the extent of liquidity stress in the system by providing data on facility usage by depository institutions. There is USD 11 bn reduction reduction in loan facility driven by a fall of USD 22 bn through the primary credit discount window and USD 11 bn rise from the Bank Term Funding program, a facility announced in the aftermath of banking crisis to allow institutions to borrow upto a period of 1 year on collateral which will be valued at par.  To just give a sense, on the rates for the facility usage ( as on 31 Mar 2023) Primary Credit 5% Secondary Credit 5.50% Seasonal Credit 4.80%  Bank Term Funding program 4.85% While the borrowing from the discount window / BTFP and other credit extensions is elevated, it has shown signs of stabilization as has other a...

BoC, BoE, BoJ, ECB and the Federal Reserve announced  announced an expansion in the frequency of USD swap line operations from weekly to daily.  Press Release: To improve the swap lines' effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations will commence on Monday, March 20, 2023, and will continue at least through the end of April. The network of swap lines among these central banks is a set of available standing facilities  and serve as an important liquidity backstop to ease strains in global funding markets , thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses. For the week ending 15 March 2023, the facility usage was to the tune of USD 472 mn. The facility is used extensively in times of severe stress as in during the covid crisis or the Global Fin...

Data released on  reserves held by depository institutions that were borrowed from the Federal Reserve through the Discount Window (DW), Paycheck Protection Program (PPP) Liquidity Facility (PPPLF), Bank Term Funding Program (BTFP) announced on Mar 12 and other lending facilities show a sharp surge in use of Federal Reserve Facilities. To put things in perspective, the Primary credit discount window as on 8th March was availed to the extent of USD 4.6 bn which surged to USD 153 bn post the SVB Crisis. If you look at the chart number 1 below, on the left hand side of the chart , you would observe the peak usage before the collapse of SVB Bank to the tune of USD 111 bn as on Oct 29, 2008.  The PPPLF is a covid era measure with nothing home to write about. The BTFP facility which became operational on 13th March 2023 saw usage to the tune of USD 12 bn  (Chart 2) . Other credit extensions rose from zero as on 08th March 2023 to USD 143 bn in the aftermath of the crisis  ...

US Treasury, Federal Reserve and FDIC in a joint statement announced decisive steps to protect depositor's money. 1. Depositors will have access to all their money starting Monday, March 13. 2. FDIC will complete the resolution of SVB Bank and any losses associated with the resolution will NOT be borne by the tax payer. However, Shareholders and Unsecured Debt holders will not be protected. 3. A similar resolution was announced for Signature Bank (assets of $ 110 bn) which closed on Sunday. 4. A separate additional funding facility was made available - " Bank Term Funding Program (BTFP)" - to eligible depository institutions to help banks to meet the funding needs of all their depositors.  The facility will offer loans of upto 1Y pledging US Treasuries, Agency Debt, MBS and other qualifying assets. These assets will be valued at par. 5. Treasury made available $ 25 bn from the Exchange Stabilization fund as a backstop to BTFP.  The risk sentiment recovered with S&P fu...