JPMorgan Blows Up The Fed's "We Can 'Control' The Crash With Reverse Repo" Plan

Not good reading.

A telltale sign of more liquidity issues on the horizon.


Zero Hedge
By Tyler Durden
12 July 2014

This is a big deal. On the heels of our pointing out the surge in Treasury fails (following extensive detailing of the market's massive collateral shortage at the hands of the unmerciful Fed's buying programs), various 'strategists' wrote thinly-veiled attempts to calm market concerns that the repo market (the glur that holds risk assets together) was FUBAR. Even the Fed itself sent missives opining that their cunning Reverse-Repo facility would solve the problems and everyone should go back to the important business of BTFATHing... They are wrong - all of them - as yet again the Fed shows its ignorance of how the world works (just as it did in 2007/8 with the same shadow markets). As JPMorgan warns (not some tin-foil-hat-wearing blogger with an ax to grind) "the Fed’s reverse repo facility does little to alleviate the UST scarcity induced by the Federal Reserves’ QE programs coupled with a declining government deficit." The end result, they note, is "higher susceptibility of the repo market to collateral shortages" and thus dramatically higher financial fragility - the opposite of what the Fed 'hopes' for.

Via JPMorgan,

Reverse repos do little to alleviate UST collateral shortage

This week’s FOMC minutes provided important hints about the Fed’s exit strategy. The interest on excess reserve (IOER) rate will play a “central role” during the policy normalization process while the overnight reverse repo facility (ON RRP) would play a “supporting role” by establishing a soft floor for money market interest rates. The Committee expressed concerns not only about the potential size of the reverse repo facility, which grew rapidly since testing began last September, but also about conducting monetary policy operations with non-traditional counterparties.

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