YouSaid · the spoken record

Lou Crandall

lines on the record: 94
first: 2023-04-10
most recent: 2023-04-10
sittings or episodes: 1
sources: podcast

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“Well Look, they're pros of what they do, but everybody likes a sounding board. And so, yeah, that's a conversation that I'll have from time to time.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Think about the stickiness of uninsured deposits is going to make banks want to look at a lot of alternatives. And it'll just be interesting to see how far along they are in the process of rethinking all of that.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Do they, one of the real questions is, I think for a lot of banks, is going to be whether they need to structure new ways of finding secured funding sources, are we going to develop new platforms for posting collateral against certain kinds of uninsured deposits? Are they going to try to securitize assets that could be taken off the balance sheet so that you can keep the risk exposure, but your overall direct funding is smaller? We may see banks looking to get involved in the repurchase agreement market. Can they replace uninsured, unsecured deposits with instruments that look more like a repo, but perhaps not with government securities? I think that the revolution in the way we”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“They know that those are temporary inflows. You really don't want them to force them to Cut back on their regular funding. You want them to keep their structural funding intact to the extent that they are just getting that overflow from the small banks or from vulnerable banks. Will they be allowed to just ride it out or will they have to apply leverage ratio constraints very rigidly But more broadly I'll be looking at the regional banks in just the atmospherics of it.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“For me, it's a question of atmosphere, and I'm actually going to be paying much more attention to the regional banks than to the G-SIBs because the G-SIBs appear all to have been liquidity beneficiaries. And what I want to hear from them is what are you going to be doing to get this stuff off your balance sheet? Is it creating liquidity, creating leverage ratio problems for you and how do you is it going to squeeze anything else out, which is a real concern. I'd love to know. Actually, here's one question I would ask Chair Powell, though we may know the answer from the bank reports by them, but has there been have banks supervisors been willing to exercise forbearance on leverage ratio constraints that to the extent That a large bank sees large inflows that would put them at leverage ratio levels they don't want to be at.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“I'm going to go with the same question on the day of every FOMC press conference. I huddle over the phone with a bunch of reporters trying to figure out what question to ask Charpal. And the problem is that what you want is a question he will actually answer. And he curates those answers very, very carefully and very well. On the subject of the banks, for me Like Joseph, that's going to be critical. And I will be tuning into the Chris Whalen podcast. I imagine he'll have some pretty strong takes. The interesting takes.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“I'm more interested in what happens with the commercial banks this next week. So there's a big narrative now that we're going to have a credit crunch because of what happened with Silicon Valley Bank. Banks are going to cut back making loans and that'll bring us towards a recession and so forth. And I'm not sure how valid that is. I want more clarity from the big banks to see how much what we've seen in the regional banks has impacted them.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Borderline and extension of the compliance department. The liquidity manager gets evaluated on how many red flags they have in the course of a quarter. Did we fall below this liquidity metric? Did we cross that line? Did we breach this threshold? They're extremely conservative and a very strong incentives never to breach any of their regulatory thresholds. So that change in the liquidity management culture in the banking system is really fundamental and it completely changed the necessary level of reserve balances.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Back in the day when liquidity was managed by funding desks, those funding desks were a profit center. Banks wanted to make money by getting a lower effective cost of funds and the Fed funds rate and the incentives to minimize interest costs, maximize trading profits was the same there as it was in the treasury dealership within the bank holding company today liquidity management”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“It's a really terrible way to run a financial system, to have banks lending each other hundreds of billions of dollars on an unsecured basis in the overnight market every single day and having to do that to ensure adequate intraday liquidity. So what we did was completely rewrite the... The liquidity management rules and banks themselves became much more conservative. And one's interest, once the interest rate on reserve balances became competitive, it was just a complete game changer that banks suddenly planned their liquidity needs, both their own internal liquidity needs and their externally imposed regulatory liquidity needs through reserve balances.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“So, what that meant is the banks had to manage liquidity by accumulating secondary reserves. Some of those were in the form of treasury securities, but treasury securities are not a perfect substitute because in a stress event, there's no such thing as a cash equivalent. There's just cash and everything else and treasuries settle on the next day basis. So what banks did was build up these huge networks of reciprocal Fed funds balances and banks were borrowing from each other to the tune of hundreds of billions of dollars in the overnight Fed funds market. And that provided them with liquidity because that money came back first thing the next morning unless it didn't.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Management varied hugely through the cycle inefficient ways. So Alan Greenspan in particular hated the reserve tax, not because he hated safety and soundness, but because he thought it was economically inefficient and tended to drive funds out of the regulated banking system into the shadow banking system. So Greenspan over a period of years essentially repealed required reserves that he kept cutting creating exemptions, lowering reserve ratios, reducing the aggregate amount to a level where he could still use it as his handle on the money market to move interest rates up or down by manipulating the supply of reserves, but in a way that wouldn't materially affect bank balance sheets.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Up until in the early days, the idea was that required reserves actually served a safety and soundness purpose, but especially after the Volcker years and double-digit interest rates, people came to realize that this was the wrong way to achieve liquidity objectives. It was overly costly. And the cost of liquidity.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“But more generally, the history of all, the big difference that has led to an entire structural revolution in liquidity management in the US banking system is the fact that the Fed now pays interest on reserves. Prior to the great financial crisis, they did not pay interest on reserves. They asked for the ability to do so repeatedly and were repeatedly denied. And so what that meant was that required reserves essentially implied what was known as the reserve tax that banks were foregoing interest because they had to hold sterile balances at the central bank as a liquidity reserve, while forcing them to hold sterile reserves as a liquidity backstop was obviously inefficient.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“And when you get to one of the things that happened in September 2019, one of the problems is that the aggregate minimum comfortable level is higher than the sum of each individual bank's estimates because there is always some maldistribution of reserves in the system. And if you get a maldistribution, some banks may not care that they're way over their level and other banks are suddenly kind of running along the edge. some banks start slowing down their throttling back their intraday payments it just propagates through the system and you get gridlock”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“On that one, one of the issues last time is that the Fed surveys were saying that you could go down to a trillion dollars in reserve. Those senior financial officer surveys, the really corny line I use about that is that those numbers are just a plan that somebody writes down in a sunny office on a summer afternoon. And as a great American philosopher, once said, everybody's got a plan until he gets punched in the nose.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“I still don't know the answer. You know, I think part of it is because post great financial crises, banks are required to hold a lot more cash at the Fed to protect themselves from liquidity quenches. So the regulators basically forced them to hold more cash. But in my own personal view is that I think there's a sizable disconnect between what the Fed thinks is the lowest comfortable level of reserves in the banking sector and what the banks think is their lowest comfortable level. So I say this because the Fed actually has all these surveys to banks asking them how many reserves do you need? And that number that comes back is always pretty low actually. I think a few years ago it was about a trillion dollars and so forth. I think the Fed suggests from some of their commentary suggests that they think it's about two and a half trillion dollars give or take. So I think there's a gap there that the banking sector is probably going to be”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Households. So let's say high net worth individuals who instead of paying 50 basis point fee to a money market fund decided to buy treasury bills directly. If that's the current setup, if the marginal buyer of bills is someone who banks with a commercial bank, then in the future, if there's a sudden surge of bill issuance that you can easily see a sudden drain. Cash held in the baking sector into the TGA and that could leave the banks in a sudden shock. So it's not something it's not a setup we've seen in the past simply because in the past Marshall Buyer has always been the money market funds. So it's definitely something interesting that we'll see play out in the coming months.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“That's a really good point. So, like Lou mentioned, if you are a bank, you have a checking account at the Fed and if you are the treasury, you also have a checking account at the Fed. If the Treasury were to suddenly issue a lot of bills, then money could go out of the banking sector and into the Treasury's check account at the Fed and that drains potentially drains reserves out of the banking sector. Now in the past when the Treasury issued a whole bunch of bills, it would be the money market funds that purchased them. So they would take money out of the reverse repo facility and instead buy bills and that money then would move out of the reverse repo facility into the Treasury's checking account at the Fed. But we've seen in the past few months in the data is that the money market funds haven't really been buying bills. They've been buying agencies as Lou mentioned earlier. And that could be in part because billiards are just not attractive compared to the reverse repo facility. The Martian buyer of bills seems to be”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Just because we get to October 1st, the debt ceiling impasse could stretch out all the way into 2024, that in the past there have been plenty of episodes where they can't agree on what the long-term fiscal compromise should look like, so they just keep kicking the can down the road. And December 15th happens to be a very popular date for setting a deadline for action just before the congressional recess. It would not be a surprise to see things get extended several times here. So we don't know when things will finally come to a head in the debt ceiling episode. But when they do, there's a very good chance that it's going to have a lot of technical implications for money market flows.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“I would say, though, that given that we've now sort of dressed up this issue as being a sort of crisis related, you have to be very careful about the signals you're sending. If you do start to tweak, a month ago, I would have been all in favor of the Fed, widening the spread by five or ten basis points the next FOMC meeting. Right now, I would just say, you know, leave that one alone for a while. Let's let this particular debate die down. But yes, in the second half of the year, let me rephrase that.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“It's been forced to economize on its cash balance. It has in the past and will again rebuild its cash balance as quickly as possible by issuing a ton of treasury bills in the weeks after a mechanically would draw the reserves draw cash balances out of bank reserve balances and into the Treasury's General account, we could go from a very solid cushion of surplus reserves on the eve of the debt ceiling action to an insufficient supply very quickly. So this is again getting back to the whole point about not the fact that I don't object in principle to the idea of widening the spread between the IORB and the RRP rates. I think it would be wise to be Moving in that direction over time because you want to start incentivizing funds out of the RP facility before you get to that particular disruptive adjustment.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Not my terms, the Fed's terms. As we get close to reserve stringency, we'll start to see little telltales in the financial system telling us that intraday liquidity is getting a little strained. However, we won't have a lot of time to process those telltale signals if reserve balances fall by say half a trillion in the space of six or eight weeks. And the mechanism there, as Jack suggested, is that the Treasury is being forced to operate with a much smaller cash balance at the Fed than it thinks is prudent. It thinks it ought to have $600 or $700 billion just in case there is a cybersecurity problem. It can't hold auctions for a week or two. There could be any one of a number of circumstances in which the federal government wants to have the cash on hand. To address problems immediately”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“So since the question is directed at me, I'll take it first. I'm sure Joseph would answer this in fairly similar terms. So, this gets back to the whole question of what the minimum comfortable level of reserves is. I said earlier that I thought we were well above that level. However, we could have a very, very sharp adjustment, and I'll get back to the details of this in a second. We could have a very, very sharp downward adjustment in the supply of reserves. And that might, again, earlier I was talking about the fact that as we get closer to the threshold of reserve stringency as opposed to reserve ampleness.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Only prioritize interest payments, prioritize some other categories, and then everything else just waits until enough tax revenues come in. I think that would be potentially economically very risky. But there's a fairly good chance that it could happen because the politics of it just seem to be pointing in that direction.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Timeline at all. But it is just a reminder that you really don't want to introduce artificial constraints on this stuff that could create very serious real world disruptions. So it's kind of sad when you think that the really optimistic view is that we won't face a really serious crunch until October 1st. Even in that scenario, the risk that we end up having to move to federal government payment prioritization is pretty high. The fiscal conservatives want to dig their heels in. They are not going to give McCarthy, the Speaker of the House, the votes that he needs unless he's shown that he's willing to be serious. And it's been demonstrated. We go into this episode pretty much knowing that it is possible for the Treasury to simply process payments on a first-come, first serve, well, no, not first, you know, just queue up payments.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“It would make an enormous amount of sense to align those two deadlines and have one big fiscal policy showdown and allow the Treasury to operate without serious constraints. I remember back in the after the Great Financial Crisis when the Dodd-Frank Act was being considered and they were discussing Title II systemic risk exemptions to allow the Treasury to lend money to the FDIC to bail out banks, the exemption that was used last month. The argument people were saying nervously, but what happens if that happens during a debt ceiling crisis and we can't do that? Well, gee, guess what? So as it turns out, the Silicon Valley and signature failures don't look like they're going to affect the debt ceiling.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“What the fiscal conservatives, especially in the House, want to achieve, is significant reductions in spending, but they haven't outlined those yet. And in all probability, I think they're not going to be able to until they're deeper into the appropriations process, which they would like to see wrapped up by the end of the fiscal year in September. There's been some discussion, and this strikes me as highly rational, and therefore I think it's unlikely to happen. But there's been some discussion about passing preemptively passing a short-term extension designed to expire at the end of September to align the debt ceiling deadline with the government shutdown deadline, that we have the separate process where if we don't have spending bills by October 1st, the government has to go into a partial shutdown.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“So right now there is a small but non-zero risk that we're actually going to run into a constraint in the second week of June, that that's a seasonal low point and the treasury's fiscal resources. I think they've got about $100 billion of clearance there right now in my projections. $100 billion could disappear very quickly given how large federal the federal budget is and how volatile the flows are. Best guess is that it really comes to a head in Late July or early August for technical reasons, that's where that becomes another period of seasonal where the seasonal risks are higher. Now, in all the things you've read about the budget negotiations, the point that keeps coming up is that it's very difficult to negotiate when one side doesn't really know what it wants yet, that what the”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“We'll get a much better fix by the final couple of days of April on where we are. But April tax receipts take a long time to process. Readers always ask me, why does it take the IRS two weeks to process all these checks? And the answer is the IRS has to process them in their own dedicated facilities But we'll find out at the end of April how strong or weak the April tax season was. It's going to be dramatically weaker than last year because we're not going to get a repeat of the just tidal wave of capital gains taxes we collected last year, but how much weaker nobody knows.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Honest God for What is it thirty years now on a regular basis? You get a small group of true believers, fiscal conservatives. And I'm in general a fiscal conservative. However, if I'm a member of Congress and I don't have the votes to actually achieve fiscal reform, my response is not to threaten to take the U.S. economy into a dark alley and bludgeon it to death unless you decide to change your votes to agree with me. It never achieves anything except it's a heck of a fundraising opportunity for a certain brand of fiscal conservative, but it is so counterproductive and just Anyway, okay, back to family show mode. So We could be. I have no idea how this is going to play out. The numbers, we're going to find out.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“I am assuming that this is a family show. So when I talk about the debt ceiling. I need to censor myself. It's not a family show, but yeah.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“And again, much of the growth that we've seen in prime funds in recent months has been in retail funds rather than institutional funds. And historically, retail funds have balances have been stickier. Just the way deposits that are associated with very convenient bank apps tend to be sticky at banks until they're not. If we had had a significant increase in institutional money fund, if we returned to anything like earlier levels, this would have been an ugly additional dimension of the turbulence in the last few weeks.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“For context, guys, during the Great Financial Crisis, there's a run on the prime funds and during March 2020, there was another run on the prime funds. So in response to the first problem with the prime funds during 2008, they had this huge money market fund reform thing. And it turns out it actually didn't work all that well because the prime funds broke again in March 2020. And so it would be, as Lou noted, look very poorly for The regulars would look very poorly if the pine funds got more inflows and ended up with having more problems later on.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“And if I could just follow up on that point, if you were to drastically reduce the availability of RP balances for banks, You would in fact, given that you, the limited supply of securities eligible to be bought by government money funds, you would probably encourage inflows into prime funds. And it's actually a really good thing the prime funds were still pretty small at the beginning of this episode because we've seen time and again that outflows from prime funds can be disruptive if the Fed had had to introduce for a third time a money market fund backup facility to support them in this episode, the congressional backlash would be rightfully very, very”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Funds that are able to invest with banks and offer a slightly higher yield. So if it's all rate driven, you would expect inflows, net inflows into those funds as well, but you actually have net outflows. The first outflows they've seen in several months, by the way. So I don't think toggling the rate will do anything to change this dynamic. It's mostly about think depositors feeling more secure with putting money in their banks.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“So I tend to think of the influencer into money market funds not so much rate driven this past month as more safety driven. So it seems like there are people who are panicking about their banks and they're just taking money out and moving from small banks to bigger banks and from the entire bank sector to the money market funds. The way I think that this is I think this is largely panic driven because if you look at a graph of government money market on assets over the past several months they've been you know just edging up slightly even as the Fed hikes raked aggressively to 4.5%. It's only since a couple weeks ago that we have a big surge into money market funds and that coincides with the panic in the Silicon Valley Bank. Another way that you can tell that it's panic driven is that and not rate driven is that you have outflows out of the prime money market funds who are the money”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“My answer to that is for the banks, for the fish that need the oxygen, if you don't catch the runoff in the RRP reservoir, it just flows all the way down to the ocean. It doesn't go back where you want it to go. The money is leaving the banks for reasons that are only tangentially related to the RRP facility. If you think the banking crisis is so severe that you need to cut the overall structure of money market rates to preserve bank stability, that's a different argument. And I would make the argument that what you should do is cut rates explicitly to do that, but doing it by making the ROP facility a less efficient calibrating mechanism just strikes me as being the wrong route to take.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“A metaphor, which is that banks are sort of like fish in a little pond, and the reverse repo facility is draining the water out of the pond. And if it continues, the banks are going to run out of water. And that's the American economy. So yes, this whole, you know, theoretically banks should have control of interest rates. That's all a nice theory. But in reality, the banks are bleeding and the fish need their oxygen. So what do you say to that, Lou?”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“I'm not sure exactly what the what part of it is that FHLB issuance is up and as a lot of the money that's gone into the money fund complex has gone into government and agency money funds that have that as an eligible asset. So the FHLBs have been recycling a lot of this cash back into the banking system.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“What happens in the bill sector tends to be self-correcting if people become uneasy about banks, then they want to flood into Treasury bills. But eventually Treasury Bill yields fall very low and you're making a significant sacrifice. You actually have to think about whether that's worthwhile or not, whether you're that concerned. If there's no elasticity in bills, you don't have to The argument is that it's a no-brainer. If what we have been seeing for the past year in terms of bank outflows had all been a flight to quality, then there would be a very real concern about the role of the RRP facility. But what we've seen since Silicon Valley, we haven't seen a big increase in the RRP facility. That's an entirely different phenomenon. And it doesn't seem as if the structure of The Fed's programs is exacerbating it.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“The fact that the money is pouring in is not due to the existence of that. That's sort of like blaming storms on the existence of storm drains. the things that are driving That are driving money out of the banks, that would still happen, even if it might happen a little bit less if the alternative was less attractive, but it still be happening. I do want to follow up on the whole question on Jack's point about the fact that bill rates would be more elastic. This has been Joseph, as you know, this has been part of the debate about the RRP facility from the beginning, that in the event of a flight to quality,”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“You be surrendering control of overnight rates and that there could be circumstances so dire where you need to do that. But the Fed has been very, very insistent on the fact that it wants to separate interest rate policy from financial stability policy in here. And the idea of easing the RRP rate by 15 or 20 basis points is a technical tweak wouldn't violate their monetary policy guidance, cutting it dramatically because you think the RRP facility is somehow a danger that would you be allowing financial stability concerns to override your monetary policy objectives. I just briefly want to go back to something Jack said earlier. He said correctly he said that You can see the RRP facility is just a bottomless pit, I think was the phrase. And that's true. Money can just pour in there endlessly.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“I wouldn't go quite that far. That captures the right spirit. But getting back to, this is why some people are... Suggesting that they cut the RRP rate all the way to 2%. If you widen the spread between the interest rate on reserves and the RRP rate to that level, what you'll end up with is market rates that are floating somewhere in the middle. And I have no idea whether it would be, if you cut the RRP rate by 250 basis points, I don't know whether commercial paper rates would come down 100, 150, 200, somewhere in there. But again, you would be surrendering.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Right, and cutting the reverse repo rate, but keeping the Fed funds rate at 4.75%, you're really cutting rates. Like they say, oh, we're not cutting rates. But what matters is the reverse repo rate. The Fed funds rate, that's just like something they teach college kids.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“But that really doesn't make any sense because, well, as we've just mentioned with Lou, that kind of violates a primary purpose of reverse repo facility. That's the control overnight rates. Then the Fed is not able to implement monetary policy. But more broadly speaking, is that if you look at money market rates, treasury bills, let's say repo and so forth, they all trade at a spread to the RP offering rate. So if you shift the RRP offering rate, you know, you kind of just shift the whole constellation of money market rates lower. You don't actually make the reverse repo facility less attractive. It kind of maintains its relative attractiveness.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“But only banks and certain, yeah, only banks can access certain educations can access the Fed's balance sheet directly and collect interest on reserves. Now, as you mentioned, Jack, some people think that, well, if you have all this money pouring out of the banking sector and going into the reverse repo facility, an easy solution for this would be to just cut the RP rate so that it's really low and so that money would stop flowing out of the banking sector and into the reverse repo facility.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Like Jack, as you mentioned, there's also another administered rate that the Fed has, and that's interest on reserves. That's the interest that banks get when they deposit cash at the Fed. Now that has a slightly different transmission mechanism. That's about controlling the minimum return that banks are willing to accept when they make a loan. So if you're a bank and you want to make a loan, what kind of interest rate are you going to offer your borrower? Well, it has to be in some respect. related to what you think the path of the Fed's overnight interest rate will be because otherwise you just leave cash on deposit at the Fed. These are slightly different because everyone can indirectly access the reverse repo facility.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“And logically, if you can invest risk free at the Fed at 6%, you wouldn't be willing to accept any other lower interest rate return from another investment. So that's how rates are controlled in practice.”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so the Fed conducts monetary policy today by moving the overnight interest rates. In practice, that's by moving the reverse repo facility rate. What that is, is basically if you are an investor, an investor really, the RP is a way that you can earn a risk-free return on an overnight basis. Now, you can't invest in RRP directly, but what you could do is you could put money in a money market fund who then has the privilege of investing in the RRP and that's really how the Fed controls interest rates right now. So let's say the Fed moves the RRP offering rate to 6%. That means globally anybody who has dollar cash in the world can indirectly access”
2023-04-10 · Forward Guidance · Lou Crandall & Joseph Wang: A Monetary Plumbing Masterclass · IDENTIFIED FROM THE TRANSCRIPT