As tensions between President Donald Trump and Iran escalate, the U.S. Federal Reserve has continued to inject fresh capital into private banks, offering $100 billion in overnight and 14-day repos on Tuesday. Meanwhile, a Rabobank strategist predicts the central bank will cut interest rates to zero in 2020, and former Fed researchers believe the Fed needs to create a “standing repo facility” that would allow financial institutions to convert securities into fresh fiat reserves whenever they wish.
Liquidity Injection Amid Geopolitical Turmoil
The world's attention is currently focused on the heightened conflict between the U.S. and Iran. Following the drone strike that killed Iranian commander Qassem Soleimani, safe-haven assets such as gold, oil, and cryptocurrencies surged in value. After Soleimani's funeral, Iran launched missiles, further escalating tensions. Yet amid the war games, the Fed has been aggressively stimulating private bank liquidity. The New York Fed has repeatedly cited significant demand for liquidity and a shortage of cash reserves in its emergency repo operations. For the past four months, private banks and bond dealers have been pledging their Treasury holdings as collateral for cash almost every few days.
On January 7, the Fed pumped nearly $100 billion into smaller financial institutions through $63.9 billion in overnight repos and $35 billion in 14-day repos. Since September 2019, the Fed has injected trillions of dollars into the banking system through repos and multiple interest rate cuts. The Fed is not alone; most global central banks are following its lead. Since early November 2019, more than 37 central banks worldwide have implemented stimulus and easing measures. The Fed has cut rates several times since September but now appears reluctant to reduce them further. However, Rabobank executive Philip Marey believes the Fed will cut rates to zero by the end of 2020. Moreover, some Fed officials believe the current monthly repo schedule is insufficient to support the faltering U.S. economy.
The Standing Repo Facility: A New Channel for Unlimited Cash
While other central banks discuss controversial easing tools like “helicopter money,” former Fed members have different ideas. During the last quarter of 2019, the Fed significantly increased its monetary interventions. At a meeting on December 10-11, Fed officials discussed implementing a standing repo facility. This facility would act as another arm of the U.S. monetary system, allowing banks and bond dealers to swap securities for cash whenever they need. The Federal Open Market Committee transcript notes: “Among the topics mentioned was the potential role of a standing repo facility in an ample-reserves regime, the setting of administered rates, and the composition of the Federal Reserve’s holdings of Treasury securities over the longer run.” Without a standing repo facility, the Fed currently announces repo offerings each month so dealers can plan ahead.
Former New York Fed President William Dudley also wrote about the subject, arguing in an opinion column that the Fed needs to implement a standing repo facility to strengthen monetary easing. Dudley noted that the autumn rate spike “reflects the difficulty in forecasting the demand for reserves given the changes.” He stressed: “[The Fed] should create a standing repo facility that is open to a broad set of counterparties confined to Treasury and agency mortgage-backed securities collateral. Such a facility would effectively cap repo rates. It would also address the potential problem of the Fed providing liquidity to primary dealers but primary dealers not lending the funds to other market participants that might need short-term repo financing.”
Who Owns the Fed? The Battle Over Control
The standing repo facility would allow borrowers to convert securities quickly and at any time. JPMorgan analysts have expressed strong support for such a facility. For decades, Federal Reserve board members have claimed that the Fed system is “not owned by anyone.” Yet JPMorgan's enthusiasm for the Fed's monetary easing policy reflects their influence over the central bank. Stockholders have controlled the consortium of modern central banking since its inception in the 17th century. Despite what the NY Fed states, the entity is owned and controlled by the 12 regional Federal Reserve Banks that serve specific U.S. regions. These banks—located in San Francisco, Kansas City, Richmond, Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Minneapolis, and Dallas—sell shares to thrifts and commercial banks in their districts.
The same financial families involved in the “money trust” (the House of Morgan) still control today's most powerful commercial banks. These banking families also leverage control over each Fed branch. For instance, in 1983 the NY Fed's top stockholders included Citibank, Chase Manhattan, Morgan Guaranty Trust, and Bankers Trust Company. As of November 2019, the largest shareowners of the NY Fed include JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, and Bank of New York Mellon. In other regions, commercial banks control other Fed branches: Bank of America is a major stockholder in Richmond, State Street has large shares in Boston, and Wells Fargo dominates the San Francisco Fed. It appears that the 12 Fed branches already function as separate standing repo facilities, and the Fed's announcement may be an attempt to divert attention from this reality.