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Zero Interest, Limitless Repo and QE4: The Federal Reserve’s Market Operations Explained

The Federal Reserve is dropping rates to zero and offering trillions in liquidity to the U.S. financial system. What is the Fed doing, and how does it work?

The post Zero Interest, Limitless Repo and QE4: The Federal Reserve’s Market Operations Explained appeared first on Bitcoin Magazine.

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“Gradually and then suddenly.”


–Ernest Hemingway

“Your ATMs are safe, your cash is safe. There’s enough cash in the financial system and there is an infinite amount of cash in the Federal Reserve.”


–Neel Kashkari, President of the Central Bank of Minneapolis

The Federal Reserve’s market activity is reaching a fever pitch.

In response to a market bloodletting that seems to precipitate new record losses every day, the Federal Reserve has responded to a somewhat unprecedented crisis with its most thorough market interventions since 2008. 

Liquidity is drying up in the financial system, the economy is shutting down as COVID-19 arrests the global populace and the Fed’s only response at this point has been to pump cash into the system by buying up assets directly from banks and the Treasury, and lowering interest rates and reserve requirements to zero percent. If this fails to ballast the economy, negative interest rates may entrench themselves into our financial system (they’ve already arrived for Treasury Bonds).

The Federal Reserve’s market operations are ramping up by the day, and it’s using more tools simultaneously to “fix” markets than ever before. So what are these tools and how is the Fed using them? Where is this money coming from and where is it going?

Let’s get up to speed.

Started From the Repo; Now We’re Here

Despite some headlines and talking points that this crisis precipitated from the COVID-19 pandemic, the fact is, U.S. financial markets were suffering ailments of their own before this virus gripped the international stage.

They came in the form of repurchasing agreements, or repos for short. As I reported in September 2019, the Federal Reserve began open repo operations in response to rising interest rates in the overnight lending market; interest rates soared from the Fed’s target rate of 2 percent to as high as 10 percent.

Why did the rate rise above the Fed’s suggested, and usually closely followed, rate? Simple answer: There was a cash crunch and banks were reluctant to lend cash. The repo market finances short-term loans, with the maturity usually lasting a day, a week or two, or no longer than a month. Banks make these intraday loans to each other to cover their reserve requirements set by the Federal Reserve at the end of each business day. The Fed stepped in because banks weren’t lending to each other, so the banks with too little cash in the vaults didn’t have enough to cover their debts and obligations.

Cue the market operations that began in September and which continued until 2020, only to be revived by a new round of repo recently. From September 2019 to the end of 2020, the Fed financed $500 billion in repo operations. By March 12, 2020, the Fed announced it would conduct $1.5 trillion in repo. On March 20, 2020, it announced it would be offering $1 trillion in daily repo loans until the end of the month. That’s a trillion with 12 zeros, every day. 

Now, this doesn’t mean that banks will be borrowing $1 trillion every day. But this limit is so large as to basically guarantee unfettered liquidity. 

In my September coverage, I rhetorically asked if a limit exists. The Fed is showing us very clearly that one does not exist.

QE4: Zero Rates, Zero Reserves, Zero F***s

Repos are loans. The money that the Fed lends out in open repo operations, theoretically, is paid back under the agreed timeframe and banks must issue collateral to receive these loans. If the banks don’t pay back the loan, then the Fed keeps the collateral.

Since repos are basically loans and trillions of dollars in repos take place regularly in the bank-to-bank lending market, some would say the Fed’s operations represent business as usual, don’t have an outsized impact and aren’t the same as printing money.

Then there’s the counterargument that these repos are basically subsidies reserved for a financial elite. And, of course, even if the money is loaned and paid back, the cash has to come from somewhere. This is why you might hear folks call repo operations “QE-lite.”

But QE-lite was not enough, apparently, so the Fed is going whole hog with QE4: its fourth quantitative easing action since 2008.

Quantitative easing, or QE, is the process by which a central bank prints new currency by expanding its balance sheet. In the U.S., the Fed prints cash and buys bonds from financial institutions to drive interest rates down. When you hear someone rave about the Fed printing money, this is what they mean.

The intended effect is to ease lending and boost spending. When the Federal Reserve prints fresh cash, it then buys up bonds and securities from banks and financial institutions for low rates to flood the system with liquidity. In 2008, this was done with 0.25 percent interest rates, which only rose to 2.5 percent again by 2018, in just enough time for it to come tumbling down again.

QE is the means by which the Fed controls this interest rate. Banks don’t have to comply with the Fed’s target rate (aka the fund rate), but why wouldn’t they? The Fed is guaranteeing cash at a certain interest rate, so Wall Street follows the lead and adjusts their own accordingly.

In this latest installment of QE, the Fed dropped the fund rate between 0 and 0.25 percent. In its announcement on March 15, 2020, the Fed promised $700 billion in fresh capital. On March 23, the Federal Reserve Open Market Committee (one of the Fed’s primary bodies that oversees market operations) announced that it would be opening the floodgates for ceaseless QE: 

“The Federal Reserve will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions,” according to a press release at the time.

Once again, it’s clear that a limit does not exist. On top of this, the Fed also announced that it is indefinitely dropping reserve requirements to zero. This was in a bid to, as ever, stimulate spending and lending. Banks already held fractions of their deposits on hand; now they are required to hold nothing at all, and this coincides with shrinking daily withdrawal limits at major U.S. banks.

The Endgame Is the Endgame

Proponents of QE will tell you that the system works; after all, it revived the economy after ’08, right? Look at how much the stock market boomed!

Indeed, and look, too, at the result: the worst Black Monday since 1987 and the U.S.’s major indices had three years of gains wiped out in a matter of weeks. This is the Ron Paul argument: that the Fed’s interventions are creating massive debt bubbles that precipitate ever-increasing disasters every decade or so. Ironically, the Fed was created to mitigate panics, but the anti-Fed argument, at least, has it that the Fed is creating more havoc than it resolves. 

But even if you don’t buy that argument, it’s hard to side with the argument that QE creates salubrious or, at best, null effects. The usual, state-friendly talking point is as follows: Banks will buy the bonds back from the Fed when they reach maturity, and the Fed will either destroy this cash to annul the value created on the original loan or keep it for a rainy day. It all works out in the wash, so best not to worry, so to speak.

There’s a lot of “stuff” in the wash, though, and it’s becoming harder to keep track of all the debt and make sure everything is laundered properly. Indeed, the problem with QE is the unwinding phase — that is, ticking interest rates up slowly, easing the purchases of Treasury bonds until the Fed stops printing more money and buying these assets.

We saw this in action recently as the Fed’s balance sheet began to shrink in late 2017. It didn’t drop much — it went from the $4.5 trillion range in 2017 to below $3.8 trillion in August 2019 — this after it ripped from under $1 trillion in 2008 to the highs it set as a result of the Fed’s aggressive monetary policy following the Great Recession.

The Fed balance sheet is just that — a balance sheet that lists total assets under management. Like all modern banks, this includes debt. So you can partly look at the Fed’s balance sheet as one big obligation: It has ballooned in recent years because of unfettered QE. And it’s growing exponentially still. Currently, the Fed’s balance sheet is over $4.6 trillion, and when we see the dust settle from current market operations, we may see it touch $10 trillion.

The Federal Reserve is dropping rates to zero and offering trillions in liquidity to the U.S. financial system. What is the Fed doing, and how does it work?
Total Assets Under The Federal Reserve’s Management: Source

The unwinding that is meant to “reset” markets to pre-QE intervention is a fantasy. The weight of debt and obligations is simply too much; the market cannot return to equilibrium before the Fed has to rush to the rescue and provide easy liquidity once again. 

With a fiscal stimulus promising checks to every American and bailouts to businesses all across the spectrum, the Federal Reserve will be working overtime for the foreseeable future. For now, the important thing to note is that central bank intervention is just beginning. The market was weak before COVID-19 compromised it further, and we likely won’t see the full economic impact of the virus for a few months as the ripples of layoffs and supply shocks rock the global economy. 

The Fed will continue to print, governments will bail out businesses, and central banks around the world will inch their systems closer to modern monetary theory (but more on that later).

We are witnessing a paradigm shift in centrally planned governments; specifically, the groundwork that is being laid today will shape how governments and their monetary arms interact with a country’s populace and its economy. The trend is leaning toward strong interventionism and unrestrained control, especially in regards to managing money.

After all, the limit doesn’t exist. They’ve told us this themselves on national TV more than once, and I think the reality is finally setting in for the average citizen: just look at how popular the “Money printer go brrr” has become. 

This is not by accident. Indeed, “money printer has gone brrr” for quite some time and will continue to go “brr” for some time more. Now, though, taxpayers are starting to hear it, some for the first time. 

The louder it gets, the more they will question what it is and how it works.

The post Zero Interest, Limitless Repo and QE4: The Federal Reserve’s Market Operations Explained appeared first on Bitcoin Magazine.

Source: https://bitcoinmagazine.com/articles/zero-interest-limitless-repo-and-qe4-the-federal-reserves-market-operations-explained?utm_source=rss&utm_medium=rss&utm_campaign=zero-interest-limitless-repo-and-qe4-the-federal-reserves-market-operations-explained

Blockchain

Bitcoin Mining Company Vows to be Carbon Neutral Following Tesla’s Recent Statement

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It goes without saying that Tesla took center stage last week when the company announced it would no longer support bitcoin payments for its electric vehicles.

The message seems to have resonated, as Greenidge Generation Bitcoin Mining has vowed to be carbon neutral in 2021 and beyond.

Carbon Neutral Bitcoin Mining

After announcing plans to expand its Bitcoin mining operations last month, Greenidge is now looking to go entirely carbon neutral this year and in the future.

The company is committed to the cause, and it plans to invest in US-based renewable energy projects.

According to a recent press release, the company will also take part in the Regional Greenhouse Gas Initiative, which is a market-based program where participants sell CO2 allowances through auctions and invest the proceeds in renewable energy and energy efficiency.


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Speaking on the matter was Jeffrey Kirt, the CEO of the company, who said:

“Our bitcoin mining capability is already best-in-class and seamlessly integrated with our electricity generation that powers thousands of homes and businesses. By taking the bold and unique step of making or cryptocurrency mining fully carbon neutral immediately – as opposed to some distant date in the future – Greenidge is once again leading in environmental efforts.”

Musk’s Message Resonates

Greenidge’s announcement comes days after the leading electric vehicle manufacturer, Tesla, revealed that it would no longer support bitcoin payments. As a reason for its decision, the company cited environmental concerns related to bitcoin mining.

Elon Musk, the company’s CEO, confirmed and reiterated that he is bullish on crypto but so long as it doesn’t have a negative environmental impact.

The company also said that it’s looking for ‘greener’ alternatives to Bitcoin so that it can continue accepting crypto payments. This led to many speculations about which cryptocurrency it would choose. Shortly after, Musk said that he’s working closely with Dogecoin developers to improve transaction efficiency, causing many to believe that the meme-inspired coin might be Tesla’s choice.

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Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://cryptopotato.com/bitcoin-mining-company-vows-to-be-carbon-neutral-following-teslas-recent-statement/

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There is something different this time around for MATIC and ETH

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MATIC’s growth has been community and developer-driven. Trading at the $1.13 level and registering 27% gain in price in the past 24 hours, MATIC’s rally is an extended one, leading the altcoin season 2.0. However, there is something different this time around, MATIC is currently rallying alongside ETH, more as an ally, than a competitor. With ETH’s price above the $3700 level, and MATIC’s rally, the alt season has offered several opportunities, consolidating alts and rallies following closely after.

Here's why traders are bullish on MATIC and ETH

MATIC network || Source: Twitter

Since the release of the latest transparency report on Polygon Multisigs, Polygon has become more relevant and there is increased demand for the altcoin across exchanges. Multisigs are used by top projects that have the feature of updating smart contracts. This is not the case for Ethereum, since smart contracts on Ethereum are immutable by design ie. they can not be changed once deployed.

However, this feature also means that if there is an inherent error or potential exploit in the code, there is no way to fix it. Upgradeable contracts are needed and that’s where Polygon’s narrative fits in, making it a much-needed scaling solution and an upgrade on ETH.

The current network statistics for MATIC are looking bullish since there are over 65.8 Million total transactions in over half a million wallet addresses and at $10.4 Billion market capitalization. The trade volume has increased consistently since the beginning of 2021 and more buyers are lining up across spot and derivative exchanges.

The demand for MATIC and the number of transactions have increased and are expected to increase to the level of Ethereum before the end of the alt season. The increase in wallet addresses and unique users is a direct measure of MATIC’s demand as an L2 scaling solution for the #1 altcoin in the crypto market.

The competition with ETH is no longer as intense, considering the fact that ETH’s increasing popularity contributes to the network growth and inflow of investment to MATIC. MATIC’s transaction volume largely depends on ETH’s network and the fact that ETH needs a scaling solution despite the launch of L2, has led to a symbiotic relationship between the two altcoins.


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Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://ambcrypto.com/there-is-something-different-this-time-around-for-matic-and-eth

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Litecoin price prediction: Litecoin trades above $300, attempt to break below later?

TL;DR Breakdown LTC retests the $300 support overnight. Lower local low set at $320. Next support at $280. Today’s Litecoin price prediction is bearish as the market rejected further upside around $320 earlier today and currently moves lower to attempt to break below the $300 once again. The overall market trades in the red today. […]

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TL;DR Breakdown

  • LTC retests the $300 support overnight.
  • Lower local low set at $320.
  • Next support at $280.

Today’s Litecoin price prediction is bearish as the market rejected further upside around $320 earlier today and currently moves lower to attempt to break below the $300 once again.

Litecoin price prediction: Litecoin trades above $300, attempt to break below later? 1
Cryptocurrency heat map. Source: Coin360

The overall market trades in the red today. Bitcoin has lost more than 2 percent and trades around $48.900. Meanwhile, Ethereum is among the worst performers with a loss of more than 5 percent. Alternatively, Stellar (XLM) is among the best performers, with a gain of 5 percent over the last 24 hours.

LTC/USD opened at $300.11 today after a bearish close yesterday that resulted in another retest of the $300 mark. Over the past hours, LTC/USD rejected further upside, indicating that we should see another push lower over the next 24 hours.

Litecoin price movement in the last 24 hours

The LTC/USD price moved in a range of $297.59 – $323.76$, indicating a moderate amount of volatility. 24 hour trading volume has dropped by 7.15 percent and totals $5.2 billion. The total market cap stands at $20.6 billion, ranking the cryptocurrency in 12th place overall.

LTC/USD 4-hour chart – LTC prepares to break below the $300 support again

On the 4-hour chart, we can see moving lower over the past hours as bears attempt to finally break below the $300 mark. 

Litecoin price prediction: Litecoin continues trading above $300, attempt to break below later?
LTC/USD 4-hour chart. Source: TradingView

Overall, Litecoin price action momentum continues to be bearish as the market retraces after setting a new all-time high at $413 on the 10th of May. Previously, we saw Litecoin rally around 80 percent from the $220 major support area, indicating we could see a similar upswing over the following weeks.

First, Litecoin has to finish retracing from the current high. Support around the $300 mark was reached on Thursday. From there, Litecoin retested the $335 resistance and reversed to the $300 overnight. 

Over the past hours, LTC/USD moved higher and established another lower high around the $320 mark. Therefore, we expect Litecoin to attempt to push below this support over the next 24 hours. Once the $300 support breaks, the next support is located around the $280 mark. 

Since the $280 level previously acted as a very strong support, we should see the market price reverse back to the upside next week. From there, LTC/USD should move higher and try to establish another several-week upswing and set further all-time highs.

Litecoin Price Prediction: Conclusion 

Litecoin price prediction is bearish as the market continues setting lower highs over the past few days. LTC/USD currently attempts to move lower once again to break the $300 support. Therefore, we expect further downside over the next 24 hours, with the next support target at the $280 mark.

While waiting for further Litecoin price action development, read our guides on how to buy Ripple, mine Monero, and long-term Ethereum Classic price prediction.

Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.

Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://www.cryptopolitan.com/litecoin-price-prediction-2021-05-16/

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