Wednesday, February 24, 2010

Fed Exiting & Supplementary Financing

Recently, we talked about the possible scenario of the Fed exiting its MBS positions by transferring them over an extended period to Fannie May and Freddie Mac with the assistance of Treasury support of Fannie and Freddie. We have seen the Discount Rate increase as an exiting return to normal lending programs by the Fed.

Now, we have been quietly presented with the resumption of the Treasury's Supplementary Financing Program which was initiated in 2008 and shrunk in 2009 with the intent to unwind it.  In the words of the Fed, the purpose of the Treasury Supplementary Financing Program was to create deposits at the Fed which would "serve to drain reserves from the banking system, and will therefore offset the reserve impact of recent Federal Reserve lending and liquidity initiatives."  The resumption announced yesterday will increase the current $5 billion level to $200 billion and the first of 8 weekly $25 billion 56-day SFP bill auctions will begin today.

This will restore the SFP to the level maintained between February and September 2009.  This again raises the question of does the Federal Reserve intend to exit its enormous balance sheet positions by selling them in an orderly fashion in the future or does it have more creative plans in mind?  The Econobrowser correctly points out that the Fed could drain its reserves by selling MBAs, doing reverse repos, selling T-bills, or with the Term Deposit Facility.  Supposedly, the Fed wants more flexibility in managing its balance sheet.  This announcement comes at the same time the Fed is making its final MBA purchases for a total of $1.25 trillion and ceasing future purchases. The addition of $200 billion in deposits would certainly improve the Fed's balance sheet.  Or will it?

As the Econobrowser reports, there is a discrepancy in the the purchases of MBAs reported by the New York Federal Reserve and  the Atlanta Federal Reserve, which is reporting them at $152 billion more than New York.  Is this significant and a factor in the decision to re-expand the Supplementary Financing Program or is the SFP renewal just providing improved balance sheet flexibility to the Fed.  If the later, why are all comments anonymous and for background only?

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