Fed Rate Cut Paradoxically TIGHTENING Monetary Policy By Speeding Up QT?! | Rafi Farber

I myself was surprised that cutting rates could speed up the shrinkage of the Fed’s balance sheet in this way, but, you know, there’s a lot of moving parts here and a lot of shenanigans and a lot of things that are going to happen that the Fed never planned. Hey guys, Raf here from The Endgame Investor and today I’m going to talk about how the recent rate cuts and continued rate cuts will actually tighten monetary policy, drain bank reserves of about 85 billion dollars, or drain the reverse repos by the same amount, either or, or a combination of the two, to a total of 85 billion dollars, and can the banking system withstand that kind of quantitative tightening.

How is it that rate cuts will actually tighten monetary policy, shrink the balance sheet even further and faster, and cause a possible and eventual and inexorable banking crisis that is still ahead of us? Take a look at this. And a quick word from the sponsor of this video, The Dirty Man Safe, if you would like to hide your gold or silver or other valuables somewhere on your property or someone else’s property without telling them, probably don’t do that, but it’s possible. Then you can purchase a Dirty Man Safe whose code endgame10 at checkout for 10% off.

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You can take out your holdings at any time, provided there is a replacement for your loan, which there almost always is. Check out monetary-metals slash Rafi, link in the description below. Any case, what am I telling you to look at here? Why is quantitative tightening happening faster now that the Fed has cut interest rates? Well, this is the bank term funding program. Remember, it started in March, 2023 with the regional banking crisis. This is when the Federal Reserve allowed regional banks to flip their treasury securities to the Fed at par, irrespective of its market value.

They could loan them as collateral at par value to the Fed, which would give them cash so they wouldn’t go bankrupt in a banking crisis. That happened in March, 2023. You can see here it went from zero in this facility to about $80 billion in a month. These loans last for about a year. So you can expect, for example, since this facility began on March 8th, 2023, to April 5th, 2023, in that month, $80 billion. So therefore, in that month, a year later, March, 2024, to April, 2024, you would see this facility deflate by about that much because the loans come due and then the loans go back to the Fed and the Fed takes the money out of existence, and that is equivalent of quantitative tightening.

Now, this drop over here of about $9 billion from $94 billion to this week, September 25th, $85.941 billion. Why is there a drop there? Because if you go back a year, there is no significant rise in this facility on that week, right? It’s pretty much even like just a few hundred million dollars. What is the point? Why is this drop in the BTFB, the bank term funding program? Why is it happening now? And the answer is the rate cut. How so? Well, check this article out from Bloomberg. BNN Bloomberg Business Fed rate cut paves the way for banks to exit emergency facility.

You only have to just understand this very simple chart. Here, you have the balance of the BTFB. That’s the chart that I just showed you before, just in black instead of white. And this is the bank term funding program borrowing rate as of March 11th, 2024. The program closed on that day. There are no new loans being originated since March 11th, 2024. And the interest rate on that was 5.4 percent. This over here, this line is the last line, the last available interest rate. So banks are paying 5.4 percent on their bank term funding program loans.

And how much interest are they earning now that we have a 50-point basis point rate cut on their bank reserves? They’re earning about 4.8 percent. So therefore, they are earning 4.8 percent on their bank reserves to pay a loan that is 5.4 percent. That does not make sense. Ladies and gentlemen, that does not make sense. That does not make sense. It doesn’t make sense. What are they doing? They are taking their bank reserves from which they are earning about 4.8 percent and using it to pay back the bank term funding program for which they are paying 5.4 percent.

As long as rates were above this line, above the 5.4 percent, and they could earn more on their interest on bank reserves and they were paying on their bank term funding program loans, then it made sense to hold those loans and profit off the spread and keep the bank term funding program loans going until they expired a year later. But now that rates are lower, it pays to pay back the bank term funding program and what happens to that money. So it says here in BNN Bloomberg, these two paragraphs are key. If loans are largely repaid, liquidity will be removed from money markets, whether the money will come from the banks from the Fed’s overnight reverse repurchase agreement facility, that’s the reverse repos, or bank reserves will depend on whether banks rely on borrowing from the federal home loan banks or money market funds pulling cash from the RFP to absorb the increased supply.

In the end, it doesn’t matter if it comes from bank reserves or the it comes from bank reserves. And then if banks that paid back their BTFP funds with bank reserves need money, they will borrow it from other banks that have extra cash, maybe in the RFP facility and they will loan it out to those banks instead. And those RFP funds will become bank reserves. And so on the other way around, same thing, vice versa, wherever the money comes from, it’s fungible and it will be replaced in either the bank reserves or the reverse repo facility.

But by the end of this, very soon, you will have total quantitative tightening of about $85 billion as it makes no sense for these bank term funding program loans to remain outstanding. They will be paid down and there will be quantitative tightening to the tune of about $85 billion, which is the amount of dollars left in the BTFP. And let’s take a look where bank reserves are now to determine where they will be once the bank term funding program is entirely paid back. This is the amount of bank reserves in the system.

We are at $3.169 trillion. This is a low that we have not seen since October of 2023 when we hit $3.145 trillion. That was the last time we were below this line of $3.169 trillion. And when was the banking crisis, the regional banking crisis was around here at a level of March 2023, $3 trillion. And so take away about $85 billion from this total of $3.169 trillion. And you have below $3.1 trillion, which takes us very close to the crisis, the previous crisis point of $3 trillion. We’re getting very, very close.

And we have another thing to consider and that is the repo volumes. This is the amount of money traded every night between banks and it comes from bank reserves. It’s gyrating pretty wildly now from between $2.4 trillion and $2 trillion a night. It’s going to steadily go higher and higher and higher. And once the amount of loans being traded every night reaches about 83% of the total bank reserves available, we’re going to have our apocalypse somewhere around there. So this is another unintended consequence of QE and QT. Who would have thought that cutting interest rates would have sped up quantitative tightening, tightening the money supply, tightening the Fed’s balance sheet and tightening monetary conditions.

This is a recipe for disaster, which we all knew was coming anyway. I myself was surprised that cutting rates could speed up the shrinkage of the Fed’s balance sheet in this way. But a lot of moving parts here and a lot of shenanigans and a lot of things are going to happen that the Fed never planned. And in the meantime, we are waiting for that final banking crisis that could very well be triggered by this little faux pas. And once that final crisis is triggered, I expect gold and silver to crash very ephemerally for maybe a week or two.

And then the Fed to reverse course completely, print trillions of dollars, and then we’ll be in the endgame. We are months away. I’ve said that before. And I’ll say it again, I don’t see another way that the Fed can push this off for years at a time. We’re almost there. And once we’re there, you’ll want to already own and have your gold and silver. So get your dirty man safe, use code and game time at checkout for 10% off link in the description below, or store your gold and silver with monetary metals and get interest on your ounces in ounces or just store them for free.

And the monetary metals storage facility. This is Rafi with the endgame investor. And you can always become my patron on Patreon, where we learn biblical lessons in monetary policy and economics for as little as $3 a month for as long as the dollar survives. Because once it’s dead, I don’t think I will be trying to earn an extra $3 a month because it won’t be worth anything at all. Thanks for watching. [tr:trw].

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