“The Fed’s QT is over, and the Fed’s key rate cut is not far off” –

• “The Fed’s QT is over, and the Fed’s key rate cut is not far off” –

“Repo” or “RP” stands for “Repurchase Agreement” and refers to “re-purchase agreement” or “repurchase agreement”.

This refers to bonds issued on the condition that financial institutions that need funds borrow ultra-short-term funds as collateral for their bonds, give them a fixed interest rate agreed in advance with the principal after a certain period of time (short-term), and buy them again.

Since the bonds issued by financial institutions leave US government bonds and US government bonds as collateral to financial institutions to receive funds, there is no risk for financial institutions to issue repurchase bonds with these bonds as collateral.

Repo is also issued between central and commercial banks for liquidity control purposes.

On the contrary, there is “Reverse Repo (RRP or reverse repo)” as opposed to “Repo”.

“RRP” refers to QT (Quantitative Tipping) in which the Fed, which bought bonds, sells them to “financial companies or MMFs” to create liquidity, temporarily absorbing a lot of liquidity on the market.

However, the problem is that if this quantitative tightening continues, the Fed’s reserves will decrease.

Here, payment reserves, for example, if all of the customer’s deposits are used for loans, the customer’s deposits cannot be withdrawn when there is a customer’s request for payment.

Therefore, a system that requires a certain percentage of deposits to be held as reserves for customers’ payment needs is called the “payment reserve system”, and it is one of the important roles of the Fed to set the legal reserve ratio and keep banks’ reserves.

So when the Fed’s reserves fall, what happens?

First of all, interest rates in the short-term fund market in the Repo market soar, and failure to catch this could lead to a series of financial crises and bankruptcies for banks and companies.

However, the problem is that the Fed’s reserves are now falling sharply (see attached).

According to an analysis by Simon White, Bloomberg Macro Strategist on Jan. 10, 2024 (local time), the Fed’s “RRP” and “Reserve” combined with the RRP and Reserve at the end of 2023 shows that the Fed’s “RRP + Reserve” was $6 trillion (W7,800 trillion) from mid-2021 to the end of 2022, but is falling sharply to “$4.5 trillion (W5,800 trillion) by the end of 2023 (see attached).

This means that the US Federal Reserve’s payment reserves of “2 trillion won” have decreased, down about 25% from its peak in about a year.

So where did this money go.

Most of them were paid as interest on the U.S. federal government’s astronomical national debt.

For reference, as of January 16, 2024, the U.S. federal government’s national debt was “34 trillion dollars (approximately KRW 4.4 trillion).

So I often posted, “America is not far from ruined.”

So how will the Fed’s monetary policy change in the future?

In a word, I believe that because the US Fed has no money, “the US Fed’s quantitative tightening (QT) is over.”

And the Fed’s base rate cut is not far away, and I think it could be wide.

So why don’t the Bank of Korea lower its benchmark interest rate?