Leaderboard 728×90
Leaderboard 728×90

Fed reverse repo reaches $2.3T, but what does it mean for crypto investors?

The U.S. Federal Reserve (FED) recently initiated an attempt to reduce its $8.9 trillion balance sheet by halting billions of dollars worth of treasuries and bond purchases. The measures were implemented in June 2022 and coincided with the total crypto market capitalization falling below $1.2 trillion, the lowest level seen since January 2021. 

A similar movement happened to the Russell 2000, which reached 1,650 points on June 16, levels unseen since November 2020. Since this drop, the index has gained 16.5%, while the total crypto market capitalization has not been able to reclaim the $1.2 trillion level.

This apparent disconnection between crypto and stock markets has caused investors to question whether the Federal Reserve’s growing balance sheet could lead to a longer than expected crypto winter.

The FED will do whatever it takes to combat inflation

To subdue the economic downturn caused by restrictive government-imposed measures during the Covid-19 pandemic, the Federal Reserve added $4.7 trillion to bonds and mortgage-backed securities from January 2020 to February 2022.

The unexpected result of these efforts was 40-year high inflation and in June, U.S. consumer prices jumped by 9.1% versus 2021. On July 13, President Joe Biden said that the June inflation data was “unacceptably high.” Furthermore, Federal Reserve chair Jerome Powell stated on July 27:

“It is essential that we bring inflation down to our 2 percent goal if we are to have a sustained period of strong labor market conditions that benefit all.”

That is the core reason the central bank is withdrawing its stimulus activities at an unprecedented speed.

Financial institutions have a cash abundance issue

A “repurchase agreement,” or repo, is a short-term transaction with a repurchase guarantee. Similar to a collateralized loan, a borrower sells securities in exchange for an overnight funding rate under this contractual arrangement.

In a “reverse repo,” market participants lend cash to the U.S. Federal Reserve in exchange for U.S. Treasuries and agency-backed securities. The lending side comprises…

..

Read More

About The Author

Related posts