The Trillion-Dollar Price Tag for Treasury-Market Stability
In its semiannual report to Congress earlier this month, the Federal Reserve said that, “No notable effect on Treasury market functioning followed the expiration in March 2021 of temporary changes to the supplementary leverage ratio, which were implemented to ease strains in Treasury market intermediation in the initial weeks of the pandemic.”  This is technically correct, but substantively misleading.  While it’s certainly true that nothing untoward has since befallen the Treasury market, it’s also noteworthy that securing this happy outcome necessitated expansion of the Fed’s overnight reverse repo program (ONRRP) to almost a trillion dollars.  A trillion dollars – and the ONRRP could still get bigger – is no technicality nor is the ONRRP just some new curtain for a Fed window – it’s an unprecedented market backstop that increases moral hazard to levels yet unknown.