Following on from this post nearly a year ago I thought an update may be of interest.Clearly, the situation has not improved greatly since then and the reservations I expressed about this last year are still relevant today – but if this story proves correct it may be that the situation is to be resolved at least in the short run. At least it has not got notably worse.
The thing with the reverse repos, though, is that the money will eventually re-emerge into the systems as the deal(s) unwind, so this is only a temporary cut. Additionally, the paper that the fed would be issuing (if this is correct) will also normally be negotiable, so this is not as real a cut as it looks.
I am not sure if they intend to keep it that way (i.e. eventually allow all of that cash from the unwound repos to go back to the banks) or if they will be looking to unwind the position completely and return the monetary base to trend – i.e. about USD900bn, representing a long term withdrawal of about half of the current amount.
Either way, it looks like the gigantic experiment is set to continue for a little while yet – just with a little pause.
As for Australia – we could, by comparison at least, be said to be models of conservatism in monetary policy.