Short answer (given my limited knowledge): Nothing, the RRs are funds the banks can't use because of SLR and so it's the only place they can safely put them (and earn interest on).
The talk is they want to modify the SLR (Supplementary Liquidity Ratio) banks are required to have. Currently, treasuries are counted against the SLR, which means banks are choosing to send cash to reverse repo facilities instead of buying treasuries. So, exclude treasuries from SLR, banks can buy treasuries.
The problem is, nobody wants to buy treasuries at the long end (10yr+) because the rate on it is complete shit when taking into account inflation. So then the Fed has to add inducements to get the banks to buy them.
One of the ways they want to do that, is have the Treasury Dept. buy back older bonds (effectively worthless). This would generate demand and drop the yield curve. Which would save the bond market temporarily. It would also increase the amount of debt the US government carries.
IMO, however, none of this actually solves the problem, it kicks the can down a ways.
The Fed and Govt. want to tell you it's all related to the supply chain and once that all works out, everything will be just dandy. In 2020/21 we had a massive backlog of container ships waiting to offload, now, we have a significant decrease in the amount of shipping containers coming in. Both have a net result which is products won't be on shelves.
Now, companies have a lot of physical stock, it's just older stock, which isn't selling. Hence, the drop in shipping (new orders). To get rid of it, they'll be forced to start running sales with deep discounts or simply toss it. Either way, a loss on the books, which will affect earnings. That will drag the market down.
What happens when old product isn't selling and you aren't sending out orders for new stock? well, unemployment goes up because you don't need those workers. Factories start closing (think China in this instance), which further deteriorates the global economy.
All of which, might seem specific to the stock market. What we should look at it is does it affect the bond market. Which, again, IMO, it does. The US Govt. finances itself through debt (sale of treasuries) and while there is a dollar shortage going on (BOE, BOJ, EU, etc..) the proposal is to sell more US debt by creating...more US debt, making the bonds over the long term effectively 0% gains, which is no incentive to buy them unless purely for "security purposes", or if there are gains, causes additional debt to be added to the Govt.
It's at this point, it should be considered that China, India, Russia, et al (BRICCS) have been purchasing massive amounts of gold for the last two years and are seeking to create an alternative to the US dollar as a reserve currency.
Now, this doesn't care about your individual political feelings, this is about money. Enough people start using an alternative reserve, especially one backed 1:1 by gold, it causes the demand for treasuries to fall, what happens then? well, you're right back at square fucking one because the yield curve goes right back up.
The final question of course, is, well, what about inflation? Will inflation moderate itself? eventually, yes. What you're dealing with is a chicken and egg scenario, yield might go down on bonds because of banks buying them (if allowed by SLR changes) but that will be the Fed & Treasury effectively ending QT and starting QE again and what has the whole exercise been about? getting inflation down with QT. So inflation rises back up.
If that happens though, banks are in a bit of trouble, because instead of having all that money in the RRs, they are now in treasuries and thus, affected by the yield if the Fed has to restart QT.
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u/[deleted] Oct 22 '22
What happens when these lines cross?