I know what you're going to say. The Federal Reserve is boring enough without talking about arcane financial subjects like the "reverse repo market." Even the latter name is the simplified version.

But there is something going on that I don't think will be boring once it is finished.

The headline story has been that the Fed is lowering interest rates. But they are also supposedly reducing their balance sheet. Isn't that contradictory? Reducing their balance sheet takes base money out of the economy. But lowering interest rates encourages banks to lend more and thus create more money in the economy.

What in the Sam Hill are they actually trying to do?

Well, there is a third complicating factor. When the Fed printed that $5 trillion money tsumami 2020-21, it didn't just leave all that money sloshing around. Powell stealthily raised the "award rate" paid on reverse repos - a financial market with a balance normally close to zero where financial institutions can buy a goverment bond for a very short time - 24 hours to two weeks.

This is in effect like loaning money to the Fed, which doesn't seem to make a lot of sense. Normally, banks do this in order to put a government bond on their balance sheet overnight to keep their balance sheets tidy. But nothing about the last four years have been normal.

Instead of bumping along with a balance close to zero, the reverse repo market ballooned up to over $2 trillion as the Fed's balance sheet increased from $$3.7 trillion to $8.9 trillion. 

Since the Fed began supposedly "normalizing" its balance sheet, decrease it from $8.9 trillion to about $6.8 trillion as of this writing, it has also lowered the award rate in the reverse repo market. That combined with much higher interest rates has drained $2 trillion from the reverse repo market - almost dollar for dollar with the Fed's balance sheet reduction.

What does it all mean? I think it may mean something very significant. The reverse repo market is almost back to its normal balance around zero. That means the Fed will have a decision its been able to avoid for the past two years that could have an enormous effect on the economy and financial markets.

I break it down on today's episode of Tom Mullen Talks Freedom. Suggestion: Open the links I provide on the show notes page to refer to as you listen, if possible (please don't do this while driving lol). Once you see it, it will all make sense.

Watch Episode 194 on YouTube

Listen to Episode 194 here...

Tom Mullen is the author of It’s the Fed, Stupid and Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty, and the Pursuit of Happiness? 

 Tom