Week Ending July 30th, 2021

It was a mixed week for major stock indices. Stocks pulled back on Friday due to worries about slowing growth and spread of delta variant. Commerce department reported its advance estimate that GDP increased by 6.5% in second quarter, well shy of consensus estimate of 8.5% approximately.

I think markets will trade in narrow range going forward and investors should cut exposure to risky assets a little here and I also recommend using some kind of real hedge. As I am in the “persistent inflation“ camp , I have been hoping for some kind of hint on taper timeline from Fed’s July meeting. But again J Powell stuck to his longstanding view that recent rise in inflation is transitory. Powell also suggested in the press conference that Officials “deepened their deliberations over how and when to start tapering“ and “there is range of views on timing“.

I think there is no consensus in any shape or form among members. I think we have to wait till October this year at least to learn about the taper timeline. And if the inflation continues to surprise on the upside, policy mistake will become more unavoidable.

Fed launched domestic “Standing Repo Facility“ to control level of federal funds rate. This facility will conduct daily overnight repo operations against Treasury securities, agency debt securities and agency mortgage backed securities with maximum operation size of $500 Billion. Fed also launched repo facility for foreign and international monetary authorities. Federal Reserve will enter into overnight repurchase agreements with
Foreign intuitions against their treasury securities maintained in custody of Federal Reserve Bank of New York.

Minimum bid rate for both facilities is set at 25 basis points. The SRF is designed to dampen upward pressure in repo markets that may spill over to fed funds market. I think this facility will also help when Federal Reserve decides to unwind the bonds purchases. In 2014, when Fed stopped its asset purchases, the excessive reserves in the banking system began to shrink and banks were not willing to lend in the repo market. Banks will be able to hold more reserves when Fed decides to taper this time due to the standing repo facility. Moreover banks do not need to guess ample reserves required as banks will have access to SRF all the time.

Cut Exposure To Risky Assets A Little Here