Thursday, May 2, 2019

Can the Fed Control Overnight Rates?

The mechanism under which central banks peg overnight nominal interest rates typically relies on having a sufficiently large buffer of some asset or liability, then supplying that asset or liability inelastically at the desired overnight rate. Financial market arbitrage then looks after the rest - the pegged nominal interest rate effectively sets all short-term interest rates. Before the financial crisis, the buffer for the Fed was a stock of overnight repos, supplied at a rate that would peg overnight repo rates. But, that was a tricky game, as the Fed's ultimate interest rate target was the unsecured fed funds rate. The New York Fed had to make daily adjustments in its repo market trading strategy to account for the factors that might cause differences between market repo rates and the fed funds rate. So, with the advent of interest payments on reserves in October 2008, and the large Fed balance sheet, some may have thought that controlling overnight interest rates would be comparatively easy.

Under the floor system the Fed now operates under, the buffer is a large stock of reserve balances held by commercial banks. The Fed sets the interest rate on reserves, IOER, and in theory this should determine all overnight rates. That is, the Fed now pegs an interest rate on one of its liabilities, rather than one of its assets. But, as it turns out, arbitrage in US financial markets does not work like arbitrage in theory. In spite of the very large stock of reserves outstanding, setting IOER does not always do a good job of pegging overnight rates of interest.

When the Fed began "normalization," by raising its interest rate target, in December 2015, it established a "leaky floor" system, under which IOER would be viewed as an upper bound on the fed funds rate, and the lower bound would be the ON-RRP rate, an interest rate on reverse repurchase agreements, which the Fed would supply elastically in a daily auction. Initially, the margin between the IOER and the ON-RRP rate was 25 basis points. Until early in 2018, the fed funds rate fell between the ON-RRP rate and IOER. Overnight repo rates, along with short-term T-bill rates, tended to fall around the ON-RRP rate.

But, by early 2018, things changed. All short-term interest rates moved up to the vicinity of IOER, and the Fed's ON-RRP facility became effectively dormant. I discussed these developments in this post, in this one, and in this one. My interpretation of events is that, from 2009 to early 2018, collateral was scarce in overnight markets, making repo rates low relative to the fed funds rate and IOER. This scarcity was primarily due to the Fed's asset purchases (quantitative easing), and when the Fed phased out its reinvestment policy (replacing maturing assets on its balance sheet), the scarcity went away. The Fed blamed the Treasury, citing increased Treasury issues. It's possible that contributed to the easing of the collateral scarcity, but I'm not sure.

Recently, something unexpected has happened. These are daily observations on the fed funds rate and a Treasury repo rate:
This shows daily data from December 20, 2018, just after the last FOMC interest rate hike, through April 29. IOER is set at 2.4% through the whole period. You can see that, until recently, IOER was pegging the fed funds rate at 2.4%, but in recent weeks the fed funds rate has eased up to, to at most 5 basis points above IOER. The repo rate I've shown exhibits a similar pattern, though there's more volatility in the repo rate. As well, the repo rate exhibits spikes at month end - particularly pronounced at year-end 2018. The other two Treasury repo rates the New York Fed reports show essentially identical behavior.

For good measure, the next chart shows 1-month and 3-month T-bill secondary market yields.
So, T-bills are actually trading lower than fed funds recently - for the most part.

So, what could be going on here? It cannot be the case that reserves are somehow becoming "scarce." There's still about $1.5 trillion in reserves outstanding, and even extreme floor-system enthusiasts don't seem to think that $1.5 trillion isn't a lot. Why would banks forego a five-basis-point profit opportunity to lending on the fed funds market rather than holding reserves? What's changed in the last few weeks? Whatever is going on, the Fed is not controlling overnight rates as it anticipated, or the way it should.

There's an easy fix, however, and that's Andolfatto and Ihrig's standing repo facility (see also this post) - though Andolfatto and Ihrig (A/I) are offering the wrong reasons for the right action. The A/I argument is that a standing repo facility is necessary to make the Treasury holdings of large banks more liquid in the event of financial stress and wholesale funding outflows. Large banks hold liquid assets in line with their Dodd-Frank resolution plans, as well as to fulfill liquidity coverage requirements. One might think that Treasury securities are just as good as reserves for these purposes, but A/I argue to the contrary. The idea is that a stressed large bank might have trouble unloading a large quantity of Treasuries, or borrowing against them on the repo market. This argument might seem odd as: (i) A time of heavy stress for a large bank would typically be associated with aggregate stress. And - again typically - what happens in such episodes is that market participants are fleeing to safety, and safe assets include Treasury securities. So, there's not likely to be a problem in unloading Treasuries or in borrowing against them during a period of stress. (ii) It's the Fed's job to smooth fluctuations in short safe rates of interest. So, is there something wrong with the Fed's ability to control short rates?

Well, it appears there is something wrong with the Fed's ability to control short rates. I'm actually less concerned with the fed funds rate, and more concerned with repo rates, as the Fed should be. Those end-of-month spikes in repo rates shouldn't be happening. Here's what would fix overnight markets. The Fed should go back to the sort of repo intervention they did before the financial crisis - fine if they want to call this a standing repo facility, or whatever. Use the same counterparties as for the Fed's reverse repo facility - a broad-based approach is ideal. A/I are suggesting that the targeted repo rate be above IOER, but why not set it equal to IOER?

This then raises two questions: (i) Why the focus on the fed funds rate? Most central banks target a repo rate. (ii) Why the large balance sheet? The floor system isn't working.

Thursday, February 21, 2019

Balance Sheet News

The FOMC minutes for the January 29-30 meeting, released yesterday, contain some important information about the Fed's balance sheet, and plans for the FOMC's future operating strategy. Let's unpack this, to try to understand what they're up to.

The key information is in the section in the minutes on "Long Run Monetary Policy Implementation Frameworks." This section deals with presentations from staff economists (in part from the previous FOMC meeting), and discussion of that material. The minutes say:
The staff briefing also included a discussion of factors relevant in judging the level of reserves that would support the efficient implementation of monetary policy.
The key word is "efficient." It's not clear why we would just look at the level of an item on the liabilities side of the Fed's balance sheet to determine what would permit "efficient" monetary policy. It's also not clear what "efficient" means. But whatever it is, some people seem convinced that the Fed has almost attained it:
Some recent survey information and other evidence suggested that reserves might begin to approach an efficient level later this year.
So, what to do?
Against this backdrop, the staff presented options for substantially slowing the decline in reserves by ending the reduction in asset holdings at some point over the latter half of this year and thereafter holding the size of the SOMA portfolio roughly constant for a time so that the average level of reserves would fall at a very gradual pace reflecting the trend growth in other Federal Reserve liabilities.
Note that, at that point in the meeting, this is all coming from staff economists. There's a statement about the objective, which is efficiency, a conclusion that we're close to efficiency, and a recommendation as to what to do once efficiency is achieved. That is, later in the year, the Fed should start buying securities again, so as to maintain the size of the balance sheet at a constant nominal level, until further notice. Ultimately, the minutes indicate that the FOMC agreed to that.

What's going on? Total securities held outright by the Fed look like this:
So, in terms of the nominal quantity of securities held, there hasn't really been much "normalization" of the asset portfolio. And it's not like we would arrive at a different conclusion if we were to look at total Fed assets as a percentage of GDP:
That is, 20% of GDP is lower than the peak of 25% of GDP, but it's a lot higher than the pre-crisis 6%. If 6% was OK before the financial crisis, why is something a little less than 20% "efficient" now?

It might help to look at what is happening on the liabilities side of the balance sheet. Two key Fed liabilities are currency and reserves, of course, but there are also a couple of weird items that we wouldn't normally be concerned about, which are reverse repos of foreign institutions (including foreign central banks), and the Treasury's general account with the Fed. First, currency:
The stock of currency in circulation has more than doubled in nominal terms since before the last recession. Even more impressive is what we see if we look at the currency/GDP ratio:
U.S. currency held in the world has increased from about 5.5% of U.S. GDP before the financial crisis, to over 8% of GDP today. Thus, the Fed now needs an asset portfolio of 8% of GDP just to support the demand for U.S. currency. Still, that's far short of 20%.

With respect to those weird Fed liabilities, look at this:
First, what are those reverse repos, "foreign and international accounts?" Details on this are on the New York Fed's website. These are "accounts" held by "250 central banks, governments and international official institutions." The accounts are reserve accounts. The accounts are reserves during the day, and then become Fed reverse repos overnight, secured by securities in the Fed's portfolio. Thus, like the Fed's domestic reverse repo (ON-RRP) facility, this basically permits the Fed to pay interest on a reserve account to an entity which is not permitted to receive interest on reserves given the rules set up by Congress. Calling this "reverse repurchase agreements" is just a convenient fiction to get around the law. The key point is that these reverse repos have grown from about $50 billion before the financial crisis to about $250 billion today. What's driving that? The New York Fed says:
Like other factors affecting the level of reserves in the U.S. banking system, an increase in investment in the foreign repo pool results in a corresponding decrease in reserves. Given that a change in the size of the foreign repo pool alters the availability of reserves in the U.S. financial system, the New York Fed can manage the overall size of the foreign repo pool or individual account participation in the foreign repo pool in order to maintain orderly market or reserve management conditions. In addition, the New York Fed may choose to limit the overall size of, or individual account participation in, the foreign repo pool based on other factors, such as the amount of available securities held at any time in the SOMA.
This recognizes that more reserves held by these foreign entities means less reserves held by domestic entities, and that this could mess with the Fed's monetary policy actions. But, the quote tells us that the quantity of outstanding reverse repos of this type is purely discretionary. So, for some unspecified reason the Fed decided to increase the "foreign repo pool," and presumably there is no reason outstanding reverse repos could not be reduced to their pre-crisis levels or lower.

Next, consider the balance in the Treasury's General Account, in the last chart (in blue). It's become large, and it's highly variable. For any central bank, managing reserve balances of the fiscal authority at the central bank is an issue. Whenever tax revenue flows into the fiscal authority's reserve account, that reduces reserves held by the private sector. And, when the fiscal authority issues more debt, that also reduces reserves in private hands. So, if the central bank is running a conventional corridor system, as for example in Canada, with zero reserves held overnight, inflows and outflows in the fiscal authority's reserve account can thwart monetary policy, unless these inflows and outflows are offset. For example, the Bank of Canada conducts a twice-daily auction of government of Canada reserve balances. Some of these auctions involve secured funds, some are unsecured, and the funds are lent out at various maturities.

In the US, before the financial crisis, the Fed implemented monetary policy in a corridor system, where the lower bound on overnight interest rates was zero. In that system, part of the mechanism in place to deal with fiscal effects on reserve balances was the Treasury Tax and Loan Program, which parked tax revenues in private financial institutions rather than in the Treasury's reserve account. That solved part of the problem, and presumably the New York Fed was actively engaged in offsetting the effects of Treasury auctions and maturing government debt, which would be predictable on a daily basis. All of that is out the window, apparently, as part of the Fed's current floor system. Treasury balances are large - close to $400 billion currently - and highly volatile, with swings of up to $100-$300 billion over short periods of time. Apparently this amount of volatility is of no concern to the Fed currently.

In total, the weird Fed liabilities comprise roughly 3% of GDP, so this is significant.

What's left, in terms of Fed liabilities? Reserves, of course:
So, at the current rate of decline, reserves could be down to the vicinity of $1 trillion toward the end of the year. It appears that this is the number that the Fed people think is "efficient."

So, it appears the FOMC has decided: (i) that a floor system is better than a corridor system; (ii) that it might take $1 trillion in reserves to support a floor system. What are their arguments?

1. Transitioning back to a corridor system would be difficult. From the FOMC minutes, the argument seems to be that, given uncertainty about the level of reserves required to support the floor system, we would have to go through a period of volatile short-term interest rates in the transition period. Nonsense. The problem here follows from a poor choice of the Fed's interest rate target. If the Fed were to target a repo rate, rather than the fed funds rate, the problem goes away. Here's how to do it. For now, set the target repo rate equal to IOER (interest rate on reserves). Then, auction either repos or reverse repos at that rate - fixed rate full allotment.
2. Survey evidence indicates that the demand for reserves is large. The survey evidence comes from the Senior Financial Officer Survey. Basically, people in the banking industry respond to survey questions in a way that appears to indicate that their institutions would continue to hold large quantities of reserves, even if they were giving up 25 to 50 basis points by foregoing lending in the repo market, for example. If this were true, this indicates significant friction in overnight markets, and we should see that in market interest rates. Currently, IOER is at 2.4%, and the fed funds rate is 2.4%. The last date on which the fed funds rate was less than IOER was December 14, 2018. The repo rates measured by the NY Fed are currently 2.39%, 2.37%, and 2.37%, so right now financial arbitrage in overnight markets seems pretty good. So, I think the interpretation of the survey evidence is nonsense too.
3. Regulation has increased the demand for reserves. On this one, a speech by Randy Quarles is helpful. Quarles explains how Basel III regulatory changes regarding liquidity coverage ratios (LCR) were implemented in the United States. Basically, commercial banks need to hold sufficient liquid assets to buffer potential outflows of wholesale deposits. This is essentially a type of reserve requirement. But what's a liquid asset for regulatory purposes? It turns out that Treasury securities and reserves are equivalent, and some other assets are deemed less liquid, and get a haircut when the LCR is calculated. As Quarles says:
One could envision that as the Fed reduces its securities holdings, a large share of which consists of Treasury securities, banks would easily replace any reduction in reserve balances with Treasury holdings, thereby keeping their LCRs roughly unchanged.
It's not clear in Quarles's speech whether he buys that argument or not - he's just laying out the arguments. But I think that argument is powerful. A reduction in the Fed's balance sheet is essentially a swap of Treasury securities for reserves. In fulfilling the LCR, Treasuries and reserves are equivalent, and should be. Given a deposit outflow, a bank can reduce reserves, it could sell Treasuries, or it could borrow in the repo market with Treasuries as collateral. A financial system with a lot of Treasuries and not so much reserves is just as liquid as a financial system with not so much Treasuries and a lot of reserves. In fact, we could argue that the the first system is more liquid, since Treasuries can be traded widely while reserves are confined to those financial institutions with reserve accounts. I'd say this argument is nonsense too.
4. Short-term interest rates are more volatile in a corridor system than in a floor system.Again, this depends on what interest rate the Fed targets. Using the fed funds rate as a target has its problems, for two reasons. First, under its corridor system, the Fed did not intervene in the fed funds market - it was typically intervening in the overnight repo market. Essentially, the Fed varied the quantity of repos in order to hit a fed funds target, without being able to see the actual fed funds rate while it was intervening. You can see why that might not work so well. Further, fed funds lending is unsecured, so in times of financial market turmoil, the fed funds market is contaminated with risk. The Fed may be pegging the fed funds rate in such situations, but volatility in risk will then cause volatility in safe rates of interest. Again, these problems can be solved easily if the Fed were to target an overnight repo rate, as is done in many other countries. Here in Canada, the Bank of Canada has no problem with volatility of short-term interest rates, in running its corridor system.

Overall, the Fed is overly-focused on reserves, as if monetary policy implementation could be represented satisfactorily in terms of some static demand and supply analysis of the "market for reserves." That's very misleading. Any central bank has a lot of options in implementing monetary policy, but basically there are two broad approaches. Market interest rates can be targeted through variation in the central bank's lending, or in its borrowing. When the Fed was founded, the founders envisioned that the intervention would happen through lending, and that the key instrument would be the discount rate - with potentially different discount rates for different Fed districts. Roughly, the ECB intervenes by lending to banks in the Euro zone - it's key policy rate is its refinancing rate (at least when it's running a corridor and not a floor). Before the financial crisis, the Fed intervened day-to-day by lending on the repo market. Here's what that looked like:
So, repos outstanding fluctuated between $20 billion and $40 billion, for the most part. The Fed could have chosen to intervene by varying the quantity of reverse repos outstanding (on the borrowing side), and that would not have made much difference. In the current floor system, the Fed intervenes on the borrowing side, fixing the interest rate on reserves, and letting the private sector determine the quantity of reserves and currency to hold, given that currency can be converted to reserves one-for-one.

However the Fed intervenes, this involves varying the quantity of some Fed asset or liability, so as to peg the market interest rate on that asset or liability. This intervention is most effective if the Fed can essentially set that market interest rate, and then let the market determine the quantity. For that to work, the relevant market should be sufficiently liquid, and the Fed needs to have an adequate buffer stock of that asset or liability. Apparently, before the financial crisis, the Fed was successful in intervening with a stock of repos of from $20 billion to $40 billion. So why does the Fed think it needs $1 trillion in reserves outstanding to allow it to peg short-term interest rates by setting IOER?

As David Beckworth points out, between spring 2009 and spring 2010, the Bank of Canada ran a floor system with about $3 billion in reserves held overnight. As is well known, translating between Canada and the US involves multiplying by a factor of 10, so accounting for the exchange rate, that's about $40 billion in US reserves - in the ballpark of outstanding repos prior to the financial crisis. Canada has a very different institutional setup, but one would have to make the case that the US financial system has huge financial market frictions relative to Canada to justify a threshold of $1 trillion to make a floor system work.

But what's the harm in a large Fed balance sheet? The larger the balance sheet, the lower is the quantity of Treasury securities in financial markets, and the higher is reserves. Treasuries are highly liquid, widely-traded securities that play a key role in overnight repo markets. Reserves are highly liquid - for the institutions that hold them - but they are held only by a subset of financial institutions. Thus, a large Fed balance sheet could harm the operation of financial markets. As I pointed out here and here, there's evidence that such harm was being done. That is, if there's harm, it would be reflected in a scarcity of collateral in overnight financial markets - in market interest rates. Before early 2018, T-bill rates and repo rates tended to be lower than the fed funds rate, and the fed funds rate was lower than IOER. Now, all those rates are about the same. The Fed thinks the difference is more Treasury debt, but I think the end of the Fed's reinvestment program mattered, in that it increased the stock of on-the-run Treasuries. Whichever it was, apparently the quantity of Treasuries outstanding matters for the smooth - indeed, efficient - operation of financial markets, and the Fed should not mess with that. My prediction would be that, if we get to the end of the year and the Fed is again buying Treasuries, that we'll see repo rates and T-bill rates dropping below IOER. Watch for that.

Tuesday, January 1, 2019

The Fed and the New Year

Much of the first two years of the Trump administration was unexpectedly good for the Fed. Appointees to the Board of Governors - Quarles, Bowman, Clarida - are actually qualified to do their jobs, in contrast to most of the folks now inhabiting the executive branch. Trump may have been willing to ditch Janet Yellen (for no obvious reason other than that she was appointed by Obama), but he replaced her with a Fed insider, Jay Powell, who has more or less maintained the status quo. On some dimensions, Powell is an improvement on Yellen, particularly in the communications department. The FOMC's post-meeting statements are less wordy and belabored, the press conferences are more fluid, and the pressers will now take place after all 8 FOMC meetings in the coming year, which officially makes all meetings "live." The previous fiction had been that important Fed moves could happen at any meeting, but everyone knew this was not the case. Indeed, of the 9 interest rate hikes that occurred from December 2015 through December 2018, none came after a non-presser FOMC meeting.

The quiet central banking life ended for the Fed late last year, when Trump needed a scapegoat for a tanking stock market. The Fed is now a regular Presidential tweet subject, and Powell's job is on the line. Welcome to the club, Fed, you're now on Trump's radar screen. Perhaps Powell can take solace in the belief that, even if Trump could fire him, he won't, as a scapegoat can no longer serve his or her purpose if removed from the scene.

But is the Fed doing the right thing? And what's in store for 2019? In terms of achieving its Congressional mandate, as it interprets that mandate, the Fed is doing a great job. Inflation is on target:
The labor market is tighter than it's been since the BLS began collecting JOLTS data:
And real GDP is growing at a good clip, relative to the post-recession history:
Of course, we could have said the same thing a year ago, when the Fed was achieving its inflation target, the labor market was very tight, and real GDP was growing at a good clip. Yet, the FOMC raised the target range for the fed funds rate four times during the year, and seems set to do the same thing two more times in 2019 before it stops, providing the economy stays roughly in the same place. What is the Fed trying to fix, exactly?

One place we could look for enlightenment is in the public statements of John Williams, President of the New York Fed, and Vice Chair of the FOMC. Williams has been with the Fed for essentially his whole career. He's also an economist, and accustomed to explaining technical stuff to people who don't normally think about it. Two of Williams's recent speeches deal with low real interest rates and monetary policy normalization. The bottom line from those is that the Fed is normalizing, normalization is good, and the new normal will feature a long-run nominal interest rate that is lower than in the past, as the real interest rate has fallen, and is expected to stay low. So, Williams's views about the long-run real rate of interest inform how he thinks about "normal." Those views seem to be in line with the "dot plot" from the FOMC's December 2018 projections:
Recall that each dot is associated with an FOMC participant (no names attached), and represents that member's projection for the year-end fed funds rate. The median projection for the long run is 2.8% so, given the inflation target of 2%, the committee thinks the long run real interest rate is about 0.8%.

Estimates of the long-run real interest rate differ considerably, as coming up with such estimates requires a model, and there are many of those to choose from. Alternatively, a proxy for the overnight real interest rate is the three-month T-bill rate minus the core inflation rate:
As well, we could look at TIPS yields:
So, by those measures real interest rates on safe assets have been increasing. One reason for that is what the Fed has been doing. Conventional macro models tell us that, in response to a nominal interest rate increase, the real rate increases in the short run, and then falls, with inflation ultimately increasing one-for-one with the nominal interest rate as the long-run Fisher effect sets in. This might give the Fed cause for concern, as it tells us that inflation (absent the effects of changes in the relative price of crude oil) could overshoot the 2% inflation target, even if the FOMC does not hike the fed funds target range this year. In other words, 0.8% may be too high an estimate for the long run real rate - maybe zero is more accurate.

However, we may have good reasons to think that the real interest rate is rising for reasons independent of the Fed's interest rate policy. As I noted in a previous blog post, recent developments in the overnight financial markets suggest that the Fed itself may have been responsible for some downward pressure on the real interest rate. That is, the Fed's large scale asset purchases, typically thought to work by lowering long-term bond yields, may have contributed in an important way to a safe asset shortage, noted by John Williams as an important cause of low real interest rates (though Williams didn't mentioned the Fed's role in contributing to the shortage). Treasury securities and mortgage-backed securities are an important source of collateral in secured overnight credit markets, so by purchasing these securities and replacing them with inferior reserves, the Fed contributed to a collateral shortage. The phasing out of the Fed's reinvestment program, from October 2017 to October 2018, helped to relieve this collateral shortage, moving overnight repo rates and T-bill rates up to the vicinity of the interest rate on reserves. Fed officials typically attribute these developments to an increased supply of Treasury bills, but the timing relative to the phasing out of reinvestment is difficult to ignore. In any case, we could make a case that mitigation of the safe asset shortage is putting upward pressure on the real interest rate.

So, maybe a long-run real interest rate of 0.8% isn't far-fetched. The Fed appears to be getting skittish about further interest rate increases, and language about "accommodation" has been removed from the FOMC statements. The FOMC appears to be planning at most an increase of 50 basis points in the fed funds rate range over the next year, which is not likely to be a big deal in terms of real effects, and the FOMC is very likely to back off in response to negative data. Given what we know, I'm finding it harder to quarrel with what the Fed's doing.

Things to look out for in 2019:

1. The Fed's balance sheet: In the November 2018 meeting, the FOMC discussed issues concerning the long-run implementation of policy. Will the Fed conduct policy with a small balance sheet in a corridor system, as is done in other countries (Canada, for example), or continue with the current large-balance-sheet floor system? This will involve a decision about when to resume asset purchases. The Fed will be making this decision in consultation with the public - a new approach for them. It will be interesting to see how the public consultation works, but the Fed could look to the Bank of Canada for guidance on that. Every 5 years the Bank of Canada renews its agreement with the federal government (currently an inflation-targeting agreement), and precedes the renewal with extensive consultation with the general public, academics, and think tanks. That works well I think - it's a different institutional environment, but the approach could be adapted.

2. Appointments: There are currently two vacancies on the Board of Governors. Marvin Goodfriend was nominated, and approved by the Senate Banking Committee, but his appointment may be dead. Is Trump going to weigh in on the next nominations - Sean Hannity on the Board, or some such? Among the Presidents of the regional Feds, most have not been in office long, and there are no anticipated departures, so far as I know, so probably not much going on there.

3. Voting FOMC Members: Presidents of regional Feds who vote this year are: Williams (NY), Evans (Chicago), Rosengren (Boston), Bullard (St. Louis), and George (Kansas City). All of these, except Bullard, are currently hawkish. No reason to expect any changes in policy soon, but Rosengren and Evans will likely turn dovish at the first sign of weakness in the real economy.

Tuesday, August 7, 2018

Fed's Portfolio Manager Says Not to Worry

I ran across an interesting talk by Simon Potter, who is responsible for the System Open Market Account at the New York Fed. Potter is a powerful person in the Fed system, as he looks after the specifics of monetary policy implementation. His talk addresses issues that I discussed in this previous blog post.

The first order of business in the talk is the phasing out of the Fed's reinvestment policy. Recall that, after the buildup in the Fed's balance sheet that occurred from 2009-2014, the size of the Fed's asset portfolio, in nominal terms, was held constant by purchasing new assets as the existing assets matured. In fall 2017, the FOMC began a phaseout of the reinvestment program which will be completed this fall. After that, the size of the balance sheet will continue to fall until the Fed either decides reduction should cease, or it resumes asset purchases. There have been no public statements about whether the Fed might choose to maintain a significant stock of excess reserve balances in the financial system (retain the current floor system) or revert to the system in place before the financial crisis, perhaps modified in some fashion.

Potter provides a useful figure that shows what happens as reinvestment is phased out, and after:
That's interesting, as it shows us how the caps on balance sheet reduction work. When the FOMC set up the phaseout in its reinvestment program, it included specific caps (increasing over time as shown in the figure) for Treasuries and for MBS. The caps limit the quantity of assets that can mature without triggering some reinvestment. Ultimately, these caps won't bind in the near term for MBS, but you can see that they matter for Treasury securities. Intuitively, caps might seem reasonable. You can see in the figure that Treasury securities on the Fed's balance sheet mature in a rather lumpy fashion, so smoothing might appear to be an OK idea. Indeed, as Potter says:
The cap-based program to normalize the balance the mechanism by which the decline in the balance sheet is kept to a gradual and predictable pace.
But I'm wondering why this matters. The concern seems to be that if reserves fell by a large amount in a given month, this could be disruptive. Consider this though. Here's the Treasury's general account with the Fed:
Every time the balance in the Treasury's general account increases, reserves held in the private sector decrease by the same amount, everything else held constant. So, apparently reserves can move by two or three hundred billion dollars over a short time, and the Fed does not consider that disruptive, at the current time. So why do we need a cap on balance sheet reduction to prevent $20 or $30 billion of assets from running off? I think you could make a case that the caps are disruptive, as that means the Fed is engaging in on-again off-again purchases of on-the-run Treasury securities.

Next, there's an issue concerning the recent reconfiguration in overnight interest rates that I discussed in my previous post. Basically, the FOMC set up a system of monetary policy implementation with a target range of 25 basis points for the fed funds rate, bounded by the interest rate on reserves (IOER) on the high side and the interest rate on reverse repurchase agreements issued by the Fed (the ON-RRP rate), on the low side. But recently, the fed funds rate has moved up very close to IOER, and overnight repo rates have moved up close to IOER as well. Further, other than at quarter-end, there is essentially no takeup for the Fed's ON-RRPs, so the ON-RRP facility has become irrelevant - basically that "lower bound" on the fed funds rate isn't bounding anything.

What does Potter think is going on? Well, apparently he's sticking to the same story that appeared in the FOMC minutes for the June FOMC meeting, with some more details. That is,
...a shift in flows in the Treasury market had the effect of pushing both Treasury bill yields and repo rates higher in February and March. Figure 6 shows cumulative net Treasury bill issuance since the beginning of last year, as well as projections through the third quarter of this year as reported by a private-sector forecaster. The substantial run-up in net bill issuance over the past few quarters, along with other factors, contributed to notable growth in securities dealers’ inventory of Treasury securities, shown in Figure 7—inventories that likely required financing in the repo market.
Here's Figure 6, so you can see what he's referring to:
So, Potter's claiming that the reason that overnight rates tightened up around IOER is that there was a (possibly temporary) increase in the supply of Treasury bills, which increased the quantity of collateral available in repo markets, thus expanding the supply of overnight credit.

I'm not sure what to make of that argument, so I thought I would look at more details of Treasury issuance, and the composition of outstanding Treasury debt. Here's annual data on Treasury bills, notes, and bonds. If you're not familiar with the terminology, bills are 1-year maturity and less, notes are 2, 3, 5, and 10-year securities, and bonds are anything exceeding 10 years.
That data goes up to 2017, but currently the stock of bills outstanding is about $2.2 trillion, the stock of notes is over $9 trillion, and the stock of bonds is about $2 trillion. And that's a big difference from before the financial crisis - the average maturity of outstanding Treasury debt has increased considerably. Indeed, at the same time the Fed was attempting to reduce the average maturity of consolidated government debt outstanding, the Treasury was increasing it. So, a back-of-the-envelope calculation is that the Fed purchased about $3.75 trillion in long-maturity assets from before the recession through the end of 2014. From the last chart, it looks like those purchases were more than offset, in terms of average maturity of the outstanding debt, by what the Treasury was doing. So, if people try to tell you that QE worked in practice because it reduced the average maturity of Treasuries outstanding, that can't be correct - the combined effect of Treasury/Fed debt management was to lengthen average maturity. This point has been made by others - John Cochrane in particular I think - at least concerning an earlier period.

But the fact that the Fed's QE programs were not working the way Ben Bernanke envisioned - by reducing average maturity of the consolidated government debt outstanding - doesn't mean that these purchases didn't do something. Large scale asset purchases can have detrimental effects simply by replacing Treasury securities (useful collateral) with reserves, which are not so useful, at least as overnight assets. And flows seem to be important, as on-the-run Treasury securities are apparently a key form of collateral in repo markets.

We should check on the net flows of Treasury issuance, by type security. To provide some smoothing, I'll take 6-month moving averages:
Total net issuance of Treasuries will of course tend to move with the federal government deficit:
But the deficit numbers are seasonally adjusted. Part of what the debt managers in the Treasury department do is to smooth out effects due to lumpy incoming revenue by using Treasury bill issues as a buffer. For example, every February and March there are typically large issues of T-bills, which are then retired when you pay your income taxes in April. Thus, you can see in the second to last chart that T-bill issues (even though I've used moving averages) are quite volatile relative to notes and bonds. Net T-bill issuance has indeed been increasing on trend recently, but as I noted in my previous post, there's nothing so unusual about total net Treasury issuance, and good reasons to think that there's strong, if not increasing, demand for Treasuries in the market, in part due to regulatory reasons.

So, I'm inclined to think that it's the change in the Fed's reinvestment policy that's to blame for the tightening up in overnight interest rates - I don't think it's the Treasury's fault. But why won't the Fed admit it? Because it doesn't fit their narrative. QE was sold as a good thing - Bernanke claimed it would flatten the yield curve, reduce long bond yields, and increase spending. But it appears that QE may have sucked good collateral out of markets for secured overnight credit, thus reducing overnight secured rates relative to overnight unsecured rates. There's nothing good about that - it just reflects inefficiency.

Finally, Potter discusses what he calls a "technical adjustment" in administered interest rates. The range for the fed funds rate is 1.75%-2%, but currently the ON-RRP rate is set at 1.75%, and IOER at 1.95%, as there appeared to be some worry that the fed funds rate would trade above the stated range. Here's what's happened since the June meeting to the key overnight rates:
As you can see, the fed funds rate has settled in at four basis points below IOER, basically the narrowest persistent spread observed since interest rate hikes began in late 2015. But, in terms of control over the Fed's target interest rate, this looks like a big success. Under the current operating procedure the New York Fed can nail the fed funds rate target. The unexpected feature here, which Potter doesn't comment on, is that the ON-RRP program is irrelevant - the IOER is doing all the work.

An interesting feature of the last chart is that the repo rate, while much closer than it was to IOER and the fed funds rate, does not track IOER closely. That's a puzzle to me as, in other countries where central banks target a repo rate, for example in Canada, the interest rate on reserves essentially pegs the overnight repo rate (e.g. Spring 2009 to Spring 2010 in Canada) with a floor system.

Potter comments on the reasons for the "technical adjustment" of setting IOER five basis points below the upper bound on the fed funds target range:
The target range is an important feature of the FOMC’s public communications, and maintaining federal funds rates within it is therefore taken quite seriously. Public confidence in our ability to maintain rates within the target range is important for ensuring that expectations for the FOMC’s future policy stance are properly incorporated into the term structure of interest rates, and thereby appropriately affect financial conditions and the broader economy.
For me, the public confidence issue of whether the fed funds rate might exceed the top of the range by a few basis points is a minor one compared to what I've been discussing. No one in the Fed System, including the guy who implements monetary policy, can give a convincing story about why the whole target range approach still makes any sense, why the ON-RRP facility is now irrelevant, and why IOER, overnight repo rates, and the fed funds rate are now about the same. I'm feeling somewhat underconfident, and look forward to being enlightened.

Sunday, July 29, 2018

Should You Be As Excited About GDP Growth As Donald Trump Claims to Be?

In Friday's report on real GDP growth in the second quarter, the BEA reported a quarterly growth rate of 4.1%, which exceeds both the post-WWII US average growth rate of about 3%, and the average growth rate since the end of the last recession of about 2.2%. Trump seems to be claiming that recent GDP performance has been better than it was, and is hoping for future growth of 3% or more in real GDP. This seems more modest than his early 2017 claim that growth would proceed at 4% or more. What should we make of this?

It's always useful in these circumstances to remind yourself what is being reported. GDP is a flow - output per unit time - but the BEA reports a number which is seasonally adjusted at annual rates. That is, it's reported as if the seasonally adjusted flow had continued for a year, instead of just for a quarter. So, what we're supposed to get excited about is that real GDP for the second quarter is measured to be about 1% higher (seasonally adjusted) than it was in the first quarter. The average quarterly growth rate since the end of the last recession has been 0.55%, so we got an extra 0.45 percentage points in growth relative to the recent average, which might not seem so exciting.

Further, quarterly real GDP growth rates are quite noisy. There's substantial measurement error, due to imperfect raw data, and imperfect seasonal adjustment. Here are the quarterly growth rates since the end of the last recession - seasonally adjusted at annual rates:
The noise is obvious, I think. Over the last 36 quarters, growth rates have exceeded 4% on five occasions. With one observation exceeding 4% in his 6 quarters in office, Trump is doing about average in post-recession excess-of-4% terms.

We might look at year-over-year growth rates, which will smooth out some of the noise. Here's what that looks like:
Current year-over-year growth is 2.8%, which exceeds the post-recession average of 2.2%, but 2.8% isn't unusual in the second chart.

Finally, just to cover all the bases, we could look at the whole post-recession time series of real GDP, and the 2.2% trend:
So, real GDP is a little above trend, but there's nothing in the behavior of the time series to indicate a sustained upside departure from the 2.2% trend.

Thus, any hope that Trump has of seeing 3+% sustained real GDP growth is yet to be realized. What would we tell the Donald about the future, if he asked, and had the attention span required to take in the information? This is where we get into measures of potential GDP (see also this piece by Paul Krugman). What's potential GDP? Depends who you're asking. The OECD, in its "Glossary of Statistical Terms," defines potential GDP to be:
Potential gross domestic product (GDP) is defined in the OECD’s Economic Outlook publication as the level of output that an economy can produce at a constant inflation rate. Although an economy can temporarily produce more than its potential level of output, that comes at the cost of rising inflation. Potential output depends on the capital stock, the potential labour force (which depends on demographic factors and on participation rates), the non-accelerating inflation rate of unemployment (NAIRU), and the level of labour efficiency.
Whatever good reputation the OECD has, it didn't earn it by writing definitions, apparently. The OECD says that, if inflation is constant for an unspecified period of time, then we're observing potential output, whether the inflation rate is 5,000% per annum or 2%. That can't be right.

What's the goal here? The idea is to make a long-term forecast for the growth path of real GDP, over the next two to five years. Further, this forecast is going to be made under the assumption that there are no events that will happen over this future period that would cause a major disruption - no financial crisis, no recession. A crude approach would be to observe what is going on in the last chart, and forecast that real GDP will follow a 2.2% growth path. In the past, sometimes that approach would have worked well. For example, in first quarter 1960, we would have observed that average real GDP growth over the last 10 years was 4.1%. If we took that as a forecast growth path for the next 5 years, here's how we would have done:
Excellent! Dish out the advice in 1960, and in 1965 everyone's calling you a genius. Unfortunately, that won't work every time. In fourth quarter 2007, average real GDP growth over the previous 10 years was 3.0%. Forecast a 3% growth path five years ahead, and here's what it looks like:
Dish out that advice in 2007, and by 2012 people are laughing at you.

Potential GDP measures, such as the CBO's potential GDP measures, aren't so different from that, and the CBO made errors on the order of what is in the last chart in forecasting the recovery from the recession. The CBO's approach to long-term forecasting is more or less consistent with what conventional models of economic growth predict. In a neoclassical growth model with exogenous labor force growth, exogenous total factor productivity (TFP) growth, and constant returns to scale, the economy converges to a steady state in which output grows at the TFP growth rate plus the growth rate in the labor force. So, the CBO makes long-run forecasts based on an assumption about the aggregate production function, and projections for TFP growth and labor force growth. Here's actual year-over-year real GDP growth, and year-over-year growth in the current CBO potential GDP measure.
Currently the CBO potential year-over-year growth rate is 1.9%, and the potential growth rate is lower than actual growth has been, on average, as the CBO does not think that 2.2% growth can be sustained. Presumably that's mainly because unemployment has been falling as employment has been growing, since the end of the recession. Employment growth is ultimately bounded by growth in the labor force (employment plus unemployment), and labor force growth in turn is bounded by growth in the working age population.

To see what has been going on, let's look at employment growth (establishment and household survey measures) and labor force growth:
Since the last recession, payroll employment (establishment survey) grew on average at 1.5%, household survey employment grew on average at 1.2%, and the average labor force growth rate was 0.6%. Labor force growth (year over year) and growth in working-age population (also year over year) look like this:
Recently, labor force growth has increased somewhat to around 1%, while working-age population growth (no idea exactly how these numbers are constructed - growth rates look a little odd) has been on a secular decline and is currently in the neighborhood of 0.5%.

What about productivity? John Fernald, at the San Francisco Fed, has constructed TFP series for the United States that are adjusted for capacity utilization. As far as I know, this is the state of the art, though I know people get in heated arguments about this. Here's the growth rate in Fernald's annual TFP series, 1948-2017:
That's somewhat depressing. Since the recession, TFP growth has mostly been lower than the post-WWII average growth rate of 1.3%. The average since the last recession is 0.3%.

So, the most pessimistic scenario is that TFP continues to grow at 0.3% per year, employment grows at the working-age population growth rate of 0.5%, and we get sustained growth of 0.8% per year in real GDP. TFP growth, as we know from growth economics, is key though. Higher TFP growth means higher growth in real wages, which means higher growth in the labor force (labor supply effect - provided the substitution effect is large on the extensive and intensive margins). And then higher TFP growth and higher labor force growth both contribute to output growth. But, optimistically, supposing TFP grows at 1% (just short of the post-WWII average) and the labor force grows at 1%, that only gives us 2% growth in real GDP. To get to 3% or, more outlandishly, 4%, requires a serious miracle.

So, where could a miracle come from? Well, people are always inventing things, and the miracle could be the implementation of a new technology. There's plenty of debate about this, indicating that economists aren't much better at predicting technological innovations five or ten years hence than your average person. Are we going to get a government-induced economic miracle? From the current US government, that would be another kind of miracle altogether. Some people think that regulation is a big deal - excessive regulation leads to inefficiency and lowers TFP. But regulation can cut both ways. Remember the financial crisis? If we unwind financial regulation that was introduced to prevent crises, that of course won't help the average rate of economic growth. Some people think that taxation is a big deal. The US tax code could in principle be redesigned to collect the same amount of revenue in a far more efficient way, potentially increasing TFP and the size of the labor force. But it's hard to argue the the tax changes recently passed by Congress would do much in this respect. Further, tariffs are indeed taxes, and the way these ones work isn't going to grease the wheels of the US economy.

Governments can potentially increase productivity through policies related to public education. But apparently the US Secretary of Education thinks public education is a waste of resources. Governments can provide public infrastructure that makes the private sector more productive. Haven't seen much of that. Donald Trump likes to spend on the military and keeping people out of the country, neither of which is going to contribute to measured GDP.

It would be nice to be more optimistic, but it looks like what you see is what you get.

Sunday, July 8, 2018

Don't Fear the Inversion - It's the Short Rate That Kills You

Nick Tamaraos has a nice summary of issues to do with the flattening US Treasury yield curve, and the implications for monetary policy. Some people, including Tim Duy, and some regional Fed Presidents, are alarmed by the flattening yield curve, and the issue entered the policy discussion at the last FOMC meeting.

What's going on? While it's typical to focus on the margin between 10-year Treasuries and 2-years, I think it's useful to capture the very short end of the yield curve as well. I would use the fed funds rate for the short end, but that's sometimes contaminated by risk, so the 3-month t-bill rate, which most of the time seems to be driven primarily by monetary policy, seems like a good choice. Here's the time series of the 3-month T-bill, the 2-year Treasury yield, and the 10-year:
What people have pointed out is a regularity in the data. A flat or inverted yield curve tends to lead a recession. In the chart above, we're looking for compression in the 3 time series I've plotted. You can certainly see that compressions tend to lead the NBER-dated recessions (the shaded areas). To get a closer look at this, plot the difference between the ten-year yield and the 2-year yield, and the difference between the 2-year yield and the 3-month T-bill rate:
In this second chart, you can see that those two interest rate differentials go negative before recessions. But there are a couple of episodes in the sample, in 1996 and 1998, when the yield curve is pretty flat, but there's no ensuing recession. What's different about those two episodes is that (see the first Chart) the compression is caused more by long bond yields moving down, rather than the short rate moving up, as we observe in the cases where compression precedes a recession. If you were worried about an oncoming recession right now, based only on yield curve observations, you shouldn't be. All the recent flattening in the yield curve is in the long end. The margin between the two-year yield and the three-month T-bill rate hasn't been falling, as it did prior to previous recessions.

I think it's fair to conclude that what's going on in the data isn't a phenomenon related to the slope of the yield curve at the long end (2 years to 10 years), but at the short end. Recessions tend to happen when the short rate goes up a lot, and that's driven by monetary policy. As an alternative recession indicator, let's look at the real interest rate, measured by the difference between the three-month T-bill rate and year-over-year core inflation:
Typically, when the real interest rate moves from trough to peak by a large amount, a recession happens. That seems to work pretty well, except during the 1980s disinflation. So, for example, from trough to peak, the real rate moves about 420 basis points before the 2001 recession, and about 400 basis points before the 2008-09 recession. Recently, the movement from the trough to where we are now is about 200 basis points, so by that criterion, it's not time to worry yet.

What's the policy issue here? Well, apparently some members of the FOMC are starting to question whether continued rate hikes are a good idea, and are looking for arguments that will convince their colleagues to hold off. For example, in a talk at the end of May, Jim Bullard gave three reasons for holding off on interest rate increases: (i) inflation expectations are about where they should be; (ii) the Fed is achieving its goals; (iii) the yield curve is flattening. One measure of anticipated inflation is the breakeven rate - the margin between a nominal bond yield and the TIPS yield for the same maturity. Here are the five-year and 10-year breakeven rates:
Both of those have moved up above 2%, and the increase in the five-year breakeven is particularly important, as that's telling you more about near-term inflation expectations. As well, for good measure, the Philadelphia Fed's survey of forecasters gives a measure of anticipated CPI inflation for the next year:
That measure has also moved well above 2%, in line with 2% inflation - more or less - in terms of the Fed's inflation target measure, the PCE deflator. In terms of achieving its goals, the Fed is essentially nailing its inflation target, and the labor market is tighter than anyone would have imagined possible a few years ago. But what about the flattening yield curve, the third item on Jim Bullard's list?

There was a discussion about the flattening yield curve at the last FOMC meeting, as documented in the most recent FOMC minutes. Here's the relevant paragraph:
Meeting participants also discussed the term structure of interest rates and what a flattening of the yield curve might signal about economic activity going forward. Participants pointed to a number of factors, other than the gradual rise of the federal funds rate, that could contribute to a reduction in the spread between long-term and short-term Treasury yields, including a reduction in investors' estimates of the longer-run neutral real interest rate; lower longer-term inflation expectations; or a lower level of term premiums in recent years relative to historical experience reflecting, in part, central bank asset purchases. Some participants noted that such factors might temper the reliability of the slope of the yield curve as an indicator of future economic activity; however, several others expressed doubt about whether such factors were distorting the information content of the yield curve. A number of participants thought it would be important to continue to monitor the slope of the yield curve, given the historical regularity that an inverted yield curve has indicated an increased risk of recession in the United States. Participants also discussed a staff presentation of an indicator of the likelihood of recession based on the spread between the current level of the federal funds rate and the expected federal funds rate several quarters ahead derived from futures market prices. The staff noted that this measure may be less affected by many of the factors that have contributed to the flattening of the yield curve, such as depressed term premiums at longer horizons. Several participants cautioned that yield curve movements should be interpreted within the broader context of financial conditions and the outlook, and would be only one among many considerations in forming an assessment of appropriate policy.

What's going on here? The flattening yield curve is being used as an argument for a pause in interest rate hikes, so the people in favor of more interest rate hikes are looking for reasons why things are different now, and the drop in the margin between the 10-year yield and the 2-year yield doesn't mean what it used to. People may be able to come up with explanations about what's going on with respect to the 10-year vs. the 2-year Treasury bonds, but as I discussed above, that's not really important - it's what's going on at the short end of the yield curve that matters. The key question is: What are the benefits and costs of further rate hikes, given the current state of the economy? In evaluating the costs, we need to be concerned about the effects of these hikes on real economic activity. What's it take for the Fed to kick off a recession, and does the Fed really want to do the experiment to find out, if everything looks OK? As a side note, I thought the part of the FOMC discussion where the staff gives a presentation relating to an alternative indicator - the difference between the current fed funds rate and what the market thinks the future fed funds rate will be - was good for a chuckle. If the FOMC thinks the market knows more about what it's going to do than what it knows about what it's going to do, we're all in trouble.

What's the bottom line here? The case for continued rate hikes the FOMC has made is based on a faulty theory of inflation. The Fed thinks that tightness in the labor market will inevitably cause inflation to explode, and it thinks that increasing unemployment will keep inflation on target. But: (i) Phillips curve theory is not a theory; (ii) the central bank does not control inflation by controlling the unemployment rate; (iii) there is no such thing as an overheating economy. There is some question about what real interest rate we would see when the US economy settles down - supposing monetary and non-monetary factors don't change from what they are currently. Possibly that real interest rate - r* if you like - has increased somewhat from where it was earlier this year due to the phasing out of the Fed's QE program. But, given the current state of the economy, I think the onus should be on members of the FOMC who want further hikes to justify them, not the other way around.

Friday, July 6, 2018

Fed Balance Sheet Policy, and Treasury Debt Management

I happened to be entertaining myself, reading the FOMC minutes from the June 12-13 meeting, when I ran across this, in a discussion led by the people from the New York Fed who manage the System Open Market Account (SOMA):
The deputy manager followed with a discussion of money markets and open market operations. Rates on Treasury repurchase agreements (repo) had remained elevated in recent weeks, apparently responding, in part, to increased Treasury issuance over recent months. In light of the firmness in repo rates, the volume of operations conducted through the Federal Reserve's overnight reverse repurchase agreement facility remained low. Elevated repo rates may also have contributed to some upward pressure on the effective federal funds rate in recent weeks as lenders in that market shifted some of their investments to earn higher rates available in repo markets.
First, it seems a good sign that the Fed is paying attention to Treasury debt management. After all, the large asset purchase programs the Fed engaged in from late 2008 to late 2014 were a form of debt management. The Fed conducted assets swaps of short-maturity reserves for long-maturity Treasuries and mortgage backed securities, and swaps of shorter-maturity Treasuries in its portfolio for long-maturity assets. In so doing, the Fed wanted to change relative asset supplies at different maturities with the purpose of altering the term structure of interest rates - basically, flattening in the yield curve. Or, that was the theory, at least.

But in conducting its quantitative easing (QE) programs, the Fed appeared to be paying no attention to what the Treasury was doing. That's somewhat disturbing, as one of the Treasury's jobs is to manage the government debt - to decide when to issue debt, how much to issue, and what maturities to issue. If the Fed wants to manage the government debt, maybe it should be coordinating with the Treasury, or maybe it should ask Congress to add debt management to the Fed's job description.

But, back to the FOMC minutes. The quote is factually correct, in that there was larger issuance of Treasury securities in the first part of this year:
You can't quite see it in that chart, but it helps to take a 6-month moving average:
So, indeed, average issuance over the last six months took a jump of about $100 billion per month early this year, relative to last year. If you thought about that in the context of a reduction in the Fed's uptake of Treasuries and close substitutes, with the reduction in that monthly uptake currently capped at $30 billion, then it might seem like the Treasury's activities are more important. In my last post, I was blaming the cessation of the Fed's reinvestment program for the tightening up of overnight interest rates. That is, all overnight interest rates - repo rates, the fed funds rate - are close to the interest rate on reserves (IOER) currently, and that's a new phenomenon. In the quote above, it looks like the SOMA people are blaming the Treasury for this. A bit of an odd tactic that, as one might think the Fed would take the blame when their floor system starts to work the way it should.

But, that increase in new Treasury issues in January through May of this year didn't occur for no reason. When the Treasury has a month when a lot of government debt matures, it will issue more Treasuries to finance the principal payments and to fill the holes in financial markets left by the departing Treasuries. We should actually be more interested in net Treasury issue - the value of new securities sold minus the outflow from maturing debt. Here's what that looks like:
So, nothing particularly unusual going on there recently. Just for good measure, we'll look at a 6-month moving average as well:
That spikes up in the first part of this year, but it was also way down in the last part of last year. Also, note the quantities here. The cap on the value of securities in its portfolio the Fed will allow to mature is currently $30 billion, and that will increase to $40 billion in July, and finally $50 billion. The net flow of new Treasuries has averaged about $60 billion since 2014, so $30-$50 billion is large relative to that and, I think, consistent with the idea that it's the Fed's non-reinvestment policy that's mitigating a scarcity of safe collateral in the repo market. We have to account for mortgage-backed securities in the calculation, but I don't think that changes the story.