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Who’s Borrowing and Lending in the Fed Funds Market Today?

The Federal Open Market Committee (FOMC) communicates the stance of monetary policy through a target range for the federal funds rate, which is the rate…

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Gara Afonso, Gonzalo Cisternas, Brian Gowen, Jason Miu, and Joshua Younger

The Federal Open Market Committee (FOMC) communicates the stance of monetary policy through a target range for the federal funds rate, which is the rate set in the market for uncollateralized short-term lending and borrowing of central bank reserves in the U.S. Since the global financial crisis, the market for federal funds has changed markedly. In this post, we take a closer look at who is currently trading in the federal funds market, as well as the reasons for their participation.

The Fed Funds Market

The federal funds (or fed funds) market enables depository institutions to directly trade central bank reserves in the U.S. In this market, depository institutions and other financial entities—mainly government-sponsored enterprises (GSEs)—borrow and lend funds on an uncollateralized basis, typically with overnight maturity. The fed funds market is key for monetary policy implementation and has historically played an important role in the redistribution of reserves across the banking system. Prior to 2008, reserves were in the tens of billions of dollars and the fed funds market was very active, with participants consistently borrowing, lending, and intermediating throughout the day to meet their statutory reserve requirements. Effective October 1, 2008, Congress gave the Fed the authority to pay depository institutions interest on their reserve balances. In addition, the Fed has expanded its balance sheet to support the U.S. economy—first during the global financial crisis and more recently during the COVID-19 pandemic—leading to reserves reaching $4 trillion in late 2021, as discussed in this post. In this new environment, the need to actively borrow in the fed funds market has waned. Daily trading volume dropped from around $150-$175 billion, or around 2 percent of commercial bank assets, prior to 2008 (as estimated in this post) to around $60-$80 billion per day in the 2010s, increasing to an average of $110 billion, or 0.5 percent of bank assets, per day in 2023.

With reserves elevated in the banking system, who is now borrowing and lending in the fed funds market? And why?

Borrowers in the Fed Funds Market

As the chart below shows, the main borrowers in the fed funds market are the U.S. branches and agencies of foreign banks (FBO branches). Since 2016, FBO branches have borrowed around $45-$110 billion per day, representing between 65 and 95 percent of the total daily volume in the fed funds market. FBO branches are the most common structure of foreign banking in the U.S., and they generally engage in activities similar to those of domestic banks.

FBO Branches Are the Main Borrowers in the Fed Funds Market

Liberty Street Economics line chart showing the average volume by borrower type in the fed funds market, measured in billions of dollars, between the fourth quarter of 2015 and the third quarter of 2023. The main borrowers are the U.S. branches and agencies of foreign banking organizations and domestic banks.

Sources: Federal Reserve Form FR 2420, Report of Selected Money Market Rates; authors’ calculations.
Note: The chart shows quarterly average federal funds volume by borrower type from the fourth quarter of 2015 through the third quarter of 2023.

Unlike domestic banks, however, most FBO branches are not insured by the Federal Deposit Insurance Corporation (FDIC) after amendments to the International Banking Act disallowed new branches of FBOs from obtaining deposit insurance. This regulatory difference has two important implications for why FBO branches borrow in the fed funds market: First, it limits their access to deposits—the main source of domestic bank funding—making fed funds an important source of their short-term funding. Second, since they do not pay the FDIC assessment fee, most FBO branches face an effective cost of borrowing fed funds that is lower than that of domestic banks. Lower funding costs give FBO branches an advantage over their domestic counterparts in arbitraging fed funds offered at rates below the interest on reserve balances (IORB) rate, as they can effectively earn a larger spread by borrowing fed funds and depositing the borrowed funds at the Fed. Furthermore, differences in regulatory requirements across jurisdictions make engaging in the arbitrage trade less costly and less capital intensive for FBO branches. Specifically, leverage ratios in foreign jurisdictions are often calculated as a period-end snapshot, as opposed to daily or weekly averages in the U.S., which allows FBO branches more flexibility to borrow between reporting dates and simply unwind their positions on month-end or quarter-end dates to maintain higher reported leverage ratios.

The chart above shows that domestic banks are also borrowers in the fed funds market. Borrowing by domestic banks ranged from $2.5 billion in late 2021 to $25 billion in mid-2019, representing between 5 and 35 percent, respectively, of the total daily volume of fed funds traded.

As shown in the next chart, their borrowing increases when aggregate reserves decline. This finding is consistent with results from the November 2022 Senior Financial Officer Survey (SFOS), where more than 70 percent of domestic banks responded that they were likely or very likely to borrow in unsecured funding markets—including the fed funds market—as a way to build liquidity if their level of reserve balances were to fall below a minimum threshold (see this summary of the SFOS results).

Fed Funds Borrowing Increases as Aggregate Reserves Decline

Liberty Street Economics scatter chart with fitted line showing the quarterly averages of fed funds borrowed by depository institutions, measured in billions of dollars. Borrowings by depository institutions increase when aggregate reserves decline.

Sources: Federal Reserve Bank of St. Louis, FRED database; authors’ calculations.
Note: Reserves figures are quarterly averages.

Who’s Lending in the Fed Funds Market?

Federal Home Loan Banks (FHLBs) are the top lenders in the fed funds market. The FHLBs are GSEs that support mortgage lending and community investments and are organized as cooperatives owned by their members. The eleven FHLBs raise funds in global markets through the sale of debt securities that they then lend to their members through collateralized loans (called “advances”), which represent around two-thirds of their total assets (see the FHLB financial reports). As the next chart shows, GSEs dominate lending in the fed funds market and are responsible for more than 90 percent of the total daily volume of fed funds traded.

FHLBs Are the Main Lenders in the Fed Funds Market

Liberty Street Economics line chart showing the average fed funds volume, measured in billions of dollars, by lender type between the fourth quarter of 2015 and the third quarter of 2023. Government sponsored entities dominate lending in the fed funds market and are responsible for over 90 percent of the total daily volume of fed funds traded.

Sources: Federal Reserve Form FR 2420, Report of Selected Money Market Rates; authors’ calculations.
Note: The chart shows quarterly average federal funds volume by lender type from the fourth quarter of 2015 through the third quarter of 2023.

Two primary factors contribute to FHLBs’ willingness to lend in the fed funds market. First, FHLBs must hold liquidity portfolios—partly to meet minimum regulatory requirements, but also to satisfy advances to their members. Fed funds are key instruments in such portfolios, along with interest-bearing deposit accounts and other selected short-term investments such as reverse repos. This means that FHLBs turn to the fed funds market to invest excess cash holdings. Second, unlike domestic banks and FBO branches, FHLBs do not earn interest on their balances at the central bank, which creates an incentive for them to lend at rates below the IORB rate. In turn, this incentive to lend at low rates triggers the arbitrage mechanism between fed funds rates and the IORB rate, making it a regular phenomenon rather than an anomaly.

Two additional points are noteworthy here. First, since FHLBs have access to the overnight reverse repo (ON RRP) facility that the Fed introduced in 2013, they are unwilling to lend at rates below the ON RRP rate. Second, since FHLBs face counterparty credit limits, the aggregate volume lent to a single counterparty is often limited (see here for details on these limits), which favors that a nontrivial arbitrage spread usually prevails.

The chart above shows that domestic depository institutions also lend in the fed funds market, but at very small volumes. This is due to their ability to earn the IORB rate, which disincentivizes them from lending reserves in the fed funds market when the clearing rate is below IORB.

Wrapping Up

The fed funds market has changed dramatically since 2008: The Fed expanded its balance sheet to support the U.S. economy, resulting in reserves in the banking system increasing substantially, and it also began paying interest on these reserve balances. Daily volume in the fed funds market has decreased substantially and market dynamics have evolved to capture arbitrage activity between FHLBs and branches of foreign banks.

Gara Afonso is the head of Banking Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Gonzalo Cisternas is a financial research advisor in Non-Bank Financial Institution Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.  

Brian Gowen is a capital markets trading principal in the Federal Reserve Bank of New York’s Markets Group.

Jason Miu is a capital markets trading associate director in the Federal Reserve Bank of New York’s Markets Group.

Joshua Younger is a policy and market analysis advisor in the Federal Reserve Bank of New York’s Markets Group.

How to cite this post:
Gara Afonso, Gonzalo Cisternas, Brian Gowen, Jason Miu, and Joshua Younger, “Who’s Borrowing and Lending in the Fed Funds Market Today?,” Federal Reserve Bank of New York Liberty Street Economics, October 10, 2023, https://libertystreeteconomics.newyorkfed.org/2023/10/whos-borrowing-and-lending-in-the-fed-funds-market-today/.

You may also be interested in:

How the Federal Reserve’s Monetary Policy Implementation Framework Has Evolved

Liberty Street Economics

A New Reserves Regime? COVID-19 and the Federal Reserve Balance Sheet

Liberty Street Economics

Who’s Lending in the Fed Funds Market? 

Disclaimer
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).

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Analyst reviews Apple stock price target amid challenges

Here’s what could happen to Apple shares next.

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March 12, 2024

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They said it was bound to happen.

It was Jan. 11, 2024 when software giant Microsoft  (MSFT)  briefly passed Apple  (AAPL)  as the most valuable company in the world.

Microsoft's stock closed 0.5% higher, giving it a market valuation of $2.859 trillion. 

It rose as much as 2% during the session and the company was briefly worth $2.903 trillion. Apple closed 0.3% lower, giving the company a market capitalization of $2.886 trillion. 

"It was inevitable that Microsoft would overtake Apple since Microsoft is growing faster and has more to benefit from the generative AI revolution," D.A. Davidson analyst Gil Luria said at the time, according to Reuters.

The two tech titans have jostled for top spot over the years and Microsoft was ahead at last check, with a market cap of $3.085 trillion, compared with Apple's value of $2.684 trillion.

Analysts noted that Apple had been dealing with weakening demand, including for the iPhone, the company’s main source of revenue. 

Demand in China, a major market, has slumped as the country's economy makes a slow recovery from the pandemic and competition from Huawei.

Sales in China of Apple's iPhone fell by 24% in the first six weeks of 2024 compared with a year earlier, according to research firm Counterpoint, as the company contended with stiff competition from a resurgent Huawei "while getting squeezed in the middle on aggressive pricing from the likes of OPPO, vivo and Xiaomi," said senior Analyst Mengmeng Zhang.

“Although the iPhone 15 is a great device, it has no significant upgrades from the previous version, so consumers feel fine holding on to the older-generation iPhones for now," he said.

A man scrolling through Netflix on an Apple iPad Pro. Photo by Phil Barker/Future Publishing via Getty Images.

Future Publishing/Getty Images

Big plans for China

Counterpoint said that the first six weeks of 2023 saw abnormally high numbers with significant unit sales being deferred from December 2022 due to production issues.

Apple is planning to open its eighth store in Shanghai – and its 47th across China – on March 21.

Related: Tech News Now: OpenAI says Musk contract 'never existed', Xiaomi's EV, and more

The company also plans to expand its research centre in Shanghai to support all of its product lines and open a new lab in southern tech hub Shenzhen later this year, according to the South China Morning Post.

Meanwhile, over in Europe, Apple announced changes to comply with the European Union's Digital Markets Act (DMA), which went into effect last week, Reuters reported on March 12.

Beginning this spring, software developers operating in Europe will be able to distribute apps to EU customers directly from their own websites instead of through the App Store.

"To reflect the DMA’s changes, users in the EU can install apps from alternative app marketplaces in iOS 17.4 and later," Apple said on its website, referring to the software platform that runs iPhones and iPads. 

"Users will be able to download an alternative marketplace app from the marketplace developer’s website," the company said.

Apple has also said it will appeal a $2 billion EU antitrust fine for thwarting competition from Spotify  (SPOT)  and other music streaming rivals via restrictions on the App Store.

The company's shares have suffered amid all this upheaval, but some analysts still see good things in Apple's future.

Bank of America Securities confirmed its positive stance on Apple, maintaining a buy rating with a steady price target of $225, according to Investing.com. 

The firm's analysis highlighted Apple's pricing strategy evolution since the introduction of the first iPhone in 2007, with initial prices set at $499 for the 4GB model and $599 for the 8GB model.

BofA said that Apple has consistently launched new iPhone models, including the Pro/Pro Max versions, to target the premium market. 

Analyst says Apple selloff 'overdone'

Concurrently, prices for previous models are typically reduced by about $100 with each new release. 

This strategy, coupled with installment plans from Apple and carriers, has contributed to the iPhone's installed base reaching a record 1.2 billion in 2023, the firm said.

More Tech Stocks:

Apple has effectively shifted its sales mix toward higher-value units despite experiencing slower unit sales, BofA said.

This trend is expected to persist and could help mitigate potential unit sales weaknesses, particularly in China. 

BofA also noted Apple's dominance in the high-end market, maintaining a market share of over 90% in the $1,000 and above price band for the past three years.

The firm also cited the anticipation of a multi-year iPhone cycle propelled by next-generation AI technology, robust services growth, and the potential for margin expansion.

On Monday, Evercore ISI analysts said they believed that the sell-off in the iPhone maker’s shares may be “overdone.”

The firm said that investors' growing preference for AI-focused stocks like Nvidia  (NVDA)  has led to a reallocation of funds away from Apple. 

In addition, Evercore said concerns over weakening demand in China, where Apple may be losing market share in the smartphone segment, have affected investor sentiment.

And then ongoing regulatory issues continue to have an impact on investor confidence in the world's second-biggest company.

“We think the sell-off is rather overdone, while we suspect there is strong valuation support at current levels to down 10%, there are three distinct drivers that could unlock upside on the stock from here – a) Cap allocation, b) AI inferencing, and c) Risk-off/defensive shift," the firm said in a research note.

Related: Veteran fund manager picks favorite stocks for 2024

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Major typhoid fever surveillance study in sub-Saharan Africa indicates need for the introduction of typhoid conjugate vaccines in endemic countries

There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high…

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There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high burden combined with the threat of typhoid strains resistant to antibiotic treatment calls for stronger prevention strategies, including the use and implementation of typhoid conjugate vaccines (TCVs) in endemic settings along with improvements in access to safe water, sanitation, and hygiene.

Credit: IVI

There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high burden combined with the threat of typhoid strains resistant to antibiotic treatment calls for stronger prevention strategies, including the use and implementation of typhoid conjugate vaccines (TCVs) in endemic settings along with improvements in access to safe water, sanitation, and hygiene.

 

The findings from this 4-year study, the Severe Typhoid in Africa (SETA) program, offers new typhoid fever burden estimates from six countries: Burkina Faso, Democratic Republic of the Congo (DRC), Ethiopia, Ghana, Madagascar, and Nigeria, with four countries recording more than 100 cases for every 100,000 person-years of observation, which is considered a high burden. The highest incidence of typhoid was found in DRC with 315 cases per 100,000 people while children between 2-14 years of age were shown to be at highest risk across all 25 study sites.

 

There are an estimated 12.5 to 16.3 million cases of typhoid every year with 140,000 deaths. However, with generic symptoms such as fever, fatigue, and abdominal pain, and the need for blood culture sampling to make a definitive diagnosis, it is difficult for governments to capture the true burden of typhoid in their countries.

 

“Our goal through SETA was to address these gaps in typhoid disease burden data,” said lead author Dr. Florian Marks, Deputy Director General of the International Vaccine Institute (IVI). “Our estimates indicate that introduction of TCV in endemic settings would go to lengths in protecting communities, especially school-aged children, against this potentially deadly—but preventable—disease.”

 

In addition to disease incidence, this study also showed that the emergence of antimicrobial resistance (AMR) in Salmonella Typhi, the bacteria that causes typhoid fever, has led to more reliance beyond the traditional first line of antibiotic treatment. If left untreated, severe cases of the disease can lead to intestinal perforation and even death. This suggests that prevention through vaccination may play a critical role in not only protecting against typhoid fever but reducing the spread of drug-resistant strains of the bacteria.

 

There are two TCVs prequalified by the World Health Organization (WHO) and available through Gavi, the Vaccine Alliance. In February 2024, IVI and SK bioscience announced that a third TCV, SKYTyphoid™, also achieved WHO PQ, paving the way for public procurement and increasing the global supply.

 

Alongside the SETA disease burden study, IVI has been working with colleagues in three African countries to show the real-world impact of TCV vaccination. These studies include a cluster-randomized trial in Agogo, Ghana and two effectiveness studies following mass vaccination in Kisantu, DRC and Imerintsiatosika, Madagascar.

 

Dr. Birkneh Tilahun Tadesse, Associate Director General at IVI and Head of the Real-World Evidence Department, explains, “Through these vaccine effectiveness studies, we aim to show the full public health value of TCV in settings that are directly impacted by a high burden of typhoid fever.” He adds, “Our final objective of course is to eliminate typhoid or to at least reduce the burden to low incidence levels, and that’s what we are attempting in Fiji with an island-wide vaccination campaign.”

 

As more countries in typhoid endemic countries, namely in sub-Saharan Africa and South Asia, consider TCV in national immunization programs, these data will help inform evidence-based policy decisions around typhoid prevention and control.

 

###

 

About the International Vaccine Institute (IVI)
The International Vaccine Institute (IVI) is a non-profit international organization established in 1997 at the initiative of the United Nations Development Programme with a mission to discover, develop, and deliver safe, effective, and affordable vaccines for global health.

IVI’s current portfolio includes vaccines at all stages of pre-clinical and clinical development for infectious diseases that disproportionately affect low- and middle-income countries, such as cholera, typhoid, chikungunya, shigella, salmonella, schistosomiasis, hepatitis E, HPV, COVID-19, and more. IVI developed the world’s first low-cost oral cholera vaccine, pre-qualified by the World Health Organization (WHO) and developed a new-generation typhoid conjugate vaccine that is recently pre-qualified by WHO.

IVI is headquartered in Seoul, Republic of Korea with a Europe Regional Office in Sweden, a Country Office in Austria, and Collaborating Centers in Ghana, Ethiopia, and Madagascar. 39 countries and the WHO are members of IVI, and the governments of the Republic of Korea, Sweden, India, Finland, and Thailand provide state funding. For more information, please visit https://www.ivi.int.

 

CONTACT

Aerie Em, Global Communications & Advocacy Manager
+82 2 881 1386 | aerie.em@ivi.int

Journal

The Lancet Global Health

Method of Research

Observational study

Subject of Research

People

Article Title

Incidence of typhoid fever in Burkina Faso, Democratic Republic of the Congo, Ethiopia, Ghana, Madagascar, and Nigeria (the Severe Typhoid in Africa programme): a population-based study

Article Publication Date

12-Mar-2024

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US Spent More Than Double What It Collected In February, As 2024 Deficit Is Second Highest Ever… And Debt Explodes

US Spent More Than Double What It Collected In February, As 2024 Deficit Is Second Highest Ever… And Debt Explodes

Earlier today, CNBC’s…

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US Spent More Than Double What It Collected In February, As 2024 Deficit Is Second Highest Ever... And Debt Explodes

Earlier today, CNBC's Brian Sullivan took a horse dose of Red Pills when, about six months after our readers, he learned that the US is issuing $1 trillion in debt every 100 days, which prompted him to rage tweet, (or rageX, not sure what the proper term is here) the following:

We’ve added 60% to national debt since 2018. Germany - a country with major economic woes - added ‘just’ 32%.   

Maybe it will never matter.   Maybe MMT is real.   Maybe we just cancel or inflate it out. Maybe career real estate borrowers or career politicians aren’t the answer.

I have no idea.  Only time will tell.   But it’s going to be fascinating to watch it play out.

He is right: it will be fascinating, and the latest budget deficit data simply confirmed that the day of reckoning will come very soon, certainly sooner than the two years that One River's Eric Peters predicted this weekend for the coming "US debt sustainability crisis."

According to the US Treasury, in February, the US collected $271 billion in various tax receipts, and spent $567 billion, more than double what it collected.

The two charts below show the divergence in US tax receipts which have flatlined (on a trailing 6M basis) since the covid pandemic in 2020 (with occasional stimmy-driven surges)...

... and spending which is about 50% higher compared to where it was in 2020.

The end result is that in February, the budget deficit rose to $296.3 billion, up 12.9% from a year prior, and the second highest February deficit on record.

And the punchline: on a cumulative basis, the budget deficit in fiscal 2024 which began on October 1, 2023 is now $828 billion, the second largest cumulative deficit through February on record, surpassed only by the peak covid year of 2021.

But wait there's more: because in a world where the US is spending more than twice what it is collecting, the endgame is clear: debt collapse, and while it won't be tomorrow, or the week after, it is coming... and it's also why the US is now selling $1 trillion in debt every 100 days just to keep operating (and absorbing all those millions of illegal immigrants who will keep voting democrat to preserve the socialist system of the US, so beloved by the Soros clan).

And it gets even worse, because we are now in the ponzi finance stage of the Minsky cycle, with total interest on the debt annualizing well above $1 trillion, and rising every day

... having already surpassed total US defense spending and soon to surpass total health spending and, finally all social security spending, the largest spending category of all, which means that US debt will now rise exponentially higher until the inevitable moment when the US dollar loses its reserve status and it all comes crashing down.

We conclude with another observation by CNBC's Brian Sullivan, who quotes an email by a DC strategist...

.. which lays out the proposed Biden budget as follows:

The budget deficit will growth another $16 TRILLION over next 10 years. Thats *with* the proposed massive tax hikes.

Without them the deficit will grow $19 trillion.

That's why you will hear the "deficit is being reduced by $3 trillion" over the decade.

No family budget or business could exist with this kind of math.

Of course, in the long run, neither can the US... and since neither party will ever cut the spending which everyone by now is so addicted to, the best anyone can do is start planning for the endgame.

Tyler Durden Tue, 03/12/2024 - 18:40

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