The Fed Is Now Paying $500 Million To A Handful Of Banks Every Day, And Suddenly Has A Very Big Problem

Just over three months ago, on July 1, we were the first to point out a very inconvenient problem resulting from the Fed’s shockingly rapid rate hikes and policy tightening: with the Fed Funds Rate at 1.75%, the US central bank was now paying out nearly a quarter billion in interest every day on its Reverse Repo Facility and on bank reserves parked at the Fed.

Since then, the Fed has almost doubled the prevailing interest rate by 150bps (2x75bps) to 3.25%, and while there has been a modest decline in the total amount of reserves and reverse repos, which peaked at $6 trillion on Dec 31, 2021 and have since shrunk to $5.2 trillion…