So even when the data says otherwise, why do these various theories live on?
“People become wedded to their narratives, and move away from them very slowly, especially if the narratives relate to issues to which they are attached, like GameStop,” said Hersh Shefrin, a behavioral economist and finance professor at Santa Clara University. “Sticking with one’s narrative, stubbornly, is consistent with confirmation bias or motivated reasoning.”
Observers may cull fragments of data that fit with narratives that are “intuitively appealing,” as opposed to doing real analysis to determine whether there’s any evidence supporting their claims, according to Shefrin. “Just look at the salty language that appears to substitute for careful analytical thinking,” he said.
This may be why some RRP watchers are still insisting that an eventual collapse in demand for the Fed’s facility will somehow harm hedge funds and send shares of GameStop soaring once again, even though hedge funds are not counterparties with the central bank.
As far as the central bank itself is concerned, New York Fed Executive Vice President Lorie Logan noted in April that the facility was becoming “more central in the framework” of keeping short-term interest rates within the target range. Since then, Fed officials have been clear that it is working as designed.
“The ON RRP facility is working as intended, even as usage expands to new highs,” Logan said in an Oct. 14 speech. “Just as usage of the facility grew in response to downward pressure on money market rates, it should decline in response to increases in them.”
Even as the U.S. central bank starts tapering its asset purchases, usage of the facility is unlikely to decline dramatically until the Fed outright stops buying securities — and stops creating reserves. As supply of securities returns to the market, it should draw rates higher and pull participants away from the RRP.
“I just need QE to stop so RRP starts going down,” Tim said. “Once they start tapering, yields will start to move up a bit and money funds will start to move cash out of the facility. They’ll all have to find a new narrative.”
-With assistance from Boris Korby.
This article was provided by Bloomberg News.