The Fed's repo amount and TGCR shows positive pearson correlation. How so?

Question

If I understand correctly, repo (https://fred.stlouisfed.org/series/RPONTSYD#0) → easier to borrow and the interest rate decreases → Tri-Party General Collateral Rate (TGCR) decreases → monetary liquidity increases.

And vice versa is true: reverse repo (https://fred.stlouisfed.org/series/RRPONTSYD) → more difficult to borrow and the interest rate increases → Tri-Party General Collateral Rate (TGCR) increases → monetary liquidity decreases.

It seems that repo amount and TGCR are negatively related and reverse repo amount and TGCR are positively related.

But I ran a Pearson correlation, which showed that the correlation between TGCR and repo is 0.847, with a p-value of 0.004. Here, I used monthly data (take a mean of every day in a month) and then took a log difference of the monthly data to get a relative change.

The result I got was counterintuitive. I then checked the correlation between lagged TGCR and repo amount. The result was not statistically significant. Anyone could give some insights into this? Why is the correlation between TGCR and repo positive? Is it supposed to be negative? Thank you!

Answer 1

You need to understand the context. In the fall of 2019, the TGCR began moving upwards, because the banking system became short of reserves as the Federal Reserve was conducting Quantitative Tightening. I think it’s fair to say that this was somewhat unexpected , because there was still approximately 1.5TN of excess reserves in the system. Once the Fed saw that the system was short of reserves, they began providing extra reserves through the Repo operation. So this positive correlation you are observing is due to the historical sequence of events.