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<blockquote data-quote="Dissimilarty" data-source="post: 1513590" data-attributes="member: 23453">In a repurchase agreement, the &quot;banks&quot; can be either the lender or the borrower.&nbsp; In a reverse repo, the fed is the borrower and the banks are lenders.No.&nbsp; The fed has two policy goals.&nbsp; Price stability and full employment.&nbsp; Their main tool is interest rate manipulation.&nbsp; The fed doesn't &quot;need&quot; to borrow, rather there reasoning is to drain some of the reserves and put a floor on how far interest rates can fall given all of these reserves.I don't believe anyone knows exactly what happened in 2019 or why.Not really.&nbsp; Again, the Fed basically said to these big banks &quot;In order to keep interest rates where we want them, we will borrow from you at x% if no one else will.&quot;&nbsp; Like it or not, this is exactly what the Fed was created to do.Yes, but if I didn't make it clear earlier, this is all linked back to the past 10 years of quantitative easing.&nbsp; Much of banking at this level is really just accounting.&nbsp; If you look at the &quot;Bank Reserves&quot; chart I posted going back for twenty years, you will see them nearly completely stable until 2010ish when the fed started buying these assets.&nbsp; When the Fed buys an asset in the open market they essentially &quot;create&quot; bank reserves, eg.&nbsp; Bank A has $10 &quot;money&quot; and $10 bond.&nbsp; If the Fed buys that bond, Bank A now has $20 &quot;money.&quot;&nbsp; And the banking &quot;system&quot; as a whole can't get rid of that $10 &quot;money&quot; by buying anything; ie. Bank A buys $10 bond from Bank B.&nbsp; Bank A now has $10 money and $10 bond, but Bank B has +$10 &quot;money&quot; and -$10 bond.&nbsp; The only way that $10 money goes away is if the fed actually sells the $10 bond back into the open market.So now the issue the Fed has (keeping in mind their policy goals of Price stability and full employment) is that if they sell these assets back and drain reserves, they will put downward pressure on prices and increase interest rates.Not really.&nbsp; Again, this is mostly an accounting exercise.&nbsp; The reason for the dramatic increase in reserves post 2020 is the covid stimulus measures.Personally, I see nothing here to warrant calling this a &quot;crisis.&quot;&nbsp; It's simply the Fed putting a floor on rates in a novel way because of all their previous novel programs.&nbsp; Absent this, we would expect the floor to be 0%, but they believe some higher rate will better accomplish their mandates (probably exactly because they are at least somewhat worried about inflation).</blockquote>

[QUOTE="Dissimilarty, post: 1513590, member: 23453"] In a repurchase agreement, the "banks" can be either the lender or the borrower. In a reverse repo, the fed is the borrower and the banks are lenders. No. The fed has two policy goals. Price stability and full employment. Their main tool is interest rate manipulation. The fed doesn't "need" to borrow, rather there reasoning is to drain some of the reserves and put a floor on how far interest rates can fall given all of these reserves. I don't believe anyone knows exactly what happened in 2019 or why. Not really. Again, the Fed basically said to these big banks "In order to keep interest rates where we want them, we will borrow from you at x% if no one else will." Like it or not, this is exactly what the Fed was created to do. Yes, but if I didn't make it clear earlier, this is all linked back to the past 10 years of quantitative easing. Much of banking at this level is really just accounting. If you look at the "Bank Reserves" chart I posted going back for twenty years, you will see them nearly completely stable until 2010ish when the fed started buying these assets. When the Fed buys an asset in the open market they essentially "create" bank reserves, eg. Bank A has $10 "money" and $10 bond. If the Fed buys that bond, Bank A now has $20 "money." And the banking "system" as a whole can't get rid of that $10 "money" by buying anything; ie. Bank A buys $10 bond from Bank B. Bank A now has $10 money and $10 bond, but Bank B has +$10 "money" and -$10 bond. The only way that $10 money goes away is if the fed actually sells the $10 bond back into the open market. So now the issue the Fed has (keeping in mind their policy goals of Price stability and full employment) is that if they sell these assets back and drain reserves, they will put downward pressure on prices and increase interest rates. Not really. Again, this is mostly an accounting exercise. The reason for the dramatic increase in reserves post 2020 is the covid stimulus measures. Personally, I see nothing here to warrant calling this a "crisis." It's simply the Fed putting a floor on rates in a novel way because of all their previous novel programs. Absent this, we would expect the floor to be 0%, but they believe some higher rate will better accomplish their mandates (probably exactly because they are at least somewhat worried about inflation). [/QUOTE]

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