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Comment by AnimalMuppet | Hacker News Reader

> "The Fed won't admit this," Cabana said, "but it looks and smells an awful lot like the monetary authority is financing the fiscal authority."

Frightening... if true. I hope Matt Levine's explanation (cited by mrosett) is the correct one.

But also, if short-term rates are spiking (even if it's a rather different type of shrt-term rate), does that mean that the Fed was incorrect to drop the rate at its last meeting?

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This has almost always been the case. The government is a huge part of the economy and risk-free debt is a huge part of liquidity. It is boring but stuff like the timing of payments matters. Paying taxes is a big, lumpy issue...and the reason the Fed came into existence was because of big, lump payments relating to the crop cycle (i.e. money becoming tight every year as banks lent to farmers...iirc). And before the 1980s (maybe the 70s), liquidity was the primary concern of policy-makers (you can go through FED minutes in the 1960s from ALFRED, the main policy tool was free funds).

What happened is nothing to do with the level of rates. It is to do with the volume (and often the location) of liquidity (location because tax payments just go on deposit somewhere else, but it still causes a dislocation).

People just don't like how resources are appropriated as they are subject to a different work mechanism in exchange for resources and not everyone else is. These headlines are mainly to trigger that sentiment.

I dunno, a lot of the mechanisms mentioned in thread sound pretty socialistic, and at any rate dispenses with advocacy for free markets fairly completely.

Maybe it's time for the system to admit this, it can't be worse than universal health care.

Also this, from the same analyst:

> "There is not enough cash in the banking system for the banks to meet all of their liquidity and regulatory needs. I'm not that worried, because the Fed will fix it."

I for one am deeply worried, because this pretty much looks and quacks like a liquidity crisis, so it might as well be a liquidity crisis, I've last had this feeling in October 2008. At least that's what "not enough cash" means to a layperson like myself.

No, it means that the federal funds rate has begun to stop responding to changes in the Federal Reserve's overnight rate based on supply and demand. The Federal Reserve will be required to use other policy tools, such as QE, if it wants to exert greater influence on interest rates.

I was wonder the impression that banks could always borrow reserves from the Fed at e.g. 100 bps above the Fed funds rate target. Guess I was mistaken?

I believe the idea is that not all entities and institutions are eligible to borrow via the FED discount window, e.g. there is the primary credit system (primarily banks), and the second credit system (for some other low risk entities). Thus the repo market serves this segment of the market for liquidity.

Oh I see. I assumed the rates had spiked in the federal funds market, which also uses repos.

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