The Repo Market Explained | Hacker News Reader

The Repo Market Explained

bloomberg.com

Wait, the fed wants an overnight rate in a specific range. To do this they just set the deposit rate under the "floor" to encourage banks to lend above that, but they didn't set a ceiling, assuming it would magically stay in target range??

Now they are "thinking" of making a standing offer to lend at the top of their target range. Makes sense to me.

> To do this they just set the deposit rate under the "floor" to encourage banks to lend above that, but they didn't set a ceiling, assuming it would magically stay in target range?

Yes. The Fed had hoped that IOER would serve as a floor for controlling interest rates, when it ended up acting as a ceiling. They used repo transactions to try and counter this. Prior to ~2007, the Fed used open market operations to maintain a corridor system.

I honestly believe that this is how QE will be reintroduced. The article even mentions that a "solution" to the repo squeeze will be for the Fed to begin expanding its balance sheet in order to create more bank reserves.

My question is this: will interest rates ever be allowed to go back up to historical norms? This episode clearly shows that the Fed won't allow rates to go up even if it's a temporary spike, so why should we believe that Treasury yields will be allowed to go back up?

I'm no economist, but my intuition is that under normal circumstances, it makes sense for a country's interest rate to be close to the growth rate of that country's economy. Given that, it doesn't seem likely that the US will ever go back to 7% interest rates.

I know you said intuition but can you elaborate why you think that?

It's a matter of fiscal policy if we will see higher rates. If someone like Yang is elected with his free $1000 per month, we will see quick inflation and less people looking for work. The Fed mandate is to maintain some price stability and full employment (of people asking for jobs), so we will see higher rates in this case. If the banks start to crash and burn we can see non-leaking reserve QE in the same time.

Some people believe the bond markets can force higher interest rates and QT, but this seems less likely now. If nobody is buying new bonds for example, people think Fed will be pressured to override normal mandate, even though they should be independent.

My understanding is that the problem is not that banks don't have money, but that they don't have the right kind of money.

They need fed reserves, which is the only kind of money that works intra-day for bank needs, but they have treasuries and other stuff, which only clears the next day.

Why don't they sell treasuries today so that they have the money tomorrow and thus no problem tomorrow I don't understand.

This article talks about a few factors that have created this crisis: https://www.nakedcapitalism.com/2019/09/the-fed-has-not-cove...

"What were they thinking?" indeed.

The current situation means that one or more entities are in desperate need for funding and will pay any price for it. A similar situation happened in 2013 when China's Banking system was on the verge of collapse. The repo rate reached 20% before the Central Bank of China intervened to calm down the market.

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