4 ms·

I wish I understood what this meant. From my primitive understanding, we have too much money concentrated in too few people trying to make unrealistic returns,

I wish I understood what this meant. From my primitive understanding, we have too much money concentrated in too few people trying to make unrealistic returns, so they hold on to it rather than invest it. Does this move mean that the fed is trying to keep its benchmark rate too low and absent market forces it would be much higher?

yasp 7y ago
From what I've been able to gather, there has been a decrease in demand for US Treasurys from certain segments of the market. This has resulted in primary dealers having to purchase the difference. They don't purchase USTs from cash on hand. Instead, they use the repo market to fund the purchase. However, the supply of repo market funds is relatively inelastic. Thus, you have a big spike in repo demand with a relatively fixed supply. This was causing the rate spikes we saw. Thus the Fed stepping in as lender of the last resort.
- not2b 7y ago
  It seems to me that the issue is that there has been an increase in supply, because of the massive deficit. This means that there are more US Treasuries for sale than there are buyers. They could sell more by letting the interest rate rise, but that would have major negative effects if a large increase is required.
  - yasp 7y ago
    The increased supply of UST is another contributing factor, yes. Important point AFAICT is the supply inelasticity of repo funds.
- AnimalMuppet 7y ago
  So: Not enough demand for Treasuries, dealers have to purchase the difference, dealers running out of money to keep doing that, the Fed supplying the money for repo. I can buy all that, and it makes me nervous. How close are we to a failed auction where the dealers won't or can't purchase the difference? How close are we to the Fed having to buy them directly?
jigglesniggle 7y ago
Every action is an attempt to stimulate positive economic activity by increasing liquidity and decreasing volatility. Despite the various descriptions that can be used they all essentially create money, causing inflation, which incentivizes not holding on to money. In theory this affects all equally but in practice and in agreement with recent memory, losing X% of a small amount to inflation or wage stagnation (i.e. what you or I experience) is more negatively impactful than a large player losing that same relative amount.
nickles 7y ago
> Does this move mean that the fed is trying to keep its benchmark rate too low and absent market forces it would be much higher? Fed used to maintain a corridor system, in that they would intervene if effective fed funds went higher or lower than their target. They moved to a floor system, in which they attempted to set a single rate by paying banks interest on reserves (IOER) held at the Fed. For roughly a decade, this worked (a certain arbitrage helped convert this rate from a floor into a ceiling). Recently, effective fed funds has risen above IOER, but Fed was not conducting reverse repo operations to push this down.

yasp 7y ago

From what I've been able to gather, there has been a decrease in demand for US Treasurys from certain segments of the market. This has resulted in primary dealers having to purchase the difference. They don't purchase USTs from cash on hand. Instead, they use the repo market to fund the purchase. However, the supply of repo market funds is relatively inelastic. Thus, you have a big spike in repo demand with a relatively fixed supply. This was causing the rate spikes we saw. Thus the Fed stepping in as lender of the last resort.

not2b 7y ago
It seems to me that the issue is that there has been an increase in supply, because of the massive deficit. This means that there are more US Treasuries for sale than there are buyers. They could sell more by letting the interest rate rise, but that would have major negative effects if a large increase is required.
- yasp 7y ago
  The increased supply of UST is another contributing factor, yes. Important point AFAICT is the supply inelasticity of repo funds.
AnimalMuppet 7y ago
So: Not enough demand for Treasuries, dealers have to purchase the difference, dealers running out of money to keep doing that, the Fed supplying the money for repo. I can buy all that, and it makes me nervous. How close are we to a failed auction where the dealers won't or can't purchase the difference? How close are we to the Fed having to buy them directly?

jigglesniggle 7y ago

Every action is an attempt to stimulate positive economic activity by increasing liquidity and decreasing volatility. Despite the various descriptions that can be used they all essentially create money, causing inflation, which incentivizes not holding on to money. In theory this affects all equally but in practice and in agreement with recent memory, losing X% of a small amount to inflation or wage stagnation (i.e. what you or I experience) is more negatively impactful than a large player losing that same relative amount.

nickles 7y ago

> Does this move mean that the fed is trying to keep its benchmark rate too low and absent market forces it would be much higher? Fed used to maintain a corridor system, in that they would intervene if effective fed funds went higher or lower than their target. They moved to a floor system, in which they attempted to set a single rate by paying banks interest on reserves (IOER) held at the Fed. For roughly a decade, this worked (a certain arbitrage helped convert this rate from a floor into a ceiling). Recently, effective fed funds has risen above IOER, but Fed was not conducting reverse repo operations to push this down.