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The issue is that this removes an important signal to the market. If trust is down, rates will go up, because if you can't clear your own transactions you depen
by privateSFacct 7y ago
The issue is that this removes an important signal to the market. If trust is down, rates will go up, because if you can't clear your own transactions you depend on borrowing to clear transactions. This is a sign that should maintain greater cover yourself.
Of course, if fed steps in to subsidize the market - which is what this does by holding rates extremely low despite the potentially systemic risks posed by the market - then you can keep pushing for every fraction of a point. But if the repo market goes down that is going to be very serious - and so there should be a bit more cost in the market to reduce the reliance on it.
- bransonf 7y agoThis is a very good point. My take is that the Fed is trying to be vigilant amidst indicators of a looming recession. If the repo market rate is too high, banks will hoard cash. Hoarding cash will devalue the banks, and we know that'll likely trigger a definitive recession.
- privateSFacct 7y agoNo question - but why not have some of these banks pay some high overnight rates? They have the money to do so. This push to squeeze every nickle of profit out leaves almost no margin if stress hits. The repo market is huge. If there ever is a real scare and people are used to be able to get free money (or expect the fed to step in) the fed will have to step in on a HUGE basis.