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Banks have a ton of cash, and they're worried about inflation. So, they store their cash with the fed (through a repo [repurchase] agreement) temporarily. [0]

Banks have a ton of cash, and they're worried about inflation. So, they store their cash with the fed (through a repo [repurchase] agreement) temporarily. [0] What is a repo? - https://www.richmondfed.org/publications/research/econ_focus/2020/q1/federal_reserve https://www.richmondfed.org/publications/research/econ_focus... [1] Repos in charts - https://fred.stlouisfed.org/series/RRPONTSYD https://fred.stlouisfed.org/series/RRPONTSYD

MrStonedOne 5y ago
That does not explain what a reverse repo is.
wtn 5y ago
The immediate situation is a problem of money market funds having more inflows than they could allocate (without nominal losses) in a zero interest rate environment. It's not about inflation per se.
ffggvv 5y ago
that doesn’t really explain why they’d give the fed money for 0 percent interest if they are worried about inflation
- dragontamer 5y ago
  A 30-year bond is 2.20% APY yesterday. If inflation happens, the 30-year bond will likely rise with inflation: maybe 3% or 4%. It is better to store your cash today, than to "lock in" to 2.2% APY. Next month, if inflation starts to kick in, maybe you'll get 3% over the next 30 years instead of 2.2% over the next 30 years. ----------- Obviously, a 30-year bond is 'different' than cash. However, when you start looking at 6-months, 3-months, 1-month, and overnight lending rates... things look more-and-more like cash. No one ever holds "cash" per se, its always better to lend it out (even for only 1 day, you wanna have that cash generate more cash). By betting on shorter timescales (ex: 1-month), you're really betting that the longer-time scale bonds (ex: a 30-year) will rise up.
MuffinFlavored 5y ago
> they store their cash with the fed (through a repo [repurchase] agreement) temporarily. What does this gain them? Are they paid interest?
- eloff 5y ago
  They pay for the privilege of having the Fed hold their cash.
- professoretc 5y ago
  Banks don't like holding cash (because it doesn't belong to them, and could be withdrawn at any time). So it's actually the opposite: they pay for the privilege of not having to hold onto that cash.
- notahacker 5y ago
  Contrary to the other two replies, yes, they are paid interest (it's a reverse of the standard repo where they borrow money from the Fed and pay the interest)
  - selectodude 5y ago
    Reading the comments on financial articles on HN makes me question the comments on the stuff I don't actually know something about.

MrStonedOne 5y ago

That does not explain what a reverse repo is.

wtn 5y ago

The immediate situation is a problem of money market funds having more inflows than they could allocate (without nominal losses) in a zero interest rate environment. It's not about inflation per se.

ffggvv 5y ago

that doesn’t really explain why they’d give the fed money for 0 percent interest if they are worried about inflation

dragontamer 5y ago
A 30-year bond is 2.20% APY yesterday. If inflation happens, the 30-year bond will likely rise with inflation: maybe 3% or 4%. It is better to store your cash today, than to "lock in" to 2.2% APY. Next month, if inflation starts to kick in, maybe you'll get 3% over the next 30 years instead of 2.2% over the next 30 years. ----------- Obviously, a 30-year bond is 'different' than cash. However, when you start looking at 6-months, 3-months, 1-month, and overnight lending rates... things look more-and-more like cash. No one ever holds "cash" per se, its always better to lend it out (even for only 1 day, you wanna have that cash generate more cash). By betting on shorter timescales (ex: 1-month), you're really betting that the longer-time scale bonds (ex: a 30-year) will rise up.

MuffinFlavored 5y ago

> they store their cash with the fed (through a repo [repurchase] agreement) temporarily. What does this gain them? Are they paid interest?

eloff 5y ago
They pay for the privilege of having the Fed hold their cash.
professoretc 5y ago
Banks don't like holding cash (because it doesn't belong to them, and could be withdrawn at any time). So it's actually the opposite: they pay for the privilege of not having to hold onto that cash.
notahacker 5y ago
Contrary to the other two replies, yes, they are paid interest (it's a reverse of the standard repo where they borrow money from the Fed and pay the interest)
- selectodude 5y ago
  Reading the comments on financial articles on HN makes me question the comments on the stuff I don't actually know something about.