Wow. OK, here’s what happened When the Fed does QE, what that means is that they buy US Treasury debt and mortgage-backed securities at face value from banks,

Wow. OK, here’s what happened When the Fed does QE, what that means is that they buy US Treasury debt and mortgage-backed securities at face value from banks, and put digital cash in the banks’ reserve accounts. They do QE to insure liquidity in the banking sector, something that is pretty important. Banks have to keep the digital reserves there, but dollars are fungible, so they can take non-digital dollars out if they like. But they have not been. Reserve balance are astronomical. Steve Mnuchin ran the Treasury account balance very high, because there was huge demand for short-term Treasury debt in 2020. If he didn’t, rates would have been negative on T-bills. There was about an extra trillion dollars in the Treasury account just to keep short-term rates from going negative. Janet Yellen had to clean this up, so she stopped issuing so much debt and let the balance fall to more normal levels (it even got low around the debt ceiling mess). But when she did that, that cash winds up as cash deposits at banks, giving them even more cash. Because Treasury issuance was low and QE proceeded on schedule, they could not buy risk-free assets with that cash, which was why Mnuchin was keeping the balance high in the first place. So now reserve balances spiked even higher. The banks have too much cash Every overnight, they need to trade some cash for US Treasuries in the Fed’s balance sheet to get right. That is what the reverse repo facility does. Now that the Fed is tapering and Treasury issuance is back to normal, it will work itself out.