“(but that is effectively the same a short term repos continually applied).”
It’s not because the interest rate won’t necessarily be the same. The Fed is exposed to rising rates. They’re funding fixed rate term debt with short term variable rate debt.
“They’re funding fixed rate term debt with short term variable rate debt.”
The so-called debt is just reserve liabilities. It’s not variable rate debt. It’s not even debt; it’s just a liability of undefined duration. At any rate, the Fed sets that interest rate (IORB – Interest on Reserve Balances; formerly called IORR and IOER) and can lower the rate or even set it to 0. It is not subject to market forces.
Reserve liabilities can only leave the system if the Fed does something to remove them or there is heavy public demand for cash. Otherwise they circulate within the Federal Reserve system. Just one of numerous incentives to get rid of cash. Eliminate cash and the Fed has complete control over reserves. Edit: Not totally true as what the Treasury does with its General Account will also have an effect, but generally only over short periods of time.
Price hits to their security portfolio due to rising rates isn’t going to matter unless they decide to sell. Otherwise they will just hold to maturity and receive par.
The Fed can go negative equity and it is mostly meaningless (this is true even in the companies. PM is an example of this). The Fed would have to take an absolutely monstrous hit AND the public would have to rush to cash before this might become problematic under the way the system operates, which can always be changed
If the Fed does sell and take hits they can always recover the losses over time by retaining more of their interest earnings instead of remitting them to the Treasury. To do this they might need a law change, be granted an exemption or the requirement to remit to Treasury may be ignored without anyone doing anything about it.
Thanks for the detailed reply. Maybe I should have said “they’re funding fixed rate term bonds with variable rate liabilities”.
The Reserve Liabilities do pay a variable interest rate. A quick look at the history of the rates shows they were at nearly 2.5% a few years ago. link to fred.stlouisfed.org
Bonds purchased are fixed rate. It’s not necessary to sell them to generate a loss. If the interest rate on the IOER rises enough, (regardless of the cause) the Fed would incur a loss over the life of the bond. I wasn’t suggesting this was likely, only that it’s a possibility.
My main point however is that purchasing bonds via QE is not the same as short term repos continually applied because they are at different terms and rates.
anoop
2 years ago
don’t try to understand this stuff. go long s&p500 and relax on the beach. be careful of sharks, though.
thimk
2 years ago
Jim Dandy sleeping at the wheel . Plenty of money , no one wants/needs/enabled to borrow.
“Jim Dandy in a submarine
Got a message from a mermaid queen(JP Morgan,BOA et al)
She was hangin’ from a fishin’ line
Jim Dandy didn’t waste no time
Jim Dandy to the rescue
Go, Jim Dandy” — actual lyrics.
Ok. Missed your post above that states this. The time to edit my post and acknowledge that has expired.
KidHorn
2 years ago
The explanation is simple. Better for the banks to collect 0.05% interest than nothing.
Doug78
2 years ago
Why, sometimes the Fed believes as many as six impossible things before breakfast.
Eddie_T
2 years ago
On the inflation v. deflation argument, my friend Dan A. has penned a thought provoking article. He is working on a new book. I always get a little depressed when I read his stuff…..but he really gets how financial repression works to rob ordinary people of their hard-earned wealth. Wonky and dense, but worth it imho, FYI, fwiw.
I saw that. Talk about coming to do good and staying to do well. It’s fairly obscene.
When I see people like Pelosi and Feinstein, it just takes me remember how the country is really run by these powerful elites who are really the same….no matter which side of the aisle they’re on.
Remember the shooting at city hall that made her nationally famous? When Moscone and Milk were murdered by Dan White? My friend Mike Phillips recently wrote a piece about it. I think I was a freshman in college. Time gets by.
Don’t agree that the pols necessarily run things, but their positions are certainly good for their welfare and that of their entourages.
Eddie_T
2 years ago
Gold and silver appear to have completed swing lows. Technically the pressure looks to be to the upside for the next several days. If I were long though, I’d be cautious. The dollar is still in a daily uptrend, but just barely.
In Katusa’s book, he has a chapter in the appendix that should be of interest to longer term investors in the mining sector. Mining and energy are his areas of expertise. He lays out exactly how he does his own DD. I have not read it in it’s entirety yet, but it looks interesting.
Eddie_T
2 years ago
Pretty good chapter on SWAP lines and repos in Katusa’s book. Just read that last night. Not being a banker I need to review how all that works from time to time.
Too much BS
2 years ago
What the FED has been doing is taking from the working class, savers, retirees, and families working to pay off mortgages & loans and funneled all their efforts to create high rollers loaded with extreeme debt.
Got a message from a mermaid queen(JP Morgan,BOA et al)
She was hangin’ from a fishin’ line
Jim Dandy didn’t waste no time
Jim Dandy to the rescue
Go, Jim Dandy” — actual lyrics.