The Federal Reserve Bank of St. Louis discusses the Carry Trade in Liquidity.
> The IOER [interest on excess reserves] has been the effective ceiling of other short-term interest rates. The figure above compares the IOER with overnight rates on deposits and repos.
> As we can see, the IOER has mostly remained above these two rates, implying that (at least some) banks have been able to borrow funds overnight, deposit them at the Fed and earn a spread, in essence engaging in carry trade in liquidity markets.
Interest Rate on Excess Reserves
How Much Free Money?
Fed vs ECB
While the Fed has been busy giving banks free money by paying interest on excess reserves, banks in the EU have suffered with negative interest rates, essentially taking money from banks and making them more insolvent.
If the goal was to bail out the banks at public expense (and it was), it’s clear Bernanke had a far better plan than the ECB.
Mike “Mish” Shedlock
“…paying interest on excess reserves…”
I remember a time when, one of the biggest drawbacks of being a ‘national’ bank, was having to keep a non-interest-bearing account at the Fed.
It was sometimes used as an excuse for national banks to become state banks in order to get around Fed regulations (while ostensibly claiming it was to avoid having to maintain the non-interest bearing account at the Fed).
The Fed steals on behalf of their friends and clients, simply because they can. As long as they can steal, they will. As much as they can get away with. It’s their institutional mandate.
They’re no different than any other branch of the politico-legal “system.” This is all “the system” that they keep telling their well indoctrinated, uncritical, pliant drones they must sacrifice everything to prevent from collapsing. Successfully too, sadly enough.
“As we can see, the IOER has mostly remained above these two rates, implying that (at least some) banks have been able to borrow funds overnight, deposit them at the Fed and earn a spread, in essence engaging in carry trade in liquidity markets.”
I always thought the demand for overnight lending was zero during this time because banks would rather provision more excess reserves to get the higher rate the Fed pays out rather than lend on the fed funds market. Thoughts anyone?
The statement you quoted was in reference to deposit and repo rates, not the Fed Funds Rate.
However, they did also talk about the FFR.
“As the figure shows, the IOER has systematically been above the effective FFR. This means that some institutions with excess liquidity that participate in the federal funds market were not earning at least the IOER.
One reason is that not all institutions participating in the federal funds market have a deposit account at the Fed. Chiefly among these institutions are government-sponsored enterprises (GSEs). “
So, some of the available Fed Fund Market funds are not reserves and are not eligible for interest from the Fed.
Makes sense to me – thanks for the explanation.
there’s so much fraud ,counterfeiting ,manipulation ,propaganda,blatant fraud,bait n switch phony accounting goin on inside the Eccles building now that if the fed was ever audited it would Enron/WorldCom/fannie/Freddie/leghman/madoff seem like
childs play compared to the chit those folks are getting away with!
Yet the pliable drones still keep kowtowing to them. Wagging their tails and asking “how high” every time the Fed and their lackeys say they have to jump in order to “save the syyystem.”
As if there has been even one single feature of “the system” worth saving for at least the past 70 years.
Just end the Fed today. Just like that. Let the chips fall where they may, let whatever happens happen. Nothing can be worse than where we are currently at anyway, hence whatever happens, is at worst a sideways move. It ain’t harder than that. At least for those precious few who who remain more than uncritical, indoctrinated drones. Which unfortunately seem to be precious few indeed.
A far better plan would have been to allow market forces to determine the fate of the banks. If I can go bankrupt, why can’t the banks?
For the exact same reason 99.9% of North Korea can starve, but not Kim.
Agreed. Most criminals are thrown in jail for ruining peoples lifes, these guys are rewarded. I wish people would wakie wakie are realize it’s not the blue people or the red people that are putting the screws to you. It’s the central banksters who are ruining our planet. Distorting everything prices, competition, and generally trying to incite warfare. The globalist technocrats brag about having kept peace for 70 plus years. Do enough digging, and you will find that they helped insight these wars, and profited handily off them. They really enjoy loaning Monopoly$ to both sides. Wait, Monopoly $ has more value then what they print. #ENDTHEFED
absolutely – In fact, the bubble would never have gotten as big