/biz/ - Business & Finance

>>51040855

i found a blog post describing how the fed interacts with banks, maybe someone will find it interesting and discuss it
https://tmychow.com/blog/2021/08/27/damn-near-everything-is-endogenous

tldr that I took away from it is:
reserves are money that banks hold without lending out, like a cushion against runs
the fed used to require that banks hold reserves, this requirement has been set to zero since covid
the fed now pays an interest rate for reserves held by banks, the "IOR rate". Previously, no interest was paid, which encouraged banks to hold minimal reserves.

banks get reserves in two ways:
>direct collateralized borrowing from the fed (aka repos), at the "discount rate"
>overnight repo lending between banks (the "ON RRP rate").

The fed controls the money supply by making it cheaper or more expensive to acquire reserves, by moving the IOR rate, discount rate and the ON RRP rate (via open market operations). Also there can be some strange incentives, on the right of the chart when the discount rate goes below the IOR rate, the fed is effectively paying banks to hold reserves that they borrow from it (discount rate is what banks pay, IOR is what fed pays back). So in that situation, banks borrow reserves from the fed but they might be unwilling to lend them forward to customers, since holding them is free money.

One thing I didn't get is what the difference is supposed to be between open market operations in the overnight repo market (when performed by the fed), and the standard discount rate repos - aren't those both the same type of repo? Is the fed active in both only for more liquidity or is there something more there?

feel free to try to answer my query if you need a change in topic down the line

>>51014847
uhh, lets check if I understood it right or if someone can correct me
reserves are money that banks hold without lending out, like a cushion against runs
the fed used to require that banks hold reserves, this requirement has been set to zero since covid
the fed now pays an interest rate for reserves held by banks, the "IOR rate". Previously, no interest was paid, which encouraged banks to hold minimal reserves.

banks get reserves in two ways:
>direct collateralized borrowing from the fed (aka repos), at the "discount rate"
>overnight repo lending between banks (the "ON RRP rate").

The fed controls the money supply by making it cheaper or more expensive to acquire reserves, by moving the IOR rate, discount rate and the ON RRP rate (via open market operations). Also there can be some strange incentives, on the right of the chart when the discount rate goes below the IOR rate, the fed is effectively paying banks to hold reserves that they borrow from it (discount rate is what banks pay, IOR is what fed pays back). So in that situation, banks borrow reserves from the fed but they might be unwilling to lend them forward to customers, since holding them is free money.

One thing I didn't get is what the difference is supposed to be between open market operations in the overnight repo market (when performed by the fed), and the standard discount rate repos - aren't those both the same type of repo? Is the fed active in both only for more liquidity or is there something more there?