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Federal Reserve lent $300B in emergency funds to banks in the past week

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Re: Federal Reserve lent $300B in emergency funds to banks in the past week

#41

Post by HDThoreaun »

almog wrote: post #32
almost_usual wrote: post #6

Earlier quoted context omitted.

It’s a loan, not QE. QE is no strings attached money injected into the market. QT is still ongoing as of last week, however, I don’t see it lasting. I do think a .25 rate hike will still happen.

It's a loan whose collateral is taken at par value rather than market price, which essentially increase the Fed's balance sheet. As of Wednesday last week, 4 months of QT have been reverted in a single week: https://fred.stlouisfed.org/series/WALCL

It's a loan that will be paid back within 90 days. Most for the money won't enter circulation and is only a liquidity backstop for banks. The rest of the money will be gone in a few months. This is extremely different from traditional QE which involves buying long dated bonds.

Re: Federal Reserve lent $300B in emergency funds to banks in the past week

#43

Post by rosywoozlechan »

jmyeet wrote: post #26

So here's what I'm confused by. The writing was on the wall a year ago for rapid interest rate hikes. This has well-known and predictable effects on long-term bond holdings. Why didn't banks liquidate their long-term bond holdings a year ago? I can guess the answer: they wanted to protect executive bonuses and share prices. They hoped they could just stick their heads in the sands and hold those bonds to maturity. An…

There was an article in the WSJ today how the San Francisco Fed cited SVB multiple times in 2022 for their risk to rising interest rates, and how SVB's models were wrong. SVB believed the rising interest rates would improve their outlook, not be a risk.

Re: Federal Reserve lent $300B in emergency funds to banks in the past week

#44

Post by chii »

giantg2 wrote: post #37
StopHammoTime wrote: post #5

Id be curious to know how much physical currency has been withdrawn and if there are pressures on that. Inter-bank deposits are covered for people fleeing bad banks, but anecdotally I know a few people who are withdrawing all their hard cash. I wonder if central banks will have issues with that soon.

I have no idea, but that would be a real shit show if they didn't have physical currency due to a jump in demand.

i'd imagine physical currency is not a problem - it's easy to roll the printers.

And there's often a hard limit on how much physical currency can be withdrawn on short notice, and to do more you'd have to make a call to prep the bank first. This means they will have a chance to ship newly minted paper in to cover it, as long as the bank's liquidity allows for it.

Re: Federal Reserve lent $300B in emergency funds to banks in the past week

#45

Post by fosk »

almog wrote: post #32
almost_usual wrote: post #6

Earlier quoted context omitted.

It’s a loan, not QE. QE is no strings attached money injected into the market. QT is still ongoing as of last week, however, I don’t see it lasting. I do think a .25 rate hike will still happen.

It's a loan whose collateral is taken at par value rather than market price, which essentially increase the Fed's balance sheet. As of Wednesday last week, 4 months of QT have been reverted in a single week: https://fred.stlouisfed.org/series/WALCL

As long as the regular Joe doesn’t get extra money to spend, inflation will be check. Banks won’t go buy eggs anytime soon.

We had close to 0% interest rates for almost a decade, and inflation was in check. It’s not the Fed that caused inflation, it is:

* Suspending school debt (extra income)

* Injecting real cash into the economy (stimulus checks and PPP loans to small businesses)

* Supply chain bottlenecks after Covid

All things that make real people wake up tomorrow and decide to spend some extra cash they have around in their bank account. It’s very tangible, it’s very measurable.

Of course 0% interest rates didn’t help, but it wasn’t the originating source of our inflation problems, as the previous 13 years of QE didn’t cause a spike in inflation.

Re: Federal Reserve lent $300B in emergency funds to banks in the past week

#46

Post by vkou »

yieldcrv wrote: post #15
almost_usual wrote: post #6

Earlier quoted context omitted.

It’s a loan, not QE. QE is no strings attached money injected into the market. QT is still ongoing as of last week, however, I don’t see it lasting. I do think a .25 rate hike will still happen.

its a 0% loan (edit: 4.68%) at a 100% loan to value ratio, actually at par value not even the current market value, and if the banks don't pay then the fed seizes the collateral this is QE with extra steps

It's a short-term loan, so if you're calling it QE, I'd point out that it's QE today, followed by baked in QT tomorrow.

Re: Federal Reserve lent $300B in emergency funds to banks in the past week

#47

Post by joe_the_user »

jmyeet wrote: post #26

So here's what I'm confused by. The writing was on the wall a year ago for rapid interest rate hikes. This has well-known and predictable effects on long-term bond holdings. Why didn't banks liquidate their long-term bond holdings a year ago? I can guess the answer: they wanted to protect executive bonuses and share prices. They hoped they could just stick their heads in the sands and hold those bonds to maturity. An…

I think the main thing is that holding long bonds was a way to get profits and pay interest. Despite being doomed long term, there were a couple reasons banks did it - they couldn't make money by making conventional business loans, profitable loan opportunities weren't available and most banks expected to be bailed out when things went bad (Silicon Valley Bank and Signature had each been previously bailed out).

The related question is why did regulators turn a blind eye? Interest rate risk is something regulators look at. I know SVB had some loopholes that prevented a lot of oversight but one other factor that comes to mind is that the Fed needed to get rid of high prices/low-interest Fannie Mae bonds somehow and letting bonds feed on them was one way.

Re: Federal Reserve lent $300B in emergency funds to banks in the past week

#49

Post by vkou »

tick_tock_tick wrote: post #16
Findeton wrote: post #3

This is another QE/Quantitative Easing, even if they don't call it that way. I hope inflation doesn't come back/get higher again because then we'd likely see the kind of second wave inflation people saw in the 70s.

Inflation doesn't come from QE it comes from very tight labor markets and monetary policy putting money in the hands of the poorest members of society.

In response to that, I'd point out that inflation doesn't come from QE or tight labor markets, its comes from supply chain shortages, and fractional reserve banks lending money to people.

----

In reality, it comes from all of those things, to different extents, in different spaces. The price of cars and eggs went up because of supply shortages. The price of houses went up because people can borrow money for 30 year mortgages. The price of employing someone went up because of a tight labor market. The price of stocks went up because the Fed printed money with QE, and kept interest rates at zero.

Re: Federal Reserve lent $300B in emergency funds to banks in the past week

#50

Post by chii »

jmyeet wrote: post #26

So here's what I'm confused by. The writing was on the wall a year ago for rapid interest rate hikes. This has well-known and predictable effects on long-term bond holdings. Why didn't banks liquidate their long-term bond holdings a year ago? I can guess the answer: they wanted to protect executive bonuses and share prices. They hoped they could just stick their heads in the sands and hold those bonds to maturity. An…

> by adding risk to their depositor funds.

lending by a bank could've also achieved the same. Depositor's funds are always "risked" in a non 100% fractional reserve system.

The problem isn't with banks buying long-dated bonds, but that they may have bought too much. The central bank, the thinking goes, could lend as a last resort, so the risk of liquidity (or lack thereof) is lowered; this means any bank that _didn't_ buy a higher yield is losing money compared to their competitors who did (until the shit hits the fan).

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