Here it is from a trustworthy, but somewhat alarmist guy with a PhD.
Confirmed.
Here it is in a more normal aspect ratio, direct from the Fed.
1.)
The Fed holds overnight money from banks,
and short-term money from banks and a few other institutions.
It (the Fed) pays-out interest on that money.
When the Fed wants to
- bail-out banks, and/or
- fight inflation . . .
. . . it (the Fed) increases the interest rate it pays on those short-term holdings.
That is exactly precisely what we mean when we say things like âThe Fed is raising rates to fight inflation,â or âWe donât have to be afraid of inflation anymore. The Fed should cut rates.â â There is nothing new about that part.
2.)
The Fed also earns money, from its other activities. Usually the result of the two is a small profit that the Fed remits to the treasury but um . . . . in recent months (years) it has not been able to do that. The Fed has not remitted any money to the Treasury recently. Instead it has been sending the Treasury a series of IOUs.
For the first time ever it is paying out so much to fight inflation and stabilize banks that its pay-out exceeds its earnings from other operations. **<-- this is new. The profit-generating aspects of the Fed normally equal or exceed its other parts. We are on completely uncharted ground. There is no map here, there is only calculations and guesses.
.
.
.
The old sailors used to say âBeyond here be dragons.â
Thank God they were wrong.
LOL
Well itâs not necessarily bad.
Itâs just completely uncharted ground and we are left to trust the learned minds at the Fed.
Sure trusting the PhDs didnât work out so well with the Y2k bug nor with the COVID vaccine, nor with global cooling and probably not with global warming, but my point is this is not necessarily a disaster. Itâs just completely uncharted territory.
Look at the bright side. It will be an adventure!
1 Like
So . . . no wonder the Fed is talking about giving up the fight against inflation (lowering interest rates.) All this inflation fighting is getting expensive.
.
.
.
But umm those overnight holdings also serve a second purpose.
The Fed keeps that money on hand (and pays interest) to stabilize banks. I am not a big fan of the Fed, but it does serve that purpose. It does stabilize banks.
Q.
"Does the Fed really need all that money on hand to stabilize banks?
Itâs not like banks are in danger or anything, right? There is no more danger than normal so, why keep so much money on hand?"
A.
Well . . . actually there is more danger than usual. The numbers represented in the graph below are not adjusted for inflation, not adjusted for GDP, etc., but to this untrained eye, they make the bank situation look a little bit iffy.
From the FDIC, June 11, 2024 (link below):
LINK (FDIC Quarterly Banking Profile, June 11, 2024, Table 7)
https://www.fdic.gov/quarterly-banking-profile/fdic-quarterly-banking-profile-0
Iâm sure the Democrats will unveil âKamala Kashâ digital currency by Monday and promptly scrub as much of this as possible from the internet.
2 Likes
Well, when rates go down,
the value of bonds goes up so,
a rate-cut would both harm and help the âstabilize the banksâ part of the Fedâs mission.
