Fed initiative

[Skydaemon]

paying interest on commercial bank cash reserves

Talking about implementing this sooner rather than later.

I'm still thinking over what it might do. Seems very interesting with potentially a lot of implications. A lot of things are tied to fed rates.

[Skydaemon]

My thinking is leading me to a conclusion that the fed has found a backdoor way to lend money to banks at a 0% interest rate, possibly without declaring it.

If you lend money to a bank at 2%, then pay them 2% on any cash balance they have that's the same thing as giving them money for 0% as long as they keep it in cash.

Banks have a capital reserve ratio they have to meet of I forget 7% or something like that. So in other words. For every $1,000 in cash reserves they have they can make a bit more than $14,000 in loans or some kind of equivalent creation of money.

If I'm thinking clearly (it's late, not sure lol) that means the fed is also assuming the inflation risks of all the money it gives to banks for nothing in return.

If I was a bank and was offered the ability to print myself money for 0% I would grab as much of it as I could stuff in my vault and releverage the stuffing out of my bank.

Hello asset bubble?

Hmm must think more.

[Skydaemon]

More thinking.

For the fed, this has the advantages of a 0% interest rate, without risking starting a carry trade against the usd.

If japan figures this out and follows suit it could totally unwind the carry trade and really affect currencies and resulting equities/commodities etc.

// edit, nevermind, was reading it wrong, it's only for customer deposits held at the fed.