Wait, the fed wants an overnight rate in a specific range. To do this they just set the deposit rate under the "floor" to encourage banks to lend above that, but they didn't set a ceiling, assuming it would magically stay in target range??<p>Now they are "thinking" of making a standing offer to lend at the top of their target range. Makes sense to me.
I honestly believe that this is how QE will be reintroduced. The article even mentions that a "solution" to the repo squeeze will be for the Fed to begin expanding its balance sheet in order to create more bank reserves.<p>My question is this: will interest rates ever be allowed to go back up to historical norms? This episode clearly shows that the Fed won't allow rates to go up even if it's a temporary spike, so why should we believe that Treasury yields will be allowed to go back up?
My understanding is that the problem is not that banks don't have money, but that they don't have the right kind of money.<p>They need fed reserves, which is the only kind of money that works intra-day for bank needs, but they have treasuries and other stuff, which only clears the next day.<p>Why don't they sell treasuries today so that they have the money tomorrow and thus no problem tomorrow I don't understand.
The current situation means that one or more entities are in desperate need for funding and will pay any price for it.
A similar situation happened in 2013 when China's Banking system was on the verge of collapse. The repo rate reached 20% before the Central Bank of China intervened to calm down the market.