Hey @joe. I’m confused by a concept that you shared in the Debt Limit video on today’s content. If the $1T in new b-bills is sold on the open market, how does the sale of those T-bills and the use of those funds have the effect of draining commercial bank reserve balances at the Fed?
Perhaps I’m confusing two simultaneous efforts, but don’t understand how the TGA spending down its fresh funds had the effect of reducing commercial bank reserve balances at the Fed.
It's two-pronged: bank customers buying bills, and primary dealer commercial banks being required to buy bills using their reserve balances. Hope this helps!
Thanks @joe. Aside from the fed telling banks “because I said so,” why are commercial banks required to buy T-bills using their reserves? I had assumed - perhaps incorrectly- that banks had discretion on how and when to use reserve funds.
As far as I'm aware, this is only done with primary dealer banks that trade directly with the Fed & US Treasury. Not unlike during QE where the Fed has the ability to use these direct counterparties to implement its monetary policy, the US Treasury can do the same. Not to mention a great deal of these banks will buy them using their reserves voluntarily.
Hey @joe. I’m confused by a concept that you shared in the Debt Limit video on today’s content. If the $1T in new b-bills is sold on the open market, how does the sale of those T-bills and the use of those funds have the effect of draining commercial bank reserve balances at the Fed?
Perhaps I’m confusing two simultaneous efforts, but don’t understand how the TGA spending down its fresh funds had the effect of reducing commercial bank reserve balances at the Fed.
Thanks for clarifying!
It's two-pronged: bank customers buying bills, and primary dealer commercial banks being required to buy bills using their reserve balances. Hope this helps!
Thanks @joe. Aside from the fed telling banks “because I said so,” why are commercial banks required to buy T-bills using their reserves? I had assumed - perhaps incorrectly- that banks had discretion on how and when to use reserve funds.
As far as I'm aware, this is only done with primary dealer banks that trade directly with the Fed & US Treasury. Not unlike during QE where the Fed has the ability to use these direct counterparties to implement its monetary policy, the US Treasury can do the same. Not to mention a great deal of these banks will buy them using their reserves voluntarily.