We saw the Fed issue a historic increase in the Fed Fund rate this week. It sent rates up 75 basis points. Unfortunately, we are seeing a reverse effect.
In this video we look at the 4 week TBill, which is going for more than 50 basis points below IOER and Reverse Repo. How can that be? Why would a bank pay more money to get a smaller return?
The answer is contained in the video.
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The truth is that it is a good question why pay a lot when the benefit to be obtained is less. I imagine that there will be something hidden that we do not know
Cheap credit makes a big difference, at least in things like real estate and automobiles, because the people borrowing don't look at the price of the item, they look at the payment. If the payment is within range due to the price or because of the interest rates, it makes no difference to most of them. Over the last few years we've seen historically low interest rates in housing and especially in hot markets, this has enabled insane increases in price. When I bought in 2014 in Southern California, I thought prices were already insane. They've literally doubled since then. This is why you don't see as big a jump in housing prices in Western NY where I grew up, because property taxes are effectively 3%+, which puts a ceiling on price. People wrap that tax payment into their monthly mortgage cost, so it makes a big difference in what the payment ends up being, so the price of the house either stays relatively low or the people don't buy it (oftentimes because they bank wouldn't lend it to them otherwise).
That said, I agree with what you say about access to credit. I find it odd that it's so easy to get a loan for college, a car, or a house that you don't really need and will yield you no income, has no collateral in one case and depreciating collateral in the other two, but getting a loan for a business that will make money is like pulling teeth.
That does make sense. With how the Fed works right now, those bonds and treasuries work out better for the banks as they need to make sure they have enough reserves. However, with lending down, do they really need to get so many reserves?
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