How does the Fed remove money?

longandshort · Dec 17, 2021

Spaghetti Code said:
Suppose the Fed raised the FFR to 20%. No bank would bother borrowing from the Fed, and instead borrow from any of the other banks. The EFFR wouldn't really move, since the Fed can't force banks to borrow at that rate. I realize that the Fed is made up of banks, but lets say that one of the larger banks disagrees with the chosen FFR.

From my reading, LIBOR is on its way out, and SOFR is a backwards looking, market rate. Only market participants can move SOFR, correct? If the Fed has no assets on the balance sheet, it can't be a participant.
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If the Fed funds rate rose then the overnight rate would rise too. This is because dealer banks can park their excess reserves with the fed and accrue interest—so the lowest rate they would take would be FFR+1bp (or around there).

nooby_mcnoob · Dec 17, 2021

Spaghetti Code said:
If the Fed runs out of treasuries, it can't dump them. I don't think (and would be amazed if) the Fed could short treasuries.
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OK but one step at a time right? Let them run out of treasuries first...

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How does the Fed remove money?

longandshort

nooby_mcnoob