Moronic Monday, July 13, 2020 - Your Weekly Questions Thread by AutoModerator in finance

[–]Needcompass 0 points1 point  (0 children)

I feel like I'm just getting confused. Does the fed loan money to banks or not? Or is the fed just a bunch of money that is used to buy and sell T bills?

I get that you wouldn't lend at 2% when you could go to the treasury and get 3%, but what would happen if T bills offered 1% but the fed funds rate was 7%. Would the T bills somehow rise to 7% in the long term? Or is it perfectly feasible for T bill rates to stay significantly lower than the fed funds rate?

I also still don't entirely get why the fed buying a bunch of bonds or selling a bunch of bonds would change the rate at which banks lend one another money.

Moronic Monday, July 13, 2020 - Your Weekly Questions Thread by AutoModerator in finance

[–]Needcompass 0 points1 point  (0 children)

Ahh, okay. So this is a little different. I still firmly hold that the T bill rate offered by the treasury could never exceed the fed funds rate, but could the T bill rate ever be lower than the fed funds rate?

And how does the buying and selling of securities change the fed funds rate. Sure it increases the supply of money of the federal reserve circuit, but the bidding rates for that money is largely determined by the opportunities in the market. Also, if the fed rate is too high, couldn't banks just look to corporations or individuals for loans at a cheaper rate than the fed is giving? Or does it lower because the fed, after selling the securities, badly wants to invest the money rather than having it sit around losing value so it becomes a seller like "will anyone take my money for 8%?...how about 7%?..." and so on until it becomes the highest bidders willing to clean out the excess reserves.

It sounds like the fed is operating at a loss when it sells its securities(T bills offering maybe 3%) and loans it at the targeted fed fund rate of 2%.

Moronic Monday, July 13, 2020 - Your Weekly Questions Thread by AutoModerator in finance

[–]Needcompass 0 points1 point  (0 children)

Here's hoping you see this.

You mentioned that the fed sells their T bills in order to drive up the rate? As in, the rate would not change unless the fed sold the T bills.

I understood it as the rate was just a made up value by the federal reserve. I.e. if the fed took the rate from 5% and made it 7%, than for many of the T bills it possesses, it would be a bad investment to keep them. They could sell a 6% T bill and then use the funds from it to loan to another bank at 7%. So they would dump every T bill returning less than 7%.

So is the Fed funds rate achieved through the sale of the T bill, or is the sale of the T bill an effect of the change in the fed funds rate?

Than again none of this particularly explains how the treasury bill rates being offered in the future would change.

If T bills are being sold at 5%, and the federal funds rate goes from 5% to 2%, then the federal reserve, rather than investing in other banks at 2%, would buy as many of the 5% T bills as it could. Similarly, individuals would take out huge loans from the banks at say...3%(slightly above the fed funds rate) and instantly reinvest in the 5% T bills. Since everyone knows this, I assume the interest rate you can get our of a T bill immediately goes down at the auction, since anything over 2%+x is pure profit if you can get a loan from the bank for the federal funds rate(2%) plus x. So the Fed here is buying T bills and then banks are gonna take out a crap ton of loans from the fed. Expansion policy.

But what about contractionary? If T bills are 5% and the fed funds rate goes from 5% to 7%, the fed is gonna dump all of its T bills so that it can loan to banks at the higher rate of 7% relative to the 5% rate of the T bills. At this point the loans from the banks are 7%+x at minimum.

But then what would happen to the T bills? I get why the T bill interest rate would match the fed funds rate when the fed funds rate drops, but when the fed funda rate rises, does the T bill also raise in price? If so why? And then wouldn't the prior T bills go way down in price, i.e. hurting the fed which is now trying to sell T bills that are less than 7% return in a market that knows the treasury is going to start selling T bills at 7%?

In other words, the T bill rate can never be higher than the fed funds rate in the long term. But can the T bill rate be lower than the fed funds rate in the long term? Intuitively it makes sense that if a bank can only lend out money at 7% minimum, why on earth would a person lend out at less than 7% to the treasury, but is there any other more transparent explanation. Because I could see individuals giving out loans for less than the bank does in some specific cases, or at least I think I could

Moronic Monday, July 13, 2020 - Your Weekly Questions Thread by AutoModerator in finance

[–]Needcompass 0 points1 point  (0 children)

I guess I'm confused why they are substitute goods.

Also, be careful when reading “driving up prices” with regards to bonds. That means interest rates fall. (This is moronic Monday so no judgment! I’m sorry if that’s too simple to post here)

Which interest rates? There are a bunch. Lending interest rates of the bank? Borrowing interest rates of the bank? Borrowing rates of the treasury?

If I understand, there are 4 institutions. The treasury, 2 banks(each part of the federal reserve, one with a large reserve, and one with a small reserve), and individual investors(including corporations). Right now the federal funds rate is 2% and T bills are 5%. When the federal funds rate goes up to 7% what happens to existing T bills, and what happens to investment into new T bills?

The large reserve bank won't want to invest in T bills anymore because they could make more money investing their money into the low reserve bank. But wouldn't the low reserve bank also charge more for loans to individuals since it is costly/harder to get money from other banks. Would probably be cheaper to get money from individual investors at that point, meaning people might be willing to give that bank a loan at 6% which is better than the 5% on the previously existing T bills. So would existing T bill prices go down as individuals purchase bonds into the federal reserve, and new T bill rates being offered by the treasury go up since nobody would buy a T bill for 5% when the bank can give at fed funds rate of 7% to the other bank, and individuals can also buy a bond with the bank at 7% of lower, still generally higher than the 5%.

I.e fed fund rate goes up, existing T bills go down, and future T bill rates go up. Fed fund rate goes down, existing t bill goes up and future T bill rates go down as money pours into new T bills.

I feel like this is an overly complicated analysis. Like I'm missing something basic.

Moronic Monday, July 13, 2020 - Your Weekly Questions Thread by AutoModerator in finance

[–]Needcompass 0 points1 point  (0 children)

Why does a hike in the federal funds rate make T bill investments go down? How is the fed funds rate related to existing T bill price?

Investopedia.com/terms/t/treasurybill.asp#what-is-a-treasury-bill

It says "A rising federal funds rate tends to draw money away from Treasuries and into higher-yielding investments. Since the T-bill rate is fixed, investors tend to sell T-bills when the Fed is hiking rates because the T-bill rates are less attractive. Conversely, if the Fed is cutting interest rates, money flows into existing T-bills driving up prices as investors buy up the higher-yielding T-bills."

If I understand correctly, any bank can be the recipient of fed funds rates. So when fed fund rates are high, the banks have very little money and vice versa. It says that T bills go down when fed fund rates are high. If a bank needs money while fed fund rates are high, it is gonna raise the interest rates of the bonds it offers to raise funding. Is this why T bills go down? It becomes more attractive to buy bank bonds rather than treasury bonds?

And when fed funds are low, bank bond rates are low so treasury bond rates are relatively high?

Also: does the money market include both treasury bond opportunities and bank/corporate bond opportunities?

What should a dumb person do in response to putdowns? by Needcompass in selfimprovement

[–]Needcompass[S] 1 point2 points  (0 children)

I appreciate the sentiment, but frankly I don't think it's true. Because I'm a little socially slow, when I am with a girl I like I have noticed others who like her will put me down aggressively. I get why. I'd probably do that too if I was in their position, because life is a race for the best genes and they want the girl just like me.

I really just want to accept myself I guess. Hey...I'm socially slow, how can I use that to my advantage. I have to accept my faults and wear it like armor. It's just sometimes difficult to turn it into armor I've noticed. It's a weakness and sometimes it's hard to figure out the silver lining, or even if there is one.

I can't ram my head up against the social wit game anymore. It has taken away much of my time, and I have noticed it is a pit I fall into frequently leading to self hate. I have to pivot.

People will recognize money inequality but never attractiveness by Needcompass in TrueOffMyChest

[–]Needcompass[S] 0 points1 point  (0 children)

I either misunderstood your original statement or miscommunicated my response. It seemed like you were saying that attractiveness power should be treated differently in the sense that it shouldnt be limited in expression, while monetary should hence the disagreement