The Fed creates and deposits dollars into the dealer bank accounts so they can bid on Treasury bonds. The only time these banks have to “borrow” money from the Fed is when their customers have drawn down their cash reserves below required levels (fractional reserve) and their fellow banks are also unable to lend them excess cash. When they borrow from their fellow banks it is at the Overnight Funding Rate and they have to pay interest for a short period of time until their reserves rise and they can return the principal. When they borrow from the Fed they have to pay the slightly higher Discount Rate until they can return the principal to the Fed. Borrowing from the Fed is rare and highly discouraged since it indicates the unwillingness of other banks to make loans to them.
“The Fed creates and deposits dollars into the dealer bank accounts...”
Thank you for that informative post. Money, debt, money creation at high levels is mysterious to me.
You’re saying the Fed deposit, not loans, money to “dealer bank accounts” (what are they?), so they “can bid” on Treasury bonds.
Are the dealer banks required to bid, meaning it would be “must bid” rather than “can bid”?
Let’s say a dealer bank buys Treasury bonds. Then the created money goes right back to the Fed, correct?
What’s the point is these maneuvers. Why doesn’t the Treasury or Fed just lend the money to the dealer banks?
You speak of borrowing from the Fed as indicating basically that the borrowing bank is untrustworthy.
What, then, is accomplished by the Fed starting a process with “depositing dollars into a possibly untrustworthy dealer bank”?