”The Fed’s loans to banks will only increase inflation further and they permanently ruined their balance sheet”

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by Ayy_boi3

No, and here’s why:

The Fed Discount Window gives out loans to banks in need. Recently banks have taken out huge amounts of loans from here to prepare for any continuation in panic outflows that have arisen from the SVB and Signature Bank debacles.

The amount of money banks take out as a loan isn’t decided on what they will need in the likeliest scenario. It’s decided on how much they will need in the worst case scenario. Banks are trying to gather enough liquidity to not only survive the outflows that are happening now, but to also survive the second and third wave of panic outflows in case other banks would fall, think of First Republic Bank.

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The loans banks have taken aren’t meant to be pumped into the economy through assets or commodities. They are purely meant as short term liquidity backstops for risk prevention. It’s why I expect the vast majority of these giant loans given out by the Fed to be returned as soon as possible, likely in the next 3 months.

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These 5% fed loans are expensive, and banks can not rely on them forever. That’s why smaller banks will intentionally give out less loans to reduce risk on defaults and to maintain more liquidity.

By slowing down the amounts of loans these banks give, the economy automatically slows down with it.
By slowing down the economy, you slow down inflation.

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The people with the idea that the fed liquidity will increase inflation has the whole story completely twisted, inflation will actually have double downwards pressure from here on out.

This is one of the reasons why markets have started pricing in rate cuts already. It’s the reason why people aren’t worried about the infamous balance sheet increase picture, because the majority of those loans will be returned in the near future.

TL;DR: The Fed’s recent actions are not inflationary, and in fact may help to reduce inflationary pressure in the economy.


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