The recent Fed announcement has inflationary implications that will cause an even bigger inflationary banking crisis.
Banking institutions will now gain the ability to borrow from the Fed at the face value of their bond holdings.
So if Bank A made the dumb decision to buy treasuries when yields were 2%, and now they are facing a 25-30% haircut on their bond holdings, they can now use these holdings as collateral while the Fed lends to them at 100%.
So a $1,000 bond that is now Marked to Market at $700, can now be used as collateral to borrow $1,000 in cash.
Why is this bad?
Well, now Bank A can take $1,000 and buy a new bond at a 6% yield. They can earn 6% interest whereas before, they would only earn 2%.
Banks with shit risk management to begin with are now able to increase their treasury holdings, earn higher interest, and have their deposits backstopped by the FED if need be.
TLDR: Banks can now borrow free money from the Fed, invest in higher yielding treasuries than before, and avoid any consequence. Inflation will continue to increase.
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