Why the Fed Rate Chases the 3-Month T Bill

kcb writes: "You assert that the Fed is charging a few thousand percent too much for cash they issue. The question is: relative to what?"

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Historically and without significant exception, the Fed sets their rate to equal the 3-Month T Bill.

Contrary to popular belief, there is never any doubt what the Fed will do with their interest rate. They ALWAYS chase the 3-M T.

The reason is simple, the Fed has no control over interest rates, because they have to make money or they cease to exist, same as every private business on the planet.

The 3-M T is their benchmark, because it is market driven at about the same term the Fed lends. Actually, the Fed usually lends for 30 days so their rate should be a little lower than the 3 month, but they typically gouge, and the primary dealers are more risky than the US gov as a whole.

There is no way banks can lend en mass above the market-driven 3-M T rate, because if the world's wealth is willing to protect money at that rate (0%, today), they certainly won't pay more than that rate for leveraged capital.

This relationship always holds true.

One can then glean that when the 3-M T rises above the Fed rate, they'll raise their rate. Why? Because they can. They want the highest profit they can rake in. If they charge too much, they go bankrupt like every other private biz.

That said, they can put the screws to their competition by charging WAY too much for desperately needed reserves to cover over leverage gone bad, like they are today. In that case, if the suffocating bank is weaker than the Federal Reserve system, they'll fail first and the Fed can then seize them for pennies on the dollar.

The flip side of that coin is the Fed pricing their counterfeit cash slightly below the market rate (placing it "on sale") to expand the cash supply, push prices skyward, and encourage the over-leveraging at inflated prices so they may later call the margin and seize the underlying assets (by later charging too much for reserves to cover).

With these swings in interest rates relative to the market, the Fed can by method of inflation and deflation steal our nation's wealth until our children wake up homeless on the land their fathers conquered (ok, that's Charles Lindbergh melded with Thomas Jefferson).

That's the beauty of having a 100% monopoly on cash accounting. I can change your books anytime I want to, for the better, or for the worse.