Repo's

Banks must carry a reserve of 10%. If a bank has deposits of $100 they can loan out $90 and must keep $10 in reserve. They do not keep this money in cash but use it to buy government securities so they earn interest on their reserves. The amount of loans varies daily and thus the banks need for cash varies. To keep things in balance banks use repo's, that is, overnight purchase or sale of bonds. If the bank needs cash for loans it will sell bonds to get cash and if it has excess cash it will purchase bonds. These operations often occur overnight. Last September the demand for overnight cash increased so rapidly that the interest charge rose above what the Fed had set as a control on inflation and a mini-panic set it. In order to prevent that from happening again the Fed started to sell bonds to get a reserve of cash to be used for repo's. This will continue at the rate of about $60 billion per month thru next March. This is different from the quantitative easing that was set up during the last recession when long term bonds, one to ten years, were purchased to increase the amount of cash to encourage banks to make business and consumer loans to stimulate the economy.