TAF increase and interest on excess reserves

[gonegolfin]

Now it is getting scary ... the TAF has been increased to $900 billion. This is considerably more than the current treasury portfolio of the Fed. Which means ... a lot of this money cannot be sterilized.

Additionally, the Fed announced today that interest will be paid on excess reserves (over and above reserve level requirements). This is essentially a prop under the federal funds market. Bank will not lend into the federal funds market below the rate being paid on excess reserves at the Fed. This will pull the federal funds rate back up to its target.

http://newyorkfed.org/markets/ior_faq.html

Brian

 

[forsmant]

Doesn't this discourage banks to loan the excess reserves? Perhaps the increase in the base really is for bank runs. What happend to the helicopter Ben?

 

[TheEvilDetector]

Now it is getting scary ... the TAF has been increased to $900 billion. This is considerably more than the current treasury portfolio of the Fed. Which means ... a lot of this money cannot be sterilized.

Additionally, the Fed announced today that interest will be paid on excess reserves (over and above reserve level requirements). This is essentially a prop under the federal funds market. Bank will not lend into the federal funds market below the rate being paid on excess reserves at the Fed. This will pull the federal funds rate back up to its target.

http://newyorkfed.org/markets/ior_faq.html

Brian

If lending doesn't resume, at least the depositors will get their cash when the bank runs start because the banks have access up to $900B of cheap cash.

That would be price inflationary if the depositors don't hoard too much, but I imagine they will buy up goods, driving the prices up, while the money is worth something.

http://news.smh.com.au/world/fed-pa...ank-credit-to-900-bln-dlrs-20081007-4v56.html

Brian, when you mention federal funds market, are you referring to interbank lending?

 

[forsmant]

MOney hoarding is not price inflationary. The demand for cash is greater than the demand for goods. Prices will stay the same or trend downward. It is when the demand for cash gets less that the prices will rise. When this happens the banks will probably get the money back and have a lot of excess reserve to loan out putting more upward pressure on prices due to the money multiplier effect.

 

[TheEvilDetector]

MOney hoarding is not price inflationary.

That's what I meant by "That would be price inflationary if the depositors don't hoard too much"

The demand for cash is greater than the demand for goods. Prices will stay the same or trend downward. It is when the demand for cash gets less that the prices will rise. When this happens the banks will probably get the money back and have a lot of excess reserve to loan out putting more upward pressure on prices due to the money multiplier effect.

Later on I think people will take cash out of banks, buy up some food, and those that get paid in cash will hang onto it, amid bank closures, until they figure out which banks are safe. So I don't know how you would classify the above, but I think prices will rapidly go up as goods become scarce.

 

[gonegolfin]

MOney hoarding is not price inflationary. The demand for cash is greater than the demand for goods. Prices will stay the same or trend downward. It is when the demand for cash gets less that the prices will rise. When this happens the banks will probably get the money back and have a lot of excess reserve to loan out putting more upward pressure on prices due to the money multiplier effect.

Precisely.

Brian

 

[gonegolfin]

Doesn't this discourage banks to loan the excess reserves? Perhaps the increase in the base really is for bank runs. What happend to the helicopter Ben?

Yes, the Fed paying interest discourages banks from lending to each other in the Fed funds market. Essentially, the Fed is setting a range for overnight lending. The bottom end of that range is the interest rate paid by the Fed for excess reserves. The top end is the federal funds rate (which has as a floor, the interest paid by the Fed on excess reserves).

We are beginning to see increases in the monetary base (before the actions announced today). Now with the TAF exceeding the Fed's portfolio of treasuries by a significant amount, we are talking about quantitative easing (printing money) in an amount to be determined at these auctions. The Fed may choose to sterilize none of it.

Brian

 

[gonegolfin]

If lending doesn't resume, at least the depositors will get their cash when the bank runs start because the banks have access up to $900B of cheap cash.

That would be price inflationary if the depositors don't hoard too much, but I imagine they will buy up goods, driving the prices up, while the money is worth something.

http://news.smh.com.au/world/fed-pa...ank-credit-to-900-bln-dlrs-20081007-4v56.html

Brian, when you mention federal funds market, are you referring to interbank lending?

Yes, I am referring to overnight interbank lending. This move by the Fed essentially neuters the federal funds rate.

Brian

 

[TheEvilDetector]

Yes, I am referring to overnight interbank lending. This move by the Fed essentially neuters the federal funds rate.

Brian

This seems counter productive.

Furthermore, how will the banks ever repay this debt?

Also, how does interest rate paid on excess reserves compare to TAF interest rate?

 

[gonegolfin]

This seems counter productive.

Furthermore, how will the banks ever repay this debt?

Also, how does interest rate paid on excess reserves compare to TAF interest rate?

It is not counterproductive in terms of the Fed's goals. Without a floor on the federal funds rate, the quantitative easing being introduced would send it to zero. This would be bad for the treasury market and would not inspire banks to lend in the overnight markets.

The TAF is an auction, so the interest paid varies according to bid. It usually hovers around the trading federal funds rate. Sometimes there is a chance for arbitrage, but not typically.

Brian