Wednesday, April 1, 2015

Is this an error from the Shadow Open Market Committee?

SOMC: Prior to the financial panic in the fall of 2008, when the Fed wished to raise interest rates it sold securities to drain aggregate reserves from the banking system. Banks pushed the federal funds rate higher as they bid harder among themselves for increasingly scarce reserves. The Fed then paid zero interest on reserves. Banks economized on reserve demand. And the Fed managed the federal funds rate by varying the scarcity of aggregate bank reserves within a relatively small range, well under $50 billion.
Marvin Goodfriend is explaining how a currency banker can set rates with market activities. Sell to drain money, buy to fill money.  But it misses a key point, earning are remitted back to Treasury so the banker simply chases its tell.  Its efforts will merely cause shifts in portfolio leaving the balance unchanged. I think the Fed figured this out all the way through the Greenspan era.  The other half of the error is that Treasury does not pay for losses, so with a balanced sheet, the Fed really has no effecto going the other direction.

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