Let's try the shortest term rate, the effective funds rate. Where does that money com e from? It is mostly, I heard, a fixed regulated ratiuo of long term assets held by GSEs and regulated home lenders. So, the data shows about the same balance volatility as before with little change in balance; yet the rate jumped a quarter point. It was, in fact, a regulated rate. Regulated by Congress. Congress, by virtue of applying a constant to an institutional ratio requires a rate regulation by the Fed. It meets all the qualifications of a price control. Taylor has it slightly backwards, the price floor is set by Congress, and the Fed has the power to raise that rate floor.
Why does the North Atlantic economy right now want and need such a low real interest rate for its proper equilibrium? And for how long will it want and need this anomalous and disturbing interest-rate configuration? These are deep and unsettled questions involving, as Olivier Blanchard puts it, "dark corners" where economists' writings have so far shed much too little light.
Hold on tight to this: There is a wrongness, but the wrongness is not in what central banks have done, but rather in the situation that has been handed to them for them to deal with.
What happens next?
The Fed is discvovering the cost of regulating andx owning the GSEs, and that costy will be apportioned through the interest rate mechanism. Wd do n ot know the cost, it is in sider information betweenm Treasury, the Senate and the debt cartel. But regulatory costs have to be discovered since Congress is effectively a member banks. Regulzatory costs become a currency risk, and the currency bankers wants currency risk monetized.
Tighten or ease?
Dunno, the Fed does not know, we do not know if regulation is too restrictive or not. So the Fed has to follow the loop, see how the GSEs react and how the Treasury debt market reacts.
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