tag:blogger.com,1999:blog-1784920910280020735.post1610534509955121587..comments2008-12-03T10:15:39.522-05:00Rebecca Wilderhttp://www.blogger.com/profile/09101893640012081618noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-1784920910280020735.post-57606098985876815162008-12-03T09:10:00.000-05:002008-12-03T09:10:00.000-05:00nice post, but really, if you were trying to be anonymous, why the picture? :)Taggerthttp://www.blogger.com/profile/11702256120186056219noreply@blogger.comtag:blogger.com,1999:blog-1784920910280020735.post-62897032041910467512008-11-10T20:03:00.000-05:002008-11-10T20:03:00.000-05:00"short-term Treasury market is negative in real terms, which does not bode well" Yes, this is Bill Gross's bubble.Flow5http://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-1784920910280020735.post-68870410720559874602008-11-10T19:52:00.000-05:002008-11-10T19:52:00.000-05:00"When the Federal Reserve System was established in 1913, lending reserve funds through the discount window was intended as the principal instrument of central banking operations" <BR/><BR/>Ever since George Mitchell, advances by the 12 reserve banks were not closely monitored to prevent the use of these funds for profit, that is, to finance an expansion of thee applicant bank’s earning assets. <BR/><BR/>So beginning on Jan 9 2003 the "Reserve Banks would only extend primary credit on a short-term basis (typically overnight) to depository institutions with strong financial positions and ample capital, at a rate ABOVE the target federal funds rate" (penalty rate).Flow5http://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-1784920910280020735.post-3748085611247642532008-11-10T19:39:00.000-05:002008-11-10T19:39:00.000-05:00Why not add the volume from all of the liqudity facilities that borrow at the &quot;penalty&quot; rate. Then borrowing levels should be inversely proportional to &quot;tight&quot; money &amp; &quot;easy&quot; money.Flow5http://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-1784920910280020735.post-86984809086770482482008-11-10T18:51:00.000-05:002008-11-10T18:51:00.000-05:00Will do on the stop-out rate!<BR/><BR/>RRebecca Wilderhttp://www.blogger.com/profile/09101893640012081618noreply@blogger.comtag:blogger.com,1999:blog-1784920910280020735.post-26256976776431595552008-11-10T18:49:00.000-05:002008-11-10T18:49:00.000-05:00Hi Flow5,<BR/><BR/>Thank you for reading and commenting. And thank you for your insights on monetary policy. <BR/><BR/>You said, “Why watch interest rates? These operations are losing their effectiveness as the volume of inter-bank demand deposits at the District Reserve Banks grows.”<BR/><BR/>The Fed has lost control over the effective rate, which is why the Fed introduced the IOR policy in the first place, and further modified the IOR rate two times since its introduction on October 6 (just another rate getting lost in the mix). And yes, reserve deposits have skyrocketed: aggregate reserves with the Fed (H.4.1 table) on November 5: $493 billion; aggregate reserves held with the Fed on November 7, 2007, just $9 billion. The Fed is trying to heal the credit markets, but biggest signal of health in the credit system is not how high is the reserve base (lowering the target) us, but perhaps high is the 10-yr (or even 3month, which is still hovering around 25 bps) Treasury yield – I totally agree with Prof. Hamilton on this point. The short-term Treasury market is negative in real terms, which does not bode well for the health of the U.S. economy and monetary policy going forward. <BR/><BR/>You said (after a nice quote from Richard Anderson), “I would be surprised if the majority of depository institutions actually pay for this insurance. Relatively speaking - it's expensive.”<BR/><BR/>I totally agree. It will be interesting to see how many banks choose to opt out on December 5, since the TLGP is by definition temporary. We will find out, though, since the FDIC will list the banks that opt out around December 19.<BR/><BR/>As you point out, monetary policy is not well defined at this juncture. It seems that the most effective Fed policy right now is the commercial paper funding facility, which supports credit markets directly (this facility grew by $185 billion just last week).<BR/><BR/>Thanks again, RebeccaRebecca Wilderhttp://www.blogger.com/profile/09101893640012081618noreply@blogger.comtag:blogger.com,1999:blog-1784920910280020735.post-18308758626825151632008-11-10T18:41:00.000-05:002008-11-10T18:41:00.000-05:00You should be watching the "Stop-Out" rate.<BR/>Temporary Open Market Operations<BR/>http://www.ny.frb.org/markets/omo/dmm/temp.cfmFlow5http://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-1784920910280020735.post-46604123037686374212008-11-10T17:33:00.000-05:002008-11-10T17:33:00.000-05:00Let me see a show of pseudonyms that thinks the "trading desk" will tolerate "failures" in the fed funds market!!!!!!Flow5http://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-1784920910280020735.post-67720663933675410932008-11-10T15:11:00.000-05:002008-11-10T15:11:00.000-05:00I would be surprised if the majority of depository institutions actually pay for this insurance. Relatively speaking - it&#39;s expensive.<BR/><BR/>Payment of interest on inter-bank demand deposits (IBDDs) held in the District Reserve Banks, owned by the member banks (or excess &amp; required reserves) is similar to its predecessor (the federal funds &quot;bracket racket&quot;). Sell securities when rates hit the bottom bracket (floor). Buy securities at the top bracket (ceiling). <BR/><BR/>This practice began in c. 1965. This practice ended July 1989.<BR/><BR/>Pegs didn’t disappear with Paul Volcker. Volcker targeted non-borrowed reserves, not total reserves, but the fed funds brackets were widened, not eliminated. Consider that one dollar of borrowed reserves provides the same legal-economic base for the expansion of the money supply as one dollar of non-borrowed reserves. During Volcker’s administration, at times 10% of all reserves were borrowed. Consider what would happen if Bernanke ignored borrowed reserves today.<BR/><BR/>Then from July 1989, until Oct 9 2008, the fed funds rate was tied to a series of temporary targets (pegs).<BR/><BR/>Now monetary policy has shifted to the payment of interest via pegs on &quot;excess balances&quot;. This is an indirect method by which the &quot;trading desk&quot; can raise reserve requirements. The larger the volume of excess reserves, where risk-free interest payments are applied, e.g., excess clearing balances, &amp; pass-through correspondent balances, &amp; re-distributed surplus vault cash (lowest figure since Apr 26, 2006), the lower the banking system&#39;s expansion coefficient. <BR/> <BR/>Also, the payment of interest on these unused balances will drive the FFR lower (other things being equal), as one rate is risk-free &amp; the other inter-bank rate&#39;s risk is unknown. Presumably, a reduction in the volume of inter-bank lending may be displaced by targeting legal reserves - because of a disproportionately larger volume of excess-balances (and potentially redistributed, excess vault cash, etc). This is still an experiment.<BR/><BR/>To be effective, the (free) legal reserves of commercial banks must be confined to a bank asset that can be constantly monitored and controlled by the monetary authorities. Only Federal Reserve Bank inter-bank demand deposits (IBDD) meet this condition. The volume of (IBDDs) is almost exclusively related to the volume of Reserve Bank credit. I.e., Reserve Banks acquire Treasury Bills, etc., by creating IBDDs – the (free) legal reserves of money creating institutions. Hopefully, this change will tighten the linkage between reserves and bank credit (the money multiplier).<BR/><BR/>There are 5 interest rates (ceilings tied to the Primary Credit Rate), that the Fed can directly control in the short-run; the Discount Rate charged to bank borrowers, as well as, the PDCF, ABCP, ABCP MMF, MMIFF &amp; the bank’s “tax rebate”. The effect of Fed operations on all other interest rates is still INDIRECT, and varies WIDELY over time, and in MAGNITUDE. E.g., TSLF, CPFF, OMO, TAF, &amp; SOMA.<BR/><BR/>Interest rate “pegs” are based on the absurd belief that there is, at any given time, a federal funds rate which is consonant with the proper level and rate of growth of bank credit and the money supply.<BR/>One last note: New Zealand pioneered payment of interest on reserves, and its rates soared to + 8%. And all countries Governor Laurence H. Meyer cited as illustrations - report m3Flow5http://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-1784920910280020735.post-80076910099405653322008-11-10T15:05:00.000-05:002008-11-10T15:05:00.000-05:00"There is general agreement that, for almost all banks throughout the world, statutory reserve requirements are not binding. Banks need central bank deposits for clearing checks and making other interbank payments, which gives the central bank leverage over money and bond markets" <BR/><BR/>"As I tell many audiences, the FOMC targets the federal funds rate, nominally the rate banks charge each other on overnight loans of deposits at the Fed. In fact, what the NY Open market Desk sets each day is the one-day repo rate on Treasuries, that is, the one-day cost-of-carry on government bonds. This is the true policy instrument -- and it affects huge amounts of money (essentially, the one-day return on all government securities), while fed funds transactions daily, in comparison, are a trivial amount. Folks who actually deal in money markets know this; others usually do not"<BR/><BR/>Richard G Anderson<BR/>Federal Reserve Bank of St Louis<BR/>anderson@stls.frb.orgFlow5http://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-1784920910280020735.post-81964899212663962822008-11-10T14:42:00.000-05:002008-11-10T14:42:00.000-05:00re-distributed surplus vault cash has dropped to the same level as it was back on April 26, 2006Flow5http://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-1784920910280020735.post-57832118535147308962008-11-10T14:23:00.000-05:002008-11-10T14:23:00.000-05:00Your kidding? Why would banks pay so much money for virtually risk free Fed Funds??? Who&#39;s the biggest borrower &amp; how much would this cost them? How frequently do they borrow?<BR/><BR/>Why watch interest rates? These operations are losing their effectiveness as the volume of inter-bank demand deposits at the District Reserve Banks grows.Flow5http://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-1784920910280020735.post-45780882102130514612008-11-09T16:27:00.000-05:002008-11-09T16:27:00.000-05:00Good thinking. The Fed is making this up as they go along anyway.Janiehttp://www.blogger.com/profile/16258365472084666363noreply@blogger.com