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Non-Tech : Money Supply & The Federal Reserve
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To: UnBelievable who wrote (15)8/10/2002 2:39:50 AM
From: ahhaha  Read Replies (3) of 1379
 
I get your handle.

For those who may not have read any of my prior posts my basic perspective is that the only thing holding this market up is the Fed's continual injection of daily liquidity.

FED isn't injecting "liquidity" daily. RPs aren't an injection. They come back. The only "injection" is found in the permanent additions.

Recently permanent has been pared back from the fairly heavy rate FED has maintained for the last 1 1/2 years, but this hasn't had any policy effect because the public's preference for currency over demand deposits can fully explain the permanent rate of creation.

Until either a significant drop in the value of the dollar or domestic inflation that cannot be explained away, causes them to stop, they will continue this type of activity.

RP transactions have no consequence to either of these factors. The purpose of the RPs is simply to maintain target fed funds rate. FED's RP actions have no effect because in this period the run-off in C&I loans and commersh continues. Thus it doesn't really matter what the fed funds rate is, and so RPs are superfluous.

This wouldn't be the case though if demand for loanable funds forced the market rate above target and FED defended their target using RPs. It has the effect of multiplying the economic effect of permanent additions at a rate proportional to the RP free float, the quantity of RPs instantaneously outstanding.

BTW - many people do not know that the Fed is owned by the major banks - among the largest shareholders are JPM and C.

The FED is not owned by commercial banks. The FED was chartered by the US government and is manager of the US Treasury's account. The above banks like most in the US and abroad are members in the federal reserve system. This only means they have the ability to borrow from their local federal reserve banks. Membership also means they must comply with reserve requirements. There is no capital stock or other means of ownership by which member banks could exercise some form of control over FED.
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