They simply place a bid under the market that establishes the yield they desire.>
We should be discussing the mechanics of this, and hopefully others can chime in. The Fed has several operations in it's holster. First they set the Fed funds, which is an approximate level that they try to hold the overnight fund rate. They do this through their permanent SOMA, which in effective monetizes debt via Treasury securities purchases.
ny.frb.org
YOY this has been growing at $35-40 billion (4-5%). They can also grease the skids even more via their temporary repo account, but that usually ranges between $20-40 billion.
bullandbearwise.com
I feel they have been sneaking that one up higher and higher, it's sort of backdoor debt monetizing, but allows more quick response time than perm. Then there is a variation of the repo which is lending out their securities in small amount to dealers and Pig Men. The last tool are words, talk, and damn lies. I'm amazed at how effective this still is, such as removing the word "accommodation", and getting people to buy in on bogus inflation and economic numbers.
Net net I just don't think this cuts it in an economy where about 12% of GDP is borrowed for the twin deficits. And if they did go crazy growing the SOMA at a much higher rate, it would quickly attract the attention of foreign creditors and currency speculators, so just don't consider it a serious option. Plus the fallout would flow into the wrong assets such as energy, precious metals, and tradeable commodities. There is a limit to "effective" versus backfire debt monetizing.
The way to stem higher rates is to start rationing credit. The way to best do this is regulatory, such as new lending guidelines on exotic toxic loans. This will also cool down the consumer, because the toxics have been driving housing inflation and the house as ATM, which in turn has fueled a false boom.
photos1.blogger.com
They need to target all kinds of other speculative loans and Pig Man activity, cap it's growth, because it's now crowding out government borrowing. So far they've talked about it, but the next logical step is to turn regulators loose. That will sap away some of the maladjusted demand for capital, and flakey pie in the sky credit creation, and alleviate some of the need to excessively monetize. In otherwords slow down the maladjusted Pig Man sphere, and speculative housing, keep SOMA account growth in the 5% range. and keep the FCBs in the game. I don't think the FCB will play ball to the extent necessary, but it's the most reasonable approach under the circumstances. |
