Rather, because of a change in the application of reserve requirements over the past decade, Fed actions have virtually zero impact on lending activity in the U.S. banking system.
If FED turned off the daily RPs, this claim would be refuted in an hour.
The main job of the Federal Reserve is to determine the mix of government liabilities held by the public.
The main job of FED is setting the rate of interest.
It determines the mix - but not the total amount – of government liabilities held by the public.
The public determines the mix and FED determines the amount. Don't anyone try to fool you into believing that FED doesn't care about the money supply. They put on the denial dance to fool Congress and to fool other meddlers.
Essentially, the Fed lowers the Federal Funds rate by purchasing Treasuries from banks and increasing the "monetary base" - bank reserves plus currency in circulation.
Nope. This is what they did long ago. They gave it up because it was "inexact" which they considered undermined their control. Fed funds targeting is done exclusively through the RP market, through Temporary.
The only thing that the Fed can control with certainty is the monetary base.
Nope. They can't control currency except with draconian measures like forcing banks to post currency to meet raised reserve requirements. Yuk.
Alternately, it can try to control the Federal Funds rate (and passively adjust the monetary base by whatever amount is required to keep Fed Funds on target). However, the Fed cannot control the Federal Funds rate with certainty.
They do it every day and it's creating its own "rollover" problem. FED absolutely fixes the rate. There's no free market to challenge FED. That was destroyed 10 years ago when AG manipulated the poor fools everywhere into accepting yet again the disaster of interest rate targeting.
For example, if inflationary pressures were high and interest rates were moving up, the Fed could not predictably lower the Fed Funds rate by easing monetary policy.
They could do it easily. We call this phenomenon, floodgating. Of course, such an approach is counter productive and brings about the opposite of its intent, so FED must distribute the technique of balancing over time.
Not surprisingly, central banks always target money growth, not interest rates, when inflation is high.
It is true that FED watches money supply and secretly uses it to determine policy, but target money growth? They briefly tried that starting in 1988 at the behest of Friedman, and it worked too well. The result was that it didn't seem to produce the instant prosperity that the socialists at the NY Fed required of heretic Miltie's theories. But worst of all FED didn't have the power and prestige it had with rate targeting. They are control freaks, you know, and they don't trust the public. They think prosperity comes from their handiwork when it really comes from all the slobs. They say they know this, but they don't act like they do.
Then in the early 1990s, reserve requirements were dropped to zero on savings deposits, CDs, and Eurocurrency deposits. At present, reserve requirements apply only to "transactions deposits" - essentially checking accounts. The vast majority of funding sources used by banks to create loans have nothing - nothing - to do with bank reserves.
FED can drive everyone out of CDs toot sweet by changing the rate on reserves. Banks can issue CDs to attract deposits to form a loan base, and FED can reverse all that, by sucking the deposits out of CDs forcing banks to call loans, and banks can't afford to raise the rate on CDs to defend against the mighty sucking sound.
These loans can bunched into securities and sold to somebody else, taking them off of the bank's books.
FED has total control of all these machinations. Does he really think that FED would have allowed them to escape their control?
Commercial, industrial and consumer loans no longer have any link to bank reserves.
Then why is FED creating a $7B/day RP free float? I wonder what would happen to C&I loans if FED didn't roll the RPs over? There would be a mad scramble for bank reserves which are the final support under CD created loans.
Since 1995, the volume of such loans has exploded, while bank reserves have actually declined .
I guess he didn't understand how the System had changed into one that uses the RP Temporary market for support of all financial entities.
The Fed certainly played an important psychological role in recent years, and certainly has a role to play during bank runs and other crises where the demand for monetary base soars. But the rest of the time, open market operations are almost completely sterile.
I wonder why all those banks and dealers demand their money every day at the daily open market operation fix at the NY Fed. It's feed them or the nation dies. Somehow that doesn't seem very sterile. It seems very potent.
Inflation follows unproductive government spending
No, it does not. It follows from monopoly labor's compensation demands in excess of value of output enabled to be satisfied by accommodating, eternal prosperity seeking monetary authority.
Instead, our research indicates that inflation is primarily the result of growth in unproductive forms of government spending (basically defense spending, entitlements and other expenditures that fail to stimulate the supply of goods).
There have been extended periods of disinflation with commensurate levels of defense spending, entitlements and other expenditures.
The impact is particularly severe when growth in entitlements is high and growth in productivity is low. This is why inflation exploded after the late 60's, and why it came down after the early 1980's.
Growth in entitlements is fairly high and growth in purported productivity is extremely high, but we have inflation even after adjustment for fuel costs.
Except for the Federal Funds rate, the Fed does not determine short-term interest rates.
All short rates are derived or subordinate to the fed funds rate. For example, a chart of Tbill shows the Tbill asymptotically approaches from below the rate on fed funds and does so in correlation to changes in the fed fund fixed rate.
Most of the time, it simply follows them.
It's the other way around. Otherwise, there would be a free market in other short rates, but the charts show subordinacy which is indicative of managed markets marked to market to the fed funds rate.
Statistically, the Federal Funds rate consistently lags market interest rates such as Treasury bill yields.
The Tbill rate has been below fed funds rate for many years.
Indeed, changes in market rates have far more predictive power to forecast the Federal Funds rate than vice versa.
Indeed, there is no free market in money. The AG FED killed that market during the late '90s so now it's merely procedural. It is the case though that if FED goes into a late '90s type pumping binge during a demand regime, the market would revive for the simple reason that lenders would balk at supplying funds in order to protect those funds from the inflation this author denies would arise from the pumping. As long as FED doesn't get too far out of hand, the free market will remain dormant.
But here and now, the Fed is, and probably will be, hopelessly ineffective.
No one in the world believes this. Since belief is critical for financial integrity, it follows that all FED has to do is act as though they were effective, and they get the same result as they would if they were effective. It's all a matter of belief. |
