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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Cogito Ergo Sum who wrote (10533)	11/12/2008 6:57:47 PM
From: John Pitera	Read Replies (1) \| Respond to of 33421

The Unthinkable has happened Just two weeks after Deutsche Bank issued a note discussing the possibility of Japan-style quantitative easing in the US, it’s happening. DB’s previous note was titled “The unthinkable.” This one is “Losing control of monetary policy.” From the note: We are already close to a zero interest rate policy and quantitative easing, given the recent behavior of the effective fed funds rate and reserve balances. Monetary policy has become more stimulative than indicated by the fed funds target, implying increasing loss of control of monetary policy. FT Alphaville discussed most of the ins and outs of this last week. Deutsche Bank adds more meat to the argument today: The main reason for this inefficiency has been that Treasury yields are so low that funds leak from the Treasury bill market to the fed funds market. This suppresses the effective funds rate, as investors seek out the higher return until the spread between bills and fed funds compresses. Another reason is that non-banks can participate in the fed funds market, but are excluded from receiving interest on Federal Reserve balances, which are meant for depository institutions… If the agencies supplied these funds to the fed funds market, they would potentially drive the effective fed funds rate lower. Thus monetary policy has been more stimulative than the Fed has intended by setting the target rate, a symptom of an increasing loss of control over monetary conditions. Which is a bit of a mea culpa to the previous note, when DB said the status of the USD and treasury securities as safe-haven assets was likely to mitigate the need for quantitative easing. That however, so far, is not happening for the reasons outlined above. In addition, the dollar, is in for a correction, according to some analysts. Anyway, DB for one is recommending economy-watchers look away from rate changes in favour of the Fed’s balance sheet: In summary, US monetary policy is already close to a zerointerest- rate policy, and has already begun a form of quantitative easing…. Rather than looking for the FOMC’s next setting of the fed funds target, we would pay more attention to the amount of excess reserves as an indicator of monetary policy stimulus. An increase in excess reserves could mean the Fed is adding liquidity, but it could also mean the banking system is failing to pass the liquidity on to the rest of the economy. Likewise, declining reserves could mean either a drawdown of liquidity, or a normalization in money market lending. Interpreting the moves could thus be quite important. ______ This entry was posted by Tracy Alloway on Monday, November 10th, 2008 at 15:49 ftalphaville.ft.com