Saw this blurb and I'm trying to figure out what it would mean going forward if it came to pass. (I'm not good at the macro stuff) Would it have a significant impact on any part of the market? Or is it just blowing more air into the balloon?
http://blogs.wsj.com/economics/2014/03/ ... e-exits/#1
Under the old plan, the Fed would take several steps to remove trillions of dollars it has pumped into the financial system. First it would let mortgage securities and Treasury securities mature and run off its balance sheet. Over a longer stretch it would sell mortgage-backed securities. Other technical tools – such as allowing banks to place deposits at the Fed for stretches – would further drain reserves in the financial system. Taken together these money draining moves would help to lift the Fed’s benchmark interest rate, the federal funds rate, as the supply of money in the system became scarcer. The Fed would also pay an interest rate on bank reserves to anchor rates where it wants them.
Under a new plan being considered, the Fed could leave excess reserves in the banking system for years and may never remove them. In addition to paying interest on excess bank reserves, the Fed would anchor rates through a program using reverse repurchase agreements, or “reverse repos,” in which it trades with firms outside the banking system and pays them interest on cash they lend to the Fed. Rather than draining money from the financial system, and setting interest rates by managing its supply, the Fed would set interest rates by managing the cost of money. It would become the price setter through the interest rate it pays on it.
The Fed has already said that leaving all of this cash in the financial system means it might not actively sell mortgage-backed securities. Last week, New York Fed President William Dudley told The Wall Street Journal it also meant the Fed doesn’t have to allow securities to mature and run off its balance sheet months in advance of rate increases, as previously planned. Under the old plan that runoff would be like a warning flare shot long before a race begins. Mr. Dudley’s point means the shot now won’t go off until right before the race begins.
No reversal of QE?
Re: No reversal of QE?
Not sure I read that snippet right, but from what I understand, this means that banks keep their excess reserves. They get less money for these reserves than they did for government securities (in interest) - These government securities are now held by the Fed.
The Fed can set the interest they pay for these funds. They will use this tool now instead of "how many reserves vs. government securities are in circulation" to influence interest rates.
Reserves themselves do little for lending as banks don't make lending decisions based on if they have reserves or not.
The Fed can set the interest they pay for these funds. They will use this tool now instead of "how many reserves vs. government securities are in circulation" to influence interest rates.
Reserves themselves do little for lending as banks don't make lending decisions based on if they have reserves or not.
Re: No reversal of QE?
My immediate reaction is...mehhhh.
"Fed doesn’t have to allow securities to mature and run off its balance sheet months in advance of rate increases, as previously planned. Under the old plan that runoff would be like a warning flare shot long before a race begins. Mr. Dudley’s point means the shot now won’t go off until right before the race begins."
It seems like all they did was tell everyone upfront that they have a way to raise rates without telegraphing it way in advance. This how it has always been, so not a big deal.
It makes one wonder if they see potential for the economy to over heat and they don't want everyone to be surprised if a rate increase comes out of left field...but I'm reaching for that conclusion.
"Fed doesn’t have to allow securities to mature and run off its balance sheet months in advance of rate increases, as previously planned. Under the old plan that runoff would be like a warning flare shot long before a race begins. Mr. Dudley’s point means the shot now won’t go off until right before the race begins."
It seems like all they did was tell everyone upfront that they have a way to raise rates without telegraphing it way in advance. This how it has always been, so not a big deal.
It makes one wonder if they see potential for the economy to over heat and they don't want everyone to be surprised if a rate increase comes out of left field...but I'm reaching for that conclusion.
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almostthere
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Re: No reversal of QE?
Here's another from the WSJ that seems to explain it a bit better.
NY Fed Boosts Reverse Repo Max Bid to $7 Billion: Change Has No Monetary Policy Implications
http://online.wsj.com/news/articles/SB1 ... 1762805826
It seems like they are experimenting with options for the eventual tightening.
My impression is that this may also be a way to influence the "shadow banking system" as well. However, I am very much a novice, and I would love to corrected by more knowledgeable folks.
Many thanks JennyPenny for the lead on the article. The eventual date for tightening has been much on my mind lately b/c I'd like to see a drop in long bonds in order to buy some portfolio insurance at a more reasonable price. This seems to be providing another clue.
NY Fed Boosts Reverse Repo Max Bid to $7 Billion: Change Has No Monetary Policy Implications
http://online.wsj.com/news/articles/SB1 ... 1762805826
It seems like they are experimenting with options for the eventual tightening.
My impression is that this may also be a way to influence the "shadow banking system" as well. However, I am very much a novice, and I would love to corrected by more knowledgeable folks.
Many thanks JennyPenny for the lead on the article. The eventual date for tightening has been much on my mind lately b/c I'd like to see a drop in long bonds in order to buy some portfolio insurance at a more reasonable price. This seems to be providing another clue.