Posted on 01/26/2009 7:09:49 PM PST by sickoflibs
The Federal Reserve is struggling to explain its plans for pulling the U.S. economy out of recession as it resorts to unorthodox policy tools while official interest rates are set near zero.
Since a rate-setting meeting in December, several U.S. central bank officials have tried to lay out what the Fed can do now that it has run out of conventional ammunition to support economic growth.
Usually, the Fed can focus its policy message around its interest rate target, but with federal funds already close to zero that capability has disappeared with no clearly discernible substitute on the horizon.
"It is very difficult to communicate the nature and effects of unconventional balance sheet actions," Glenn Rudebusch, associate director of research at the San Francisco Federal Reserve Bank said in a report earlier this month.
Rudebusch suggested the Fed needs to explain what it hopes to achieve with its various new programs to ease conditions in specific credit markets.
The Fed's next chance will come on Wednesday, when its policy-making Federal Open Market Committee issues a statement following two days of deliberations. It will be the FOMC's first meeting since it cut the overnight federal funds rate to a range of zero to 0.25 percent in mid-December.
Some Fed watchers expect a commitment to buying long-term Treasuries, word on an expansion of the efforts to buy securities in other asset classes, or even setting of an explicit inflation target as as a way to tackle worries about deflation.
Still, the reactive nature of many of the Fed's moves since 2007, with programs seemingly created on the fly as fresh crises erupted, has made crafting a clear policy message more difficult, and also devalued the currency of the FOMC statement.
"The Fed has been making up plays at the line of scrimmage, rather than taking them from a playbook," said Brian Fabbri, economist at BNP Paribas in New York. "Thus the relevance and drama of the FOMC meetings—where the markets would anticipate and react to each change in the Fed's target rate—has been reduced."
Helicopter Days
The Fed is now providing huge amounts of liquidity and credit to various segments of the private sector, massively expanding the size of its balance sheet in what Chairman Ben Bernanke terms "credit easing" policy.
It has attempted to distance itself from Japanese-style "quantitative easing," when the Bank of Japan in the early 1990s set an explicit numerical target for reserves, and expanded reserves accordingly.
"The Japanese experience suggests that simply expanding bank reserves—even by a very large amount—had little effect on bank lending or on the economy more broadly," Janet Yellen, San Francisco Fed President and an FOMC voter this year, said on Jan 15.
Still, the Fed risks a communications gap because its "alphabet soup" of programs can not be be distilled into a simple message on its policy bias—easier, tighter, or no change—or easily measured for signs of success.
Chicago Fed President Charles Evans has defined the Fed's current actions as a proxy for doing the impossible, or setting the fed funds rate at a negative level.
"The trick, no doubt, would be to print exactly the right amount of money to fix today's economic problems without generating another disaster via hyper-inflation," said Rory Robertson, interest rate strategist at Macquarie Bank in Sydney.
But fine-tuning policy around a theoretical negative funds rate is tough, as then-Fed governor Bernanke acknowledged in a now-famous 2002 speech on deflation.
"Alternative policy tools ... may raise practical problems of implementation and of calibration of their likely economic effects," Bernanke said.
Bets in the derivatives markets suggest the Fed could start lifting interest rates as soon as September. Many forecasters look for a much longer spell of near-zero rates, given their gloomy economic outlook.
Jan Hatzius, economist at Goldman Sachs, said that by the end of 2010 conventional monetary policy drivers such as the Taylor Rule, which suggests appropriate adjustments to interest rates based on factors such as inflation and the jobless rate, would imply a fed funds rate of negative 6 percent.
"Our forecast of a 9.5 percent unemployment rate by late 2010 implies the largest amount of slack of the postwar period," Hatzius said. "Fed (and Treasury) officials will need to expand their efforts to stimulate demand dramatically further."
Yes they do. They can also buy assets with new money, created out of thin air.
It does not have capital of 2.5+ trillion.
And it doesn't have deposited reserves of 2.5 trillion either.
You are just wrong and think they can print their way out of any problem.
Where did I ever claim that?
Sorry—I prefer to work with real money not “nominal money.” You can LOL all you want! Doesn’t help the economy.
Please define "real money" and "nominal money".
Are you just playing coy or do you not understand basic econ 101? Purchasing power vs nominal value. If $2 buys a big mac now, if the fed prints $5 trillion to plug the holes in the bank and a big mac is then valued at $10, it doesn’t mean big macs are worth 5x as much as before. Government bond rates would soar if they try the massive printing route which would kill basically every other sector off that’s just getting buy on low borrowing rates.
I don’t even know why I bother—You are just a pump cheerleader. Done wasting my time. Stay in long! We’ll see how well the Fed does with QE.
So where does the Fed's money come from, Peaches?
L
Coming from the guy who earlier thought the Fed didn't have as much money as they want to create? LOL!
Purchasing power vs nominal value.
All the money the Fed creates is real.
It's not a waste if you learn even one tiny fact. Considering your huge errors upthread, this was a great use of your time. Glad I could help.
You don’t know, sugar?
From where does the Federal Reserve Bank get it's money?
It's very simple. Either you can answer it or you can not.
If you can, do.
If you can't, say so.
Cough up a response, Princess.
L
Well, Jennifer, banks have accounts at the Fed. So pretend 1st National Bank of Hooterville has a balance of $1,000,000. Now the Fed wants to buy $10,000,000 of securities held by the 1st National Bank of Hooterville. The bank sends the securities to the Fed and the Fed adds $10,000,000 to the account of the bank. They can see it on their computer screen and the Fed will even send them a nice statement at the end of the month showing their balance held at the Fed is now $11,000,000.
If you need any more help, be sure to ask, honey.
Come on, Sugar...you can do it.
(Honestly Travis, this is just one step above fighting with a retard. Maybe not. One could actually lose a fight with a retard.)
L
Sorry—You haven’t found any errors. You just want to dance around economic definitions.
Do you even understand how wires work? The Fed doesn't send them, the Fed does them.
The Fed opens up the Excel spreadsheet that says "Bank of Hooterville" at the top. Then they change the $1,000,000 to $11,000,000.
How did you think they did it? LOL!
One could actually lose a fight with a retard.
There's no danger of me losing to the retards on the thread. LOL!
If you ever learn how wire transfers work and how checks clear, you won't sound so stupid in the future.
Where did the Fed get this 10,000,000 dollars from?
If one of my clients gave me XXX,XXX,XXX dollars and I just 'added' an additional XX,XXX,XXX dollars to their account without an accounting of where that money came from I'd be looking at a rather long prison stretch.
So come on, Bunky....tell me. I'm breathless with anticipation.
From where does the Federal Reserve conjur forth the additional 10,000,000 you mentioned?
Do tell... Enquiring minds want to know.
L
What did the Treasury create when the Fed bought all that commercial paper?
I'm sure you also know that FRNs are liabilities to the fed.
How much interest does the Fed owe every year on those FRNs?
MY GOD MAN! That's IT? Really?
Well I've got a deal for you. You send me 10,000.00 and I'll send you an Excel spreadsheet that says I've given you 15,000.00.
Just think about it...you'll be up 50%! You CAN'T lose!
I don't often do this, but in your case I'll make an exception.
You're an idiot.
Unless of course you send me that 10,000.00 US Dollars. Then you'll be an INVESTOR!.
Won't that be grand?
L
They changed a few bits on a computer spreadsheet.
If one of my clients gave me XXX,XXX,XXX dollars and I just 'added' an additional XX,XXX,XXX dollars to their account without an accounting of where that money came from I'd be looking at a rather long prison stretch.
Wow, Lunky is not the Federal Reserve.
From where does the Federal Reserve conjur forth the additional 10,000,000 you mentioned?
Look, I'm typing $1,000,000. Now I'm typing $11,000,000.
If I was the Fed, I'd have just added $10,000,000 to the money supply. Glad I could help.
Effectively Federal Reserve Notes. My point was that the Fed just can't create money--it must do so with the Treasury.
How much interest does the Fed owe every year on those FRNs?
Theoretically nothing--until people come into to demand physical currency for their electronic or deposited currency and the Fed can't give them any. Of course it use to be gold/silver till we decided to go the inflation route.
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