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."
Aren't you sweet?
You are a laughingstock here, with your “Debt? What debt?
Did trying to answer the question make your little brain hurt? LOL!
perpetual Keynesian outlook.
Wrong again, not a Keynesian.
Maybe if you pulled your head out, you'd discover the difference between the Treasury and the Federal Reserve? Probably not. Clown.
When his ba*** are all over his ceiling from stepping on his own financial landmines we can look at him and say "Man, that must really hurt. Sucks to be you, dude."
Then we'll split up his gear.
I'll flip you for who gets to tell his widow what an a**hole he was.
L
Maybe you can help your boyfriend explain how a Fed purchase puts our children in debt? LOL!
For starters...Printing press issues..to print $750 billion would require them to print 7.5 billion $100 bills which they don't have the capability to do-in a normal year with full on printing they may get $30-$40 billion in new money (net isn't that high as old bils are withdrawn). If they actually started to print larger bills, the risk of massive inflation and US bond market dislocation is too great. So the banks may stay solvent in that situation but it would kill the rest of the economy.
I wonder if the Fed bought securities from the banks and GSEs if that would give the banks and GSEs more money?
If Roubini is even close to right, the banks have about another $2 trillion to right off--and his model only assumes 9% unemployment (I think it will go higher).
Who did the Fed borrow money from?
Ahem--fractional reserve system. Deposits from member banks.
They just added how much to their balance sheet? You think they bought it with $100 bills? LOL!
Who did the Fed borrow money from?
Ahem--fractional reserve system.
The Fed doesn't borrow using the fractional reserve system. Ahem--the Fed doesn't borrow.
Deposits from member banks.
Are held at the Fed. The Fed doesn't need those deposits to create new money.
I read an analogy back that placed GWB as Johnson, the war, space and the Great Society all without raising taxes. Led to 1970s stagflation. But there were unions and little foreign competition then.
Schiff always claims asia will dump dollars, because we can never pay them back
"In this crisis, the Fed's assets have grown much faster than its capital. The truth is that the Federal Reserve is itself a highly leveraged financial institution. The flagship branch of the 12-bank system, the Federal Reserve Bank of New York, shows assets of $1.3 trillion and capital of just $12.2 billion. Its leverage ratio, a mere 0.9%, is less than one-third of that prescribed for banks in the private sector. Such a thin film of protection would present no special risk if the bank managed by Timothy F. Geithner, the Treasury secretary-designate, owned only short-dated Treasurys. However, the mystery meat acquired from Bear Stearns and AIG foots to $66.6 billion. A writedown of just 18.3% in the value of those risky portfolios would erase the New York Fed's capital account. . "
Until they can stand on their own, they won’t sell. At some point—they can decouple—but not now. Japan is looking at a -12/15% GDP drop in Q4....China went effectively negative in Q4 from +10% 2 quarters ago..and this is just getting started.
Compound interest, Scooter.
L
Compound interest, Scooter.
Who does the Federal Reserve borrow money from, Goober?
Why don't you tell me, Skippy?
L
You finally understand what the Fed can do?
The truth is that the Federal Reserve is itself a highly leveraged financial institution.
The Fed owes no money, how leveraged are they really?
"Creditors of central banks...are at no risk of a loss because the central bank can always create additional currency to meet any obligation denominated in that currency,"
The Federal Reserve doesn’t borrow from anybody, Jethro.
Yep--Just tell that to Iceland, Zimbabwe, Weimer, etc!
Maybe you think the fed should just print off $100 trillion and mail it out—we’ll all be rich! LOL!
Yeah, inflation is terrible. I’m glad I could educate you about the Fed adding to money supply.
Won’t help real GDP. Money supply soared in 1931 also. How have those long investments you’ve been running doing? LOL
The fed using deposited reserves to buy assets just like its member banks. It does not have capital of 2.5+ trillion. I’m not changing the subject. You are just wrong and think they can print their way out of any problem. If it was that simple they’d have done that with BSC, Leh, etc and we’d still be riding around 14k on the DOW.
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