“We're not quite sure what we have to pay in order to get the market rate, which includes some credit risk, up to the target. We're going to experiment with this and try to find what the right spread is.” –Ben Bernanke, October 7th, 2008.I love the above quote. Very confidence inspiring.
Go Bernanke! Experiment away. What could possibly go wrong?
Anywho…
The Fed raised the rate it pays banks for the excess cash they keep on deposit at the Fed. This should further affect the Reserve Balance with Federal Reserve Banks (WRESBAL) chart going forward as scared and fidgety financial institutions ‘park’ the cash they’re hoarding over at the Fed.
This is actually productive, because the Fed will turn right around and force feed that same cash right back into the system via the various emergency facilities.
The attempt is of course to keep credit flowing and the velocity of money from collapsing. This of course is all part of the desperate battle to prevent MASS DEFLATION. It won't work of course, but it sure will be one wild ride.
Fed Raises Rate It Pays on Banks' Reserve Balances (Update1): “The Federal Reserve will raise the interest rate it pays banks for the excess cash they keep on deposit so it can keep pumping funds into the financial system without affecting the central bank's monetary policy.
Fed officials acted after the initial rate they set Oct. 6 failed to keep the benchmark U.S. overnight interest rate close to the target set by policy makers. The central bank will pay interest on excess reserves at the lowest target rate for a one- or two-week period less 0.35 percentage point, effective tomorrow, the Fed said in a statement.
The previous rate was 0.75 percentage point below the target. Chairman Ben S. Bernanke wants to ensure that his efforts to flood the financial system with cash don't interfere with the policy rate. The Fed started paying interest on reserves this month after gaining authorization under the financial-rescue bill passed by Congress.”
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4 comments:
Is Ben praying? Will his prayers be answered or is this one above his and Hank's pay grade?
Brant, Atlanta, GA
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Ben,
Maybe I'm missing something, but isn't this one giant circle jerk? The financials have no cash of their own, so all of their reserves are borrowed from the Fed to start with (as your charts show). So, by parking that cash back at the Fed, and getting interest on it, where is the value? They're basically offsetting the amount of interest the Fed is charging in the first place, right? And then for the Fed to put it back in the system just means it's leant right back out to the same financial institutions that parked it there in the first place, correct? Isn't this just compounding the liquidity trap effect?
I apologize if I'm missing something major here, but the Fed and their bulls**t is tough to keep track of and rationalize.
In adittion, the Fed creates incentives to banks for not to lend money to business and consumers.
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