Friday, February 17, 2017

Rate Hike

Especially in light of the TDF announcement, the Fed will probably raise rates in mid-March (part and parcel with stop/go monetary interest rate “transmission” management). Inflation, PPI & CPI, has just accelerated and the Fed albeit temporarily, is behind its inflation mandate / presupposed curve.

The Fed’s obtainable objective - is controlling the price level. It cannot control the stock of employment to any precision thru its supply and demand for money. Interest is the price of loan funds (credit), the price of money (as measured by the rate-of-change Δ, in bank debits) is the reciprocal of the price level (various price indices, or the Fed’s mandate which subjugates the gov’ts incentivized pro-rata share of the basket of actually “consumed” goods).

The FRB-NY’s trading desk (the U.S. Central Bank) exercises control over bank lending and money stock by its buying (expanding) and selling (contracting) of secondary, generally “off-the-run”, securities, or reserve balance altering operations (reserve draining and injecting operations, smoothing the receipt and payment of IBDDs), the level of required (legal, and in due course “complicit”) member bank reserves (vault cash and deposits at the Fed) in the system (i.e., by controlling “outside” or exogenous money, a DFI’s clearing balances, -> it controls “inside” or endogenous money).

As Dr. Richard G. Anderson, former senior V.P. and economist at the Maverick Bank, says: “Reserves are driven by payments”.

Note: Since the DIDMCA of March 31st 1980, all DFIs are subject to reserve requirements:

Reserve period computations, calculation and maintenance periods, pg. 18 in:

Unfortunately, according to the “monetary” economists at the Federal Reserve’s long-standing “maverick” District Reserve Bank, e.g., Daniel L. Thornton, Vice President and Economic Adviser:

See: Research Division, Federal Reserve Bank of St. Louis, Working Paper Series
“Monetary Policy: Why Money Matters and Interest Rates Don’t” (his last paper before retirement, note that there is an old Turkish Proverb which states, “He who tells the truth should have one foot in the stirrup”

viz Thornton: “the interest rate is the price of credit, not the price of money (i.e., the price level.)”

“The Fed’s lending and investing activities not only change the supply of money, they also change the supply of credit. When the Fed makes loans or purchases assets (any asset) it alters the total supply of credit by the amount of the loan or asset purchase. It is this effect of monetary policy actions that causes interest rates to change. Interest rates would change even if the demand for money were independent of the interest rate. Hence, the interest elasticity of the demand for money is not necessary for monetary policy actions to affect interest rates. The effect of monetary policy actions on the supply of credit is sufficient for interest rates to change...”

Thus, changes in the composition and size of the Feds’ balance sheet (posited as “normalization”), and Central Reserve Bank Credit, might not be related to legal reserve management (the only available tool at the disposal of the monetary authorities, in a free capitalistic society, through which the volume of money can be controlled (not interest rate manipulation).

And reserves have not been “e-bound” (binding / restrictive) since Greenspan reduced the level of legal reserves by 40 percent since the S&L crisis, c. 1995 (when he couldn’t, or the banks couldn’t / wouldn’t, expand credit coming out of the 1990-1991 recession).

The Fed administers (re-sets its policy rate in a series of stair-stepping or cascading pegs) as a barometer, a contrived expectation’s signal and linkage of reserve supply relative to demand – which is a weak yoke or nexus to the entire yield curve’s term structure, to the level of the free-market’s clearing response, or nominal interest rates .

I.e., it is adjusting its supply of assets, relative to the market’s absorbing factors’ adjustments, principally, repos, currency, Treasury’s General Fund Account.

Balance sheet:

vs. legal reserve management:

No comments: