Robin Harding zooms in on the most interesting bit of the FOMC minutes:
The US Federal Reserve is considering cutting the interest it pays to banks on their reserves in a dramatic move to offset an eventual slowing of its $85bn-a-month asset purchases. Read more
Alan Blinder closes his op-ed in today’s Wall Street Journal:
Is there a way out? Here’s one thing that could help. As I have argued for some time, the Fed should reduce the interest rate it pays on the roughly $1.7 trillion of banks’ excess reserves. If it did so, banks would keep less cash on deposit at the Fed. The liberated funds would probably flow mainly into the money markets, but some would probably find their way into increased lending—which would give the economy a little boost. Read more
The great debate over interest on excess reserves (IOER), base money and short term debt used ‘the floor’ analogy to describe what happens to short term interest rates. But that might not have been quite the right analogy, at least in the US case.
Izzy has already covered Manmohan Singh’s excellent paper and presentation. In it he raises a few points in regard to the supposed floor that IOER sets for rates, and it is worth exploring it a bit more. Read more
Forget about the $1 trillion coin debate.
The most exciting wonky discussion being had right now is between Steve Randy Waldman and Paul Krugman over whether “base money” and short-term debt are perfectly substitutable or not, and what that may or may not mean for central bank policy.
We confess that we have a bit of a vested interest here because for a long time we’ve been arguing much the same point as Waldman.
That’s not to say that Krugman is necessarily wrong; he may just be taking Waldman slightly too literally. Read more
What we love about Bank of America Merrill Lynch’s ‘Liquid Insight’ team is that when they make calls on Treasuries and rates, they account for the impact of collateral markets and the repo effect — not to mention the general shortage of safe assets.
Take the following chart from their latest note: Read more
Okay, who’d forgotten that FDIC deposit insurance for non-interest-bearing transaction accounts expires at the end of December?
We confess, it did slip our minds – momentarily. Read more
Yichuan Wang had a spectacular, wonky post trying to adjudicate a debate about interest on excess reserves that I’ve been having with David Beckworth and Dan Carrol.
I’ve been meaning to write about it for a while, but unfortunately a very lengthy recap is needed first, or it won’t make sense to the new reader. The three of you already familiar with the debate should skip ahead to the next section. Read more
By now, everyone is familiar with the mantra that QE is [arghh!] money-printing and that a major unintended consequence could be a chronic and uncontrollable inflation. (One could call this the goldbug, Austrian, Republican case).
Less well known, perhaps, is the theory that QE could be just as unexpectedly deflationary — because long-term micro yields come to threaten a number of financial sectors outright, as well as general expectations of risk-free returns which lead to capital destructive feedback loops. Read more
A big thanks to economist David Beckworth, one of FT Alphaville’s favourite bloggers, for his characteristically smart and polite post in response to our thoughts on why lowering or eliminating IOER is a problematic idea.
(In our post we had asked what the market monetarists thought of the issues we raised.) Read more
The ECB’s recent decision to lower its deposit rate to zero raised speculation in the market that the FOMC might be considering the reduction or elimination of the 0.25 per cent interest the Fed pays on excess reserves.
Bernanke himself hadn’t mentioned the idea lately prior to his testimony before Congress this week, and it hasn’t come up in FOMC minutes since last September’s meeting. Yet the market continues to price in the possibility of a cut, as Barclays analysts noted this morning: Read more
By Jove! Someone’s finally got it.
Cutting interest on excess reserve is a hugely risky option for the Fed, and could do more damage than good (leading even to major systemic issues). We’ve said as much, and now RBC Capital markets makes the same argument too. But much more eloquently (dare we say). Read more