Wednesday, March 25, 2009
Fed may face headwinds if banks start repaying TARP funds
Goldman Sachs, JP Morgan and Bank of America are among a growing list of banks that are looking to repay TARP funds. Those three institutions alone received $60 billion in TARP money. Repaying that money would constitute a reserve drain of that magnitude.
Yet the Fed is currently expanding reserves as a result of its new policy of targeting long-term rates lower. Moreover, ongoing sales of securities by the Treasury might mean that the Fed will have to increase the size of its planned, $300 billion purchase of Treasuries.
Rather than state an amount, the Fed simply should have said, "We want long-term rates at X%."
Once again, it's a function of price, not quantity. You'd think they'd know.