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.

2 comments:

googleheim said...

yo mike

what is the general effect of taking that money "out of the system" with respect to the credit-on-accounts format of monetary policy ?

what does it do to the interest rates, the dollar, the real market, liquidity overall, etc ?

Cheryl said...

Perhaps the Fed is stating the amount for market psychological reasons?