So now, in addition to paying interest on excess reserves through the new Excess Balance Accounts, the Fed has another tool at its disposal to maintain a non-zero interest rate, without selling Treasury securities in open market operations. In other words, its now possible for the Fed to do QE-Infinity, buy up all the Treasury Securities on the market, and still maintain an overnight interest rate above zero. This new term deposit facility is basically just the Fed selling its own short term Certificates of Deposit (CDs), in order to provide an interest bearing alternatives to plain reserve balances. To be clear, these new term deposits do not satisfy an institution's required reserve balance or clearing balance and do not constitute excess balances. They are not available to clear payments and cant be used to reduce daylight or overnight overdrafts.
According to the Fed,
Term deposits may be awarded through a competitive single-price auction format with a non-competitive bidding option, a fixed-rate format at the interest rate specified in advance, or a floating-rate format. The interest rate paid on term deposits awarded through a floating-rate format will be the operation effective interest rate, which is determined by the average of the daily effective rates over the term of the instrument.
However, just as with the interest-bearing Excess Balance accounts, Fannie, Freddie, and the Federal Home Loan Banks are not eligible for this program. This means that they will continue to trade in the Federal Funds Market, which is why the effective Federal Funds Rate remains below the 25 basis points payed on excess reserve balances.As an aside, in the text of the final rule establishing the Excess Balance accounts, the Fed refers to un-remunerated reserve requirements as a "tax", just as Warren Mosler has.
I see this new facility as a modernization of monetary policy, which should make all the operations simpler to execute, and more importantly, easier for the general public to understand. Most people understand how CDs work, and these TDF are similar. For that reason, hopefully this test run will be successful, and will help us MMTers make our points, especially since Professor Scott Fullwiler has written extensively on these new advancements.
More information is available here.
So can we please stop selling Treasury debt now? Its 2014 for Eccles' sake!
15 comments:
It will be interesting to see if this is the beginning of a process leading to a shift in the responsibility for providing risk-free, low interest savings vehicles from the treasury to the central bank.
In itself, though, that just makes the plutocratic racket that is modern capitalism more obvious and transparent. People with lots money are rewarded with more free money for doing nothing other than agreeing not to spend some of their money too quickly. If all they are doing is buying obligations of the monetary authority itself, that eliminates the illusion that they are making this additional money by "investing" in the operations of government.
Next steps toward something more sensible: allow ordinary depositors to hold accounts at the Fed, and pay interest on Treasury balances.
There is no reason to use government obligations of any kind, whether issued by the treasury or the central bank to manage overnight lending rates. If the Fed wants to set a floor on overnight lending, why not just ask Congress for the statutory authority to simply declare the floor, and forbid overnight lending at rates below it?
In the end, we're going to be headed toward a more centralized public banking system, which will wipe out the rentier parasite industry, even if people don't realize it yet.
By the way, I think the idea that imposing reserve requirements without paying interest on reserves constitute a "tax" is a silly euphemism that should be avoided. All interest returns paid by government to banks on their cash assets - whether in the form of interest on reserves or interest on securities banks buy with those reserves - are free money. Declining to pay people free money on a small portion of their cash assets is not the same thing as "taxing" them.
Dan -
I think it's more that it ACTS like a tax compared to what went before. A channel of income has been reduced and the Gov't moves closer to surplus, private sector more towards deficit.
However, just as with the interest-bearing Excess Balance accounts, Fannie, Freddie, and the Federal Home Loan Banks are not eligible for this program.
This is interesting, I had assumed term deposits would be available to the GSEs. What then does this imply for the Fed in tightening up their rate floor? Do they figure reverse repo will sufficiently affect those GSE balances? Do they expect GSE balances will for some reason diminish or go away over time? Are they just indifferent to a certain amount of slack between IOR and effective FFR?
This development lends support to the view that the Fed will let it's portfolio of Treasury securities and MBS just mature and roll off rather than selling them. Moreover, if, as and/or when it comes time for the Fed to raise interest rates, it will do so simply by raising the O/N and term deposit rates on excess reserves.
"I think it's more that it ACTS like a tax compared to what went before."
But it wasn't like that before MoveThroughIt. Interest on reserves was only initiated in 2009. Before that, the whine was "Hey, you feds give us free money returns on most of our cash. But there is 10% of it that you force us to hold on account, and for which you don't give us any free money. That absence of free money is a *tax*"
Justin,
You are becoming an expert in these systems... good report here.... rsp,
"This development lends support to the view that the Fed will let it's portfolio of Treasury securities and MBS just mature and roll off rather than selling them."
Yes, I agree. The Fed suggested some time ago that terms deposits would be a key component of the "exist strategy".
exit strategy
Dan -
If they weren't getting interest on that 10% before, then I would agree that it's no loss.
@geerussell
Yes, I assume that the Fed will use its conventional tools to shape what remains of the ff market, and yes I think you're right in the Fed doesnt care about the difference between the current ff rate and the IOER rate. It cant be more than a few basis points these days anyway.
If I had to guess as to why the GSE/FHLB were excluded, Id say it is for the Fed to avoid making it seem like they are subsidizing the GSE's, since they are owned by Treasury now, and their dividends just go into the Treasury account. So they dont want to seem like they are "funding" the Treasury, even though we all know that they already do.
Warren does consider required reserves to be a "tax" on banking, i.e., it removes funds from non-government that would otherwise be available. The amount of the "tax" is the interest the bank has to pay to carry the RR, which is determined by the policy rate.
The whole idea behind using interest rates as the policy too is to regulate the cost of supplying money as the unit of account, which comes mostly from bank credit. The system works by making bank credit (deposit balances) convertible into currency on demand at par.
So the idea behind interest rate setting as a policy tool is that the demand for money is controlled exogenously.
it removes funds from non-government that would otherwise be available. The amount of the "tax" is the interest the bank has to pay to carry the RR, which is determined by the policy rate.
But, Tom, it doesn't remove anything. It just refrains from giving. And the banks didn't "pay" interest to hold funds in reserve accounts; they just didn't get the interest that they got on the dollars they were permitted to invest in treasuries.
If the government says, "We're going to pay you interest on up 90% of your cash if you set it aside for a while", it seems bizarre for the banks to look at the 10% on which they are not earning interest and say, "Hey why aren't you paying interest on that other 10% - you're taxing us!
Overnight borrowing to meet RR is a cost to banks that raises the rates banks charge. If banks borrow from the Fed, then that transfers funds from non-government to government, which is what a tax does. If banks borrow from each other or in the MM, then the interest just gets passed around in non-government and it's a transfer to government but an expense. That increased expense due to government is said to "act like tax" in that it is imposed exogenously.
I have followed Warren for some time now and quickly realized that he has a paradigm of operations in his head that he applies automatically and he also has a jargon that articulates his paradigm. Once one figures that paradigm out, then one see the difference between being "in paradigm" and "out of paradigm" in his meaning of "paradigm."
One can argue with the semantics, but that how the jargon works to articulate the POV. It's a very simple accounting-based paradigm about what happens operationally.
It's a four-entry accounting system, with double entry for party and counter-party. When government incurs a liability and non-government an asset, it is "fiscal spending." When government receives an asset, and non-government incurs a liability, then it is a "fiscal withdrawal." Taxes are fiscal withdrawals, but not the only ones.
Interest paid to the cb is also a withdrawal from a non-government asset account and an add to a government asset account. Since the cb's received asset is also a cb liability, the net is zero. The bank loses a financial asset, which reduces its equity.
Accounting-wise, its pretty much the same as taxation. Non-government losses net financial assets in the form of cash or rb, and government receives its own asset back in the case of cash, or its own liability in the case of rb.
Conversely, payment of interest by government, whether the cb or treasury, i.e., IOR or interest on govt securities, is a transfer from government to non-government without government receiving a corresponding asset charged to non-government. Transfers are "free money" that is "granted" for public purpose.
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