Scott Sumner apparently doesn't know that the Fed sets the policy rate and when paying IOR. it does so irrespective of quantity.
Those who want higher interest rates need to tell me precisely what they want the Fed to do to cause rates to be higher.Money Illusion
Markets set interest rates
Scott Sumner
3 comments:
“Those who want higher interest rates need to tell me precisely what they want the Fed to do to cause rates to be higher.”
Not a bad question, given the current record amount of reserves. I.e. if the Fed simply raised the interest it paid on reserves, that would result in a huge interest rate bill to be paid by the Fed, wouldn’t it?
An alternative (one adopted by the Chinese from time to time) is to adjust banks’ reserve requirements. I.e. if (to take the extreme) the Fed said to banks “All your reserves are now locked up because we’ve raised your reserve requirments, and if you want more reserves you’ll have to pay us a hefty amount of interest” that should have an effect.
Or perhaps I’m talking thru my rear end...:-)
Ralph they can cover it for now with the 1.7T in MBS which are yielding a lot more than the support rate they have to pay... but if they start to raise, I'd think prepayment speeds would collapse and they would be limited to raise only to the point where they would think they could remain assured (in their own minds...) that they could cover the IOR...
If the foreigners come in soon to collapse the MBS rates like they have the UST yields, the Fed could end up in BIG (political) trouble...
To respond to Sumner's question: they raise the rate of interest paid on reserves, duh.
The only quibble is that not all participants in the fed funds market are eligible, and so they might need to do repos if they want to keep market rates very close to what they are paying. But if they don't care about keeping market rates exactly near target, which is the way they should think, they can ignore that problem.
Sure, they will paying a fair amount of interest. That will reduce the Fed's profits, but it will be a long time before they have negative carry on their bond positions. In any event, it's not as if the Fed is going to run out of dollars.
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