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.


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?