Federal Reserve Chair Janet Yellen said Tuesday that the central bank should continue to use interest payments on member bank reserve balances as its primary means of affecting short-term interest rates, rebuffing calls to return to more conventional monetary policy tools....American Banker
Fed interest payments to banks are here to stay, Yellen says
John Heltman
Buy gold! :-)
ReplyDeleteIsn't this just a direct public subsidy to the corporate for-profit banks?
ReplyDeleteBanks still have to reserve capital at 0.1 ratio to these balances so as far as if it is a subsidy it is not a very good one... iow they could make more munnie deploying their capital against higher yielding assets like loans, etc...
ReplyDeleteThe thing to watch out for is if they ever invert the yield curve if they are ever spooked by their "inflation!" as they are in effect 'buying long to pay short' ... ie they buy higher yielding longer term securities and then get that interest income from the Treasury and then use those USD balances to pay the overnight interest on reserve balances...
so they can never raise the overnight rate above the effective rate they are receiving on their Government Securities... if they were to do that they would consider themselves "bankrupt" and "out of money!".....
Interest rate adjustments are absurd, first because Warren Mosler advocated a permanent zero rate, and Warren is right – especially when I say he’s right (ha ha).
ReplyDeleteSecond, it’s doubtless true that interest rates fall in a recession, which rather indicates there is no need for that fall to be bolstered by artificial falls engineered by central banks – unless it can be shown that there is some obstruction to such falls. And I cannot see one.
Third, there is a very obvious obstruction to another cure for recessions. It’s this. Given a recession and a totally free market, wages and prices will fall (in terms of dollars), which in turn raises the real value of private sector financial assets (the monetary base and the national debt). That’s called the “Pigou effect”. But that mechanism is clearly obstructed by the “wages are sticky” downwards phenomenon. Ergo the best cure for recessions is simply to print and spend more base money (and/ or cut taxes). That will increase the real value of private financial assets.
That little bit of theory supports the idea that in a recession, the authorities should ignore Wall Street bankers, and instead, direct stimulus towards Main Street.