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
While we will reserve judgment, and merely point out that of the $100 or so billion in dividends and buybacks announced by US banks after the latest stress test a substantial amount comes directly courtesy of the Fed - cash that ultimately ends up in shareholders' pockets - we will note that the interest the Fed pays to foreign banks operating in the US who have parked reserves at the Fed, amounts to $10.4 billion annualized as of this moment.
This is a subsidy from the Fed, supposedly an institution that exists for the benefit of the US population, going directly and without any frictions to foreign banks, who - just like in the US - then proceed to dividend and buybacks these funds, "returning" them to their own shareholders, most of whom are foreign individuals.
While the number appears modest, it is poised to grow substantially as the Fed Funds rate is expected to keep growing, ultimately hitting 3.0% according to the Fed.
Indicatively, assuming excess reserves remain unchanged for the next 2-3 years and rates rise to 3.0%, that would imply a total annual subsidy to commercial banks amounting to $65 billion, of which $25 billion would go to foreign banks every year.Zero Hedge
We wonder if this is the main reason why the Fed is so desperate to trim its balance sheet as it hikes rates, as sooner or later, someone in Congress will figure this out.
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
To those who have been watching the developments in the Fed’s fixed-rate full-allotment repo facility*, it won’t come as a bracing shock that the facility’s interest rate might eventually be synced with the interest rate paid on reserves and supplant the federal funds rate as the Fed’s new policy rate.The Financial Times — FT Alphaville
A short paper by Joseph Gagnon and Brian Sack arguing in favour of such a framework has been eagerly awaited and is now live (hat tip Real Time Economics). Sack’s authorship is especially notable given that he was head of the New York Fed’s markets desk until June 2012, when he was replaced by Simon Potter.
The discussion over the permanent floor has led to a (in my view) fantastic post from Steve Randy Waldman.New Economic Perspective
It is, to be sure, only a baby step towards world peace.
But it is a step! Market monetarists will lie with post-Keynesians, the parted waters will turn brackish, as we affirm, in unison: Paul Krugman and I are both inarticulate dorks. Further, it is agreed, that David Beckworth, Peter Dorman,Tim Duy, Scott Fullwiler, Izabella Kaminska, Josh Hendrickson, Merijn Knibbe, Ashwin Parameswaran, Cullen Roche, Nick Rowe, Scott Sumner, and Stephen Williamson are all dorks, albeit of a more articulate variety. I say the most articulate dorks of all are interfluidity‘s commenters.
To mark the great convergence, there will be feastings and huzzahs from all. Or at least from everyone but Paul Krugman and myself, since during feastings, it is the most inarticulate of the dorks who tend to find themselves on a spit. Wouldn’t you all prefer to eat plastic apples?Interfluidity
Since so much has already been written on the matter, I won’t spend much time recapping the major points of contention. My intent is to highlight a few questions that came to mind while reading but, in my opinion, were not adequately addressed. Hopefully the answers put forth will shed light on areas of the debate that remain dark.Bubbles & Busts
I’ve written numerous times already about how a deficit “financed” by bonds vs. “money” doesn’t matter in terms of inflationary effect. Notwithstanding my views there (which are not discussed in this post), the point of this post will be to explore the neoclassical paradigm on this matter, since this is at the core of the recent debate between Steve Randy Waldman (seehere, here, and here) and Paul Krugman (see here and here) on the so-called “permanent floor.” (It might be of interest to some that I explained how a “permanent floor” would work back in 2004.)
Let’s consider a time at some point in the future at which the Fed has ceased its current near zero interest policy, IOR, and QE’s, and has completed whatever exit strategy was deemed necessary to drain the reserve balances that the various rounds of QE produced....New Economic Perspectives
Paul Krugman responds to Steve Randy Waldman, noting that perhaps they are having a failure to communicate. I hope I can bridge that gap (I suppose we can't discount the risk that I make it wider).Tim Duy's Fed Watch
