Post RSS Feed 
Podcast Feed
The Fed adds interest to unwinding plans
December 29th, 2009After pouring mammoth volumes of credit into the US banking system to save their economy from a catastrophic meltdown, the Federal Reserve is now planning to extract some of that liquidity.
It has been signaling some credit withdrawal actions recently, and earlier this month its New York office held a live test of “reverse repos” – selling Treasuries to dealers for cash with an agreement to buy them back later at a slightly higher price.
Now, it has raised the idea of paying interest on deposits to encourage banks to “invest” at the Fed for a stated time period – a term deposit. In this way, funds flow out of the economy and are locked up by the Fed, effectively withdrawing “excess money” that was pumped in earlier to combat the financial crisis.
The Fed was given the ability in 2008 to pay interest on balances, but until now has had no programs in place to do this. The TD proposal would activate this authority.
However, there is disagreement among officials as to whether programs like the reverse repos, and term deposits will be sufficient on their own to drain enough liquidity to be effective, or whether outright asset purchases – the traditional method – will also be needed.
The full Fed proposal is here >>
Tags: Reverse Repos, Term Deposits, US Fed, US Federal Reserve.
You may also like to read:
Loading ...
December 29th, 2009 at 2:03 pm
I think talk of the Fed tightening anything is just that – talk.
The Fed currently still has sufficient credibility in the markets such that it can influence market participants simply by issuing statements. The problem is that if mumblings of tightening and withdrawing liquidity are not carried through then the Fed becomes the little boy who cried wolf.
December 29th, 2009 at 6:31 pm
My understanding is that they have been paying interest on reserve balances since Oct 2008..???
That explains the HUGE increase in reserves that Banks deposit with the FED
http://research.stlouisfed.org/fred2/series/WRESBAL
I could be wrong… need to double check.
December 30th, 2009 at 7:25 am
All this game means is the Fed creates a smaller amount of cash to suck out a greater amount. It reduces the potential for a Dollar collapse but does not stop the steady decline in value because the USA cannot pay its debts off. QED Gold will continue to rise to cover the Dollar decline. Commodities will also rise if they are priced in Dollars. The Fed can play all the games it can dream up but in the end the country is stuffed.
Likely there will be many staged events porking the Dollar and trumpeting the rise of the Greenback…all BS but great fun for the traders.
December 30th, 2009 at 1:02 pm
Read this: 2010 is going to be ‘interesting’ to say the very least.
“Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold… Or Else | zero hedge”
http://www.zerohedge.com/article/brace-impact-2010-private-demand-us-fixed-income-has-increase-elevenfold-or-else
December 30th, 2009 at 11:22 pm
will,
Great link..
“…$2.06 trillion will have to find non-Fed originating demand.”
WOW…. Are there enough dollars out there to fulfil that demand..??? and that is just USAs’ demand for credit..
What about the rest of the world..?????
long term rates are going up…up…up. AND there is nothing more inflationary than GOVT deficit spending… and we are doing that in a big way.
U are right Will, 2010 is going to be an interesting year.