Wednesday, December 10, 2008

WSJ: Fed Weighs Debt Sales of Its Own



Fed already does this. They're called "Federal Reserve Notes." It's the cash you carry around in your wallet.

The Fed has unlimited ability to add to bank reserves, however, it needs things to sell to manage those reserves. Historically, Treasuries have served that purpose, however, if it decides to issue its own debt it's only to lend more flexibility to this function. Even so, it is only designed for reserve maintenence. That's it. The media will misconstrue this one big time.

5 comments:

STF said...

Probably has something to do with the fact that they can't hit the fed funds rate target still, so this would enable them to drain reserves (actually, exchange overnight deposits for time deposits held at the Fed). As it turns out, there are enough non-bank institutions out there with reserve accounts but legally prohibited from receiving interest payment that even with interest payment at the target rate they can't get the daily effective rate to equal the target.

Mike Norman said...

How ironic. It turns out that all the "massive gov't borrowing" that the gold standard crowd is screaming about is, unfortunately, not happening fast enough and to a sufficiently large degree, so it's leaving the Fed in need of its own instrument to manage reserves.

Matt Franko said...

Mike,
Ive always wondered if the $5T of public "debt" was enough to maintain interest rates in our $14T (annual) economy.
With China and Japan (and others) "hoarding" treasuries and in effect taking about $2T out of the market, that only leaves probably about $3T to trade. Also, that $3T of bonds is spread out over multiple years maturity. If (Im guessing) the average duration of US Govt debt is about 6 years, then the US economy will output 6 x14= $84T over the same timeframe. Is an approx. $3T fund enough to influence credit in an $84T economy? What about in times of extreme stress such as now?

Your point is well taken.

Resp,

STF said...

Also . . . don't know if the Fed realizes it, but this could be a much easlier avenue for them to set rates along the term structure, which they've been hinting at, since they can obviously set the rate they will pay on time deposits at any maturity. Even better if they took Warren's idea and loaned at these maturities too, setting an upper and lower bound at different maturities.

STF said...

Love the pool and monopoly analogies!