In a sickening and twisted story from Wonderland, people including reporters, are buying into the central banker insanity…
Fed Relies on Bank Reserves to Stem Inflation When Crisis Eases
By Steve Matthews and Michael McKee
April 28 (Bloomberg) -- Federal Reserve officials are relying on interest paid on bank reserves to help stem inflation once the economy stabilizes, spurring some former insiders to intensify their warnings that consumer prices may soar.
By paying lenders to keep cash on deposit at the central bank, the Fed is seeking to prevent the money being poured into the broader economy, potentially pushing prices higher. The strategy is a gamble: interest on reserves last year failed to stop the benchmark interest rate from falling below the policy makers’ target. Officials may discuss the issue at their gathering today and tomorrow in Washington.
The debate is likely to intensify as indicators suggest the worst of the recession is past, with prospects strengthening for growth in 2010. Once the economy does turn, Chairman Ben S. Bernanke and his colleagues will need to contend with the consequences of more than doubling the Fed’s balance sheet to $2.2 trillion, analysts said.
“You’ve got the raw material there for a rapid monetary expansion and credit expansion,” said former St. Louis Fed President William Poole, a senior adviser to Merk Investments LLC of Palo Alto, California, and a contributor to Bloomberg.
Investors’ expectations for inflation are climbing amid signs the grip of the financial crisis is easing. One measure of 10-year inflation expectations, taken from the difference between yields on 10-year Treasury Inflation Protected Securities and regular Treasuries, climbed to 1.55 percent yesterday, the highest level in almost seven months.
Policy makers “have to be more aggressive than in the past about stopping inflation,” said Allan Meltzer, the Fed historian and professor of political economy at Carnegie Mellon University in Pittsburgh.
Bernanke said in an April 14 speech in Atlanta that discussions about how to withdraw the Fed’s monetary stimulus once the recovery takes hold “have occupied a significant portion of recent FOMC meetings.”
The Fed’s Open Market Committee may tomorrow leave its benchmark rate target at zero to 0.25 percent and maintain its goals for purchases of Treasuries and mortgage securities, economists said. An announcement is expected around 2:15 p.m.
Congress approved in 2006 the paying of interest on reserves from 2011. Bernanke requested last May that the date be moved forward so the central bank could have a tool to help keep the federal funds rate closer to the target rate while it flooded the banking system with billions of dollars of cash.
After gaining congressional approval, the central bank began paying interest on reserves in October.
Some former Fed officials are skeptical the new policy instrument will enable the FOMC to curb an increase in prices.
“It doesn’t sound to me like much of an exit strategy,” said Robert Eisenbeis, chief monetary economist for Cumberland Advisors Inc. and former research director at the Atlanta Fed. “There is a big risk of inflation.”
Unlike during previous recoveries, when banks had to raise additional funds to begin making loans, excess capital is already on their books, Poole said. “Banks will be able to fund new loans by drawing down reserve balances, rather than go into the market,” he said.
Also, the Fed doesn’t have the authority to pay interest on reserves held by government-sponsored enterprises Fannie Mae and Freddie Mac, leaving them free to lend any excess reserves. Some smaller banks also keep their reserves at larger banks rather than at the Fed, and don’t receive interest.
To lean against inflation, the Fed will need at the start of a recovery to begin raising the reserve rate and the federal funds rate, even if unemployment is still high. The fed funds rate is the rate banks charge each other for overnight loans. The jobless rate will reach 9.5 percent in the final three months of the year, according to economists surveyed by Bloomberg.
Policy makers favoring an increase in interest rates will face resistance from lawmakers, Eisenbeis said.
“If you have to turn policy while unemployment is high, politicians are going to be screaming like mad that the Fed is taking away the punchbowl too early,” he said.
Bernanke and other Fed officials have voiced confidence they can snuff out any threat of surging prices even after pursuing an unprecedented policy of cutting the main rate to as low as zero and providing lending to nonbanks.
“I am not worried at all that the Federal Reserve’s balance sheet will generate an inflation problem,” William Dudley, president of the New York Federal Reserve Bank, said in an April 18 speech in Nashville.
Still, Dudley acknowledged “worry in some quarters that paying interest on excess reserves might not work very well as a tool for controlling the federal funds rate.”
This is the most asinine article I have read in quite some time. Yes, back in October Paulson and fellow “club” members pressured Congress into approving the paying of taxpayer monies in “interest” for the bank’s “reserves.” THIS IS THE MOST BLATANT CRIME I HAVE EVER SEEN.
Banks are allowed the PRIVILEGE of loaning money and charging USURIOUS interest rates and fees IF they hold enough in RESERVE to accomplish such lending without undo risk. The situation now is that THE BANKS HAVE NO REAL RESERVES despite what the fed puts out on their charts. The charts have been whipsawed because they are playing games with the TARP and other borrowed money and how it is counted. The banks have lent the government their near worthless crap in exchange for real taxpayer backed dollars and thus their reserves are BORROWED despite how they now claim it is not. They mark all their assets to fantasy and NOW CHARGE THE TAXPAYERS for the PHONY reserves that they supposedly hold.
Let’s take a look at the supposed non-borrowed reserves. Note how this was hugely negative and was whipsawed back to positive just prior to October of last year:
How or why did that change occur? Did the banks suddenly grow money? Did the TARP allow the banks to grow that much in supposed reserves? Remember, the FED doesn’t GIVE money away (cough, cough, bullshit), they only “loan” it. So, if the TARP money is borrowed and their “reserves” grew from the TARP, then their reserves are BORROWED. Yet, the chart above says that non-borrowed reserves are at their highest point in history! Amazing how that happens just before and after Congress agrees to pay them for their supposed reserves which is a concept that is deplorable to begin with.
So now we all of a sudden have massive “excess” reserves:
And as you can see, total reserves peaked right around the October time frame.
Now, if your intention is to stimulate the economy and to get “credit” (debt) flowing again, wouldn’t you want to encourage the banks to get their money out into the system? Or is it that “confidence” in the banks is more important?
Now they are claiming they can use it as a policy tool to incentive banks to hold reserves and slow the economy when the time comes? Isn’t that what they are already doing? Do they plan on paying more money we don’t have to the banks as if they can’t make enough already?
I AM SICK OF THEIR LIES, FALSE ACCOUNTING, AND BLATANT ROBERY. Paying banks money to hold reserves is sick, morally and ethically bankrupt. A bank is by rights already a privileged institution and keeping reserves is all that is asked for them to earn that privilege. Paying them for those reserves is asinine in the extreme. They are absolutely playing games with what reserves are, who holds them, and it is simply another excuse to take money and leave Americans further in debt.
DISGUSTING. These people belong in prison at best. They are, in fact, traitors to America and should be treated as such. Look up the penalty for treason.