The Fed has already cut interest rates

[gonegolfin]

The Federal Reserve has essentially already cut its target interest rate for federal funds, despite not making an announcement of a new target rate. Federal funds have traded between 1.08% and 2.03% percent over the last nine trading days. The next high (after 2.03%) was 1.56%. Federal funds averaged 1.15% yesterday.

This means that since 9/19, the Fed has not been sterilizing all of its liquidity injections.

Brian

[weatherbill]

say that in redneck terms, huh, will ya?

[ord33]

Brian - you seem to really know your stuff. I had a question about a section in the bill and would like your input on its implications:

SEC. 128. ACCELERATION OF EFFECTIVE DATE.
Section 203 of the Financial Services Regulatory Re
lief Act of 2006 (12 U.S.C. 461 note) is amended by strik
ing ‘‘October 1, 2011’’ and inserting ‘‘October 1, 2008’’.

The above is in reference to:

http://www4.law.cornell.edu/uscode/s...000-notes.html

Amendment of Subsections (b) and (c)

Pub. L. 109–351, title II, §§ 201–203, Oct. 13, 2006, §§ 201–203, 120 Stat. 1968, provided that, effective Oct. 1, 2011, this section is amended— (1) in subsection (b)(2)(A), by striking “the ratio of 3 per centum” and inserting “a ratio of not greater than 3 percent (and which may be zero)” in clause (i) and by striking “and not less than 8 per centum,” and inserting “(and which may be zero),” in clause (ii); (2) in subsection (b)(4), by striking subparagraph (C) and redesignating subparagraphs (D) and (E) as subparagraphs (C) and (D), respectively; (3) in subsection (b), by adding at the end the following:

The original code (prior to amendment) was:
http://www4.law.cornell.edu/uscode/h...1----000-.html

(2)
(A) Each depository institution shall maintain reserves against its transaction accounts as the Board may prescribe by regulation solely for the purpose of implementing monetary policy—
(i) in the ratio of 3 per centum for that portion of its total transaction accounts of $25,000,000 or less, subject to subparagraph (C); and
(ii) in the ratio of 12 per centum, or in such other ratio as the Board may prescribe not greater than 14 per centum and not less than 8 per centum, for that portion of its total transaction accounts in excess of $25,000,000, subject to subparagraph (C).
(B) Each depository institution shall maintain reserves against its nonpersonal time deposits in the ratio of 3 per centum, or in such other ratio not greater than 9 per centum and not less than zero per centum as the Board may prescribe by regulation solely for the purpose of implementing monetary policy.

A lot of people have been up in arms about this, but the way I read it the nonpersonal time accounts are those changed with the new bill. Below is the definition of the terms, but I do not understand what a nonpersonal time deposit - is this more like lending between banks and when they deposit the amount it is considered a "nonpersonal time deposit? Would you care to take a second and explain this?

(C) The term “transaction account” means a deposit or account on which the depositor or account holder is permitted to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, telephone transfers, or other similar items for the purpose of making payments or transfers to third persons or others. Such term includes demand deposits, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers, and share draft accounts.
(D) The term “nonpersonal time deposits” means a transferable time deposit or account or a time deposit or account representing funds deposited to the credit of, or in which any beneficial interest is held by, a depositor who is not a natural person.

Thanks!

[gonegolfin]

Quote:
(2)
(A) Each depository institution shall maintain reserves against its transaction accounts as the Board may prescribe by regulation solely for the purpose of implementing monetary policy—
(i) in the ratio of 3 per centum for that portion of its total transaction accounts of $25,000,000 or less, subject to subparagraph (C); and
(ii) in the ratio of 12 per centum, or in such other ratio as the Board may prescribe not greater than 14 per centum and not less than 8 per centum, for that portion of its total transaction accounts in excess of $25,000,000, subject to subparagraph (C).
(B) Each depository institution shall maintain reserves against its nonpersonal time deposits in the ratio of 3 per centum, or in such other ratio not greater than 9 per centum and not less than zero per centum as the Board may prescribe by regulation solely for the purpose of implementing monetary policy.

A lot of people have been up in arms about this, but the way I read it the nonpersonal time accounts are those changed with the new bill. Below is the definition of the terms, but I do not understand what a nonpersonal time deposit - is this more like lending between banks and when they deposit the amount it is considered a "nonpersonal time deposit? Would you care to take a second and explain this?

No. A nonpersonal time deposit is simply a time deposit (as opposed to a demand deposit) that is owned by someone else other than an individual. For example, a corporation or a foreign bank.

It looks like this language is simply specifying reserve requirements for these types of deposits, which is less than other types of deposits. The theory behind allowing a lesser reserve requirement for time deposits is that the funds cannot be drawn on-demand without penalty.

Brian

[bojo68]

1 more for a translation of "sterilizing" into Redneck.

[gonegolfin]

say that in redneck terms, huh, will ya?

Well ... not sure about redneck terms ... but try this ...

Let's say that the Fed loans $75 billion dollars at auction to a set of banks, in return for collateral accepted by the auction (I am using the Term Auction Facility as an example here). That collateral may be agency bonds (Fannie Mae, Freddie Mac debt) or it may be mortgage-backed securities, as an example. If this is all the Fed did, this injection of liquidity into the system (newly created money) would cause the federal funds rate drop. And it may drop below the Fed's target rate for federal funds. This is obviously inflationary.

So, the Fed sterilizes some or all of this injection (according to their goals with respect to the federal funds rate) by selling treasuries from their portfolio. When the Fed sells treasuries in the open market, money is removed from the money supply. This is obviously deflationary. Thus, the intent here is to offset some or all of the original liquidity injection(s) (sterilization). So, effectively, it is an indirect method of swapping treasuries for the above mentioned collateral. But I think that an unintended consequence of this is that the healthier banks (the ones that actually have some cash to lend) purchase the treasuries instead of lending into the economy (another example of government debt crowding out real economic investment). Meanwhile, the less healthy banks that took the cash loan in exchange for the collateral are the least likely to use this money for lending purposes. They may be using it to help stay solvent.

For most of the past year, the Fed has been piling up less credit-worthy assets on its balance sheet in exchange for much higher quality debt (treasuries). Thus, the Fed has taken on substantially much more credit risk.

Brian

[freelance]

Well ... not sure about redneck terms ... but try this ...

Let's say that the Fed loans $75 billion dollars at auction to a set of banks, in return for collateral accepted by the auction (I am using the Term Auction Facility as an example here). That collateral may be agency bonds (Fannie Mae, Freddie Mac debt) or it may be mortgage-backed securities, as an example. If this is all the Fed did, this injection of liquidity into the system (newly created money) would cause the federal funds rate drop. And it may drop below the Fed's target rate for federal funds. This is obviously inflationary.

So, the Fed sterilizes some or all of this injection (according to their goals with respect to the federal funds rate) by selling treasuries from their portfolio. When the Fed sells treasuries in the open market, money is removed from the money supply. This is obviously deflationary. Thus, the intent here is to offset some or all of the original liquidity injection(s) (sterilization). So, effectively, it is an indirect method of swapping treasuries for the above mentioned collateral. But I think that an unintended consequence of this is that the healthier banks (the ones that actually have some cash to lend) purchase the treasuries instead of lending into the economy (another example of government debt crowding out real economic investment). Meanwhile, the less healthy banks that took the cash loan in exchange for the collateral are the least likely to use this money for lending purposes. They may be using it to help stay solvent.

For most of the past year, the Fed has been piling up less credit-worthy assets on its balance sheet in exchange for much higher quality debt (treasuries). Thus, the Fed has taken on substantially much more credit risk.

Brian

So, do I understand that bailout or no bailout, there's still going to be a credit crunch in practical terms. IOW, it's still going to be next to impossible to get credit?

[gonegolfin]

So, do I understand that bailout or no bailout, there's still going to be a credit crunch in practical terms. IOW, it's still going to be next to impossible to get credit?

I am not convinced this bailout will do much, if anything, to encourage lenders to lend again. In fact, as referenced in the below posting entitled "Unintended consequences of the bailout" ...

http://www.ronpaulforums.com/showthread.php?t=160635

... I think that the bailout may crowd out debt investment that is sorely needed, making the matter worse (for example, commercial paper).

Brian