Thursday, March 16, 2017

The Fed and the Facts

Once again, the media missed the story.  The headlines say:  "Fed Raises Rates."  What exactly did the Fed do, since ten year yields and mortgage rates are lower today than yesterday?  They certainly didn't raise those rates.  And, by the way, those rates matter.

Instead, the Fed now pays one percent on all commercial bank reserves parked at the Fed.  That arbitrarily forces the Federal Funds rate to one percent, since it is illogical for a commercial bank to loan reserves out to another bank at a lower rate than what the Fed is offering.  Whoop-te-do.

Of course, that isn't all the Fed did on Wednesday.  The Fed agreed to do (a limited amount of) repos at a minimum of 75 basis points.  Whether this works or not is anybody's guess since it is hard to imagine the Fed taking on 10 trillion in repos just to avoid looking stupid.

In any event, neither of these actions have implications for the broader rate spectrum.  One-day rates have been going up since December, 2015, but nothing else seems to be going with them.

Where is this story in the financial press?

The Fed announced that they do not intend to reduce their $ 4.6 trillion balance sheet, which ballooned over the Bernanke-Yellen years, from under one trillion to the current ridiculous levels.  And, why?  What economic theory suggests that anything virtuous is going to occur by the Fed arbitrarily expanding their balance sheet?

This whole business is ridiculous, has no support in economic theory and no empirical support.  This is equivalent to witchcraft.  Except that witchcraft is acknowledged to be absurd.  This isn't.  Yet.

The best analogy is to suppose you intended to raise the price of all fruits and vegetables and your policy was to bid $ 3 for every apple brought to you (assuming that apples were a dollar apiece, when you began the policy).  Okay, if you bought enough apples (heaven knows what you are going to do with them), you could force the price of apples to $ 3.  But, is there some predictable effect on the price of carrots or oranges or grapefruits.  Not likely.

The Fed should be abolished and replaced by a simple monetary rule and stop all the costly shenanigans.

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