So you think they’ll raise rates by increasing the interest on excess reserves?
My understanding is that they will raise the bracket. Fed funds rates will be manipulated by setting the discount rate above the rate paid on excess reserves.
The rate on excess reserves is now 0.25%. The discount rate is 0.75%. Huh. Anyway, I assume they will raise the rate on excess and required reserves and the discount rate in tandem.
Cites:
Why did the Federal Reserve start paying interest on reserve balances held on deposit at the Fed? Does the Fed pay interest on required reserves, excess reserves, or both? What interest rate does the Fed pay? - San Francisco Fed
Footnote 9: Federal Reserve's exit strategy - Federal Reserve Board
News:
Tim Duy: We learned today that the majority of the FOMC remains wedded to a December increase.
http://economistsview.typepad.com/timduy/2015/10/december-still-very-much-a-live-meeting.html
Oh well.
[INDENT]“December stays on the table. Very much so, in fact. … At this juncture, my expectation is that only disappointing data prevents the Fed from moving in December. It will be interesting to see how well the Fed statement holds up to the light of this week’s GDP report and the next two employment reports.”[/INDENT] Not to mention the CPI reports.
Stay tuned for the next episode of As the Economy Turns.
Last Spring, former Fed Chair and GWBush appointee Ben Bernanke discussed the natural rate of interest aka the equilibrium real interest rate aka the Wicksellian rate: The equilibrium interest rate is the real interest rate consistent with full employment of labor and capital resources, perhaps after some period of adjustment. Many factors affect the equilibrium rate, which can and does change over time. In a rapidly growing, dynamic economy, we would expect the equilibrium interest rate to be high, all else equal, reflecting the high prospective return on capital investments. In a slowly growing or recessionary economy, the equilibrium real rate is likely to be low, since investment opportunities are limited and relatively unprofitable. Government spending and taxation policies also affect the equilibrium real rate: Large deficits will tend to increase the equilibrium real rate (again, all else equal), because government borrowing diverts savings away from private investment.
If the Fed wants to see full employment of capital and labor resources (which, of course, it does), then its task amounts to using its influence over market interest rates to push those rates toward levels consistent with the equilibrium rate, or—more realistically—its best estimate of the equilibrium rate, which is not directly observable. Inflation has not accelerated. So there’s nothing unnatural about interest rate behavior over the past several years: if anything real rates have been too high, suggesting that the Fed has worked off an inflation target that is too low.
Bernanke’s post says little about what we should do the next meeting, but I thought his presentation of textbook economics was sound.
Over at Project Syndicate Brad DeLong reviews Bernanke’s memoir The Courage to Act. Bernanke conducted unprecedented unconventional monetary policy, yet the US nonetheless experienced a lost decade. Why? There are 4 hypotheses.
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Bernanke: at temporary savings glut artificially lengthened the time for aggressive monetary expansion to restore full prosperity. Could we have some fiscal stimulus please?
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Rogoff: Bernanke focused too much on the money supply. It would have been better for the Fed to buy risky debt and encourage lenders to write off losses.
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The Fed needed to target annual inflation above 2% and vow to do sufficient quantitative easing to reach the goal. I think that was Scott Sumner’s take. Expectations are the key factor in this framework.
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Monetary policy alone is not sufficient to beat recession at all times. You need to join monetary and fiscal policy to achieve takeoff.
I say that we should have applied Rooseveltian resolve. Try everything, and figure out what works later.
Sorry, but you’re wrong.
While it’s true that the Fed and the Treasury can’t fix certain problems: lack of oil or other energy sources, for example, or endemic corruption - they can fix the problems that are actually confronting the US, right now.
My view is that the best counter-cyclical policy on the fiscal side would be to raise taxes - even to the point of surplus - and use the money to pay down the debt.
On the monetary side, the Fed would sell off Treasuries.
The effect would be to suck money out of the economy - destroying it, actually. (The money, I mean, not the economy.)
Doing that would be disinflationary, because the value of money is determined by supply and demand, like any other product in a market. Reducing the supply increases the value.
A second, possibly better approach would be to create a new, better tax system than what we have now, make it permanent, and let the Fed control the amount of money in the economy.
The important thing, in my view, is to have a buffer stock of Fed-created money in the economy (as opposed to commercial bank money) which the Fed can manipulate more or less instantaneously.
I think that the over-reliance on commercial bank money is what’s created the cyclical nature of economic performance in the first place, and also what’s behind periodic financial crises, including the most recent one.
In the ordinary course of things - barring full employment and inflation - the Fed should be in the business of creating more money on a regular basis, because a growing economy needs a growing money supply.
That’s particularly true for a country like the US, where our money is in such a great state of demand that substantial amounts are going overseas and not coming back.
There’s no problem with foreigners wanting our money - in fact, it’s great for us. But we need it domestically as well, which means the money that leaves the country and doesn’t come back needs to be replaced.
On another note, I was watching the Republican debate, until Rand Paul and Ted Cruz (I think it was Cruz) started talking about the Fed. Are they really that clueless, or are they just lying?
I came across a couple of good articles in something called “The Week”.
Why balanced budgets are killing the Democratic Party
The author didn’t take the second step, which is to explain that the government doesn’t need balanced budget because the government can’t run out of money - it’s the source of it. But at least challenged Democrat kowtowing to balanced budgets.
The other wasWhy do secretaries need college degrees now?
Jeff Spross points out we’re nowhere near full employment, and that the evidence is in the relative bargaining power of employers and employees: why do secretaries need college degrees? There is no reason - but employers demand it because they can.
When we reach the point where real wages for regular people are going up, and employers are howling about how they can’t find workers, then we’ll know we’re there.
Ok, LinusK appears to be a countercyclic policy advocate, which is all good. But then you type this:
I’m not clear what you’re getting at here. The financial crisis was driven by non-bank mortgage lenders, investment banks, and off balance sheet activities of commercial banks. (And other factors.) Purchases and sales of treasuries by the Fed is routine and always has been. The Fed is shifting away from open market operations for the time being but not completely and I’m guessing not permanently.
Play with the scroll bar, and you can see the Fed’s stock of treasuries fall and rise in 2015, though it is essentially flat compared with QE.
So yes, they’ll raise rates on excess reserves.
I wish - but don’t expect - that people would understand what that means: it means the Fed is paying money - that would otherwise go to the Treasury - to banks. Banks that already have more money than they can lend. So that banks can continue sitting on the money they’re not lending, and charge higher rates on the money they do lend.
Sounds great for bankers. Pretty shitty deal for everybody else.
Eh. I understand other countries do things that way. The real problem is that the Fed may be jumping the gun.
Odds are close to 50-50 for a Dec increase, depending on how the data goes. I was highly dubious about September, but I can see this happening next month. It is reasonable from a certain perspective. Among other things you have to ignore the possibility that the US will be hit by a negative shock which pulls us into a deflationary trap. We entered the Great Recession with core CPI inflation near 2.4%. It’s now at 1.9%. Less wiggle room. Given the lost decade, I’d prefer a soft floor of 2.5% and a soft ceiling of 3.5%. Or nominal GDP level targeting.