I did a fiddling interview amongst Mary Kissel of the Wall Street Journal, next upward on thursday's oped. Mary is, every bit yous tin post away tell, a well-informed interviewer as well as asks or as well as thence tough questions. She did a cracking project of pushing difficult on the commons Wall Street wisdom most how the Fed, though it has non done anything but beak inwards years, is secretly behind every gyration of stock or housing prices.
The key betoken came to me hours later, every bit it normally does. Is the Fed inwards fact "holding down" involvement rates? Is at that spot or as well as thence form out of natural marketplace equilibrium that features higher rates now, but the Fed is pushing downward rates? That's the conventional view, clearly expressed inwards Mary's questions.
Well, let's mean value most that. If a key depository fiscal establishment were belongings downward rates, what would it do? Answer, it would lend a lot of coin at depression rates. Money would hold upward flowing out the discount window (that's where the Fed lends to banks), to banks, as well as through banks to the balance of the economy, flooding the house amongst low-rate loans. The involvement charge per unit of measurement the Fed pays on reserves as well as banks pay to borrow from the Fed would hold upward depression compared to marketplace rates; credit as well as term spreads would hold upward large, every bit the Fed would hold upward trying to drag downward those marketplace rates.
That is, of course, the exact reverse of what's happening now. Banks are lending the Fed most $3 trillion worth of reserves, reserves the banks could become out as well as lend elsewhere if the marketplace were producing cracking opportunities. Spreads of other rates over the rates banks lend to or borrow from the Fed are really low, non really high. Deposits are flooding inwards to banks, non loans out of banks.
If yous simply await out the window, our economic scheme looks a lot to a greater extent than similar ane inwards which the Fed is keeping rates high, yesteryear sucking deposits out of the economic scheme as well as paying banks to a greater extent than than they tin post away larn elsewhere; non pushing rates down, yesteryear lending a lot to banks at rates lower than they tin post away larn elsewhere.
In reality of course, the Fed isn't doing that much of anything. Lots of deposits (saving) as well as a dearth of need for investment (borrowing) drives (real) involvement rates down, as well as at that spot is non a whole lot the Fed tin post away produce most that. Except to see the parade going by, catch a flag, fountain inwards front end as well as pretend to hold upward inwards charge.
