Is Bernanke's helicopter about to take off?
Simon Ward
3 Comments
Federal Reserve Bank credit – the Fed’s aggregate lending to the banking system – rose by an unprecedented $219 billion, or 22%, in the week to last Wednesday. This reflected increases in currency swaps with other central banks, lending to banks to finance purchases of asset-backed commercial paper, primary dealer and other broker-dealer credit and the AIG loan.
The annual growth rate of Fed credit is now 32%, exceeding the levels reached at end-1999, when the Y2K computer scare led to a precautionary dash for cash, and after the 911 terrorist attacks, which temporarily disrupted the payments system – see first chart.
A key issue is whether the Fed will fully sterilise the impact of its increased lending on the monetary base (i.e. currency in circulation and bank reserves held with the Fed) – failure to do so would amount to “printing money”. As the chart shows, monetary base growth also rose sharply last week but this may reflect the technical difficulty of sterilising such a large injection immediately.
The short-term rise in bank reserves has pushed the actual level of the Fed funds rate well below the 2% target – see second chart. This amounts to an effective easing of policy, albeit possibly temporary.
While the jury is out, I doubt the Fed is yet ready to embark on an explicit policy of expanding the monetary base. Unlike Japan before its adoption of “quantitative easing” in 2001, the US still faces inflationary rather than deflationary risks. Flooding the banking system with reserves would risk a collapse in the dollar and a sharp rise in Treasury yields, exacerbating current financial difficulties.
View Printer Friendly Version
Email Article to Friend
Reader Comments (3)
Simon, can you expand on the comment re sterilization? ie, How would the Fed sterilize this move specifically? And what data would we look for at the Fed site to confirm it? Thanks for sharing.
If I read the "sloshreport" correctly, the FED has drained capital the latest weeks week:
http://www.gmtfo.com/reporeader/OMOps.aspx
How will that be inflationary? And remember that this is all loans. Loans are deflationary because it comes with interest. As long as they keep it that way they are not printing in my view. Am I correct or am I totally misunderstanding this?
The Fed sterilises the impact of increased lending on bank reserves by selling Treasuries, reducing its conventional repo lending or conducting reverse repos. These can be monitored on a weekly basis in the Fed's H.4.1 release, along with banks' reserve balances at the Fed. The latter have risen from $82 billion to $171 billion over the last fortnight, indicating incomplete sterilisation. It remains unclear whether this is temporary or reflects a deliberate policy shift.
As I understand it, the "Slosh Report" site covers only a sub-set of influences on bank reserves, e.g. it omits the impact of the recent huge expansion of currency swaps as well as the AIG loan. The Fed's H.4.1 is comprehensive although only available weekly not daily.