Sabri writes:
Another thought!
Maybe, the Fed is doing this intentionally, although there is politics
involved in this, so one needs to be careful with using words such as
intentional. This sounds like a good way to increase the banks' capital
without increasing the money supply drastically.
===========================
At the outset of this thread, I suggested that "interest now being paid on
the reserves is a means of keeping them out of circulation, a form of
sterilization."
The Richmond Fed's Jeffrey Lacker noted in a speech last year that "lending
for extended periods requires offsetting reserve drains in order to maintain
the federal funds rate target. Until recently, all of the new lending
programs introduced by the Federal Reserve have been sterilized. The Federal
Reserve Banks new authority to pay interest on reserves means that interest
rates generally ought to remain above the interest rate on reserves even if
lending is not sterilized." (footnote 7)
http://www.richmondfed.org/press_room/speeches/president_jeff_lacker/2008/lacker_speech_20081119.cfm
My understanding is that the Fed may be not only acting out of concern that
selling Treasuries in open market operations to offset it's massive loans
would raise interest rates beyond it's target, but also because it has been
swapping the Treasuries on it's balance sheet for the MBS's and other toxic
assets held by the banks as a means of divesting them of these assets, at
least until it can return this revalued collateral to the banks following a
recovery.
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