Monday, 15 March 2010

Fed pays interest on bank reserves!

This is sticking plaster to cover up a blunder, isn’t it?

Instead of giving stimulus to Main Street or State or local governments, most of the stimulus has gone to Wall Street.

Put another way, Government – central bank machines have stuffed the pockets of people and institutions who are unlikely to spend the trillions involved, e.g. as part of the quantitative easing program. These trillions just get dumped in commercial banks.

The banks cannot lend much of it because not much demand is coming from Main Street. Thus interest rates plummet. Thus the Fed has to pay interest on bank reserves, unless interest rates are to go negative. Or as the Fed puts it “Recently the Desk has encountered difficulty achieving the operating target for the federal funds rate set by the FOMC....” (See item 3 here.)

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