Monday, January 18, 2010

Fed Watch: "It's not about interest rates yet"

From Tim Duy:
St. Louis Fed President James Bullard is delivering a pretty clear message. In his view, policy for the foreseeable future is about altering the rate of asset purchases, not interest rates. This will be a challenging new ocean for Fed Watchers to navigate. Will the Fed scale up asset purchase by $25 billion? $50 billion? Hold steady? Sell $25 billion back into the markets? Fun, fun, fun.
What I find interesting is that, initially, when the Fed entered quantitative easing (or qualitative easing if you prefer to call it that way - I personally believe it's not what the Fed buys but how much of anything it buys), they decided to start paying interest on excess reserves. The goal was to be able to eventually raise rates without having to scale back the Fed's balance sheet.

Look where we are today: banks are criticized for not lending out their excess reserves and the Fed is talking about managing policy using its long term assets before acting on short term rates.

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