Tuesday, September 20, 2016

Some necessary information regarding the Fed raising, or not raising rates.

As I said, the Fed uses communication as a transmission mechanism to affect rates.  They didn’t have to do that in the past and didn’t.  The rate changes were not telegraphed ahead of their arrival.

What changed is that they can’t directly affect rates any longer.  This is because they used to affect market rates by adding or subtracting reserves from the banking system.

They can’t do that now because the excess reserves are $2.5 trillion dollars.  They could add or subtract hundreds of billions of dollars and it wouldn’t have any affect as it is too small of an amount of money relative to the amount of reserves.  They would have to drain a couple of trillion dollars from reserves before they could again directly affect market rates.  Draining a couple of trillion dollars out of the banking system would kill the U.S. economy.  And the world economy.

All they have left is talking up market rates so they can follow them up. And they desperately want to raise rates to force up inflation to create more wealth effect.

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