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Tuesday, November 11, 2008


"the unthinkable has happened"

via ft -- deutsche bank expands on its consideration of quantitative easing in the united states, toward which fed rule changes which eliminate the incentive for a private interbank market has since pointed. DB titles its note, "losing control of monetary policy" -- evan as its efficacy falls to null -- examining the apparent inability of the fed to control the effective fed funds rate.

The main reason for this inefficiency has been that Treasury yields are so low that funds leak from the Treasury bill market to the fed funds market. This suppresses the effective funds rate, as investors seek out the higher return until the spread between bills and fed funds compresses. Another reason is that non-banks can participate in the fed funds market, but are excluded from receiving interest on Federal Reserve balances, which are meant for depository institutions… If the agencies supplied these funds to the fed funds market, they would potentially drive the effective fed funds rate lower. Thus monetary policy has been more stimulative than the Fed has intended by setting the target rate, a symptom of an increasing loss of control over monetary conditions.

Which is a bit of a mea culpa to the previous note, when DB said the status of the USD and treasury securities as safe-haven assets was likely to mitigate the need for quantitative easing. That however, so far, is not happening for the reasons outlined above. In addition, the dollar, is in for a correction, according to some analysts.

Anyway, DB for one is recommending economy-watchers look away from rate changes in favour of the Fed’s balance sheet:

In summary, US monetary policy is already close to a zerointerest- rate policy, and has already begun a form of quantitative easing…. Rather than looking for the FOMC’s next setting of the fed funds target, we would pay more attention to the amount of excess reserves as an indicator of monetary policy stimulus. An increase in excess reserves could mean the Fed is adding liquidity, but it could also mean the banking system is failing to pass the liquidity on to the rest of the economy. Likewise, declining reserves could mean either a drawdown of liquidity, or a normalization in money market lending. Interpreting the moves could thus be quite important.

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gm - as things stand now, i won't be posting comments on your blog anymore.

please accept my sincere thanks - my exchanges with you have been quite a party. for me anyway, even great.

if you ever want to reach me, please do. i'd be honored.

best regards always - - dc

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thanks dc -- the pleasure's been mine -- i hope things go well for you. hope to talk again soon!

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