tag:blogger.com,1999:blog-2499715909956774229.post5915755378975980036..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Fed Policy UpdateStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-2499715909956774229.post-8147372873819237722011-04-10T16:59:52.639-07:002011-04-10T16:59:52.639-07:00Excess reserves earn interest while borrowed fed f...Excess reserves earn interest while borrowed fed funds cost interest. <br /><br />Banks would probably not finance commercial loans with funds from the fed funds market, but a risk-reward analysis could convince banks to move funds from their reserve accounts at the fed into C&I, consumer, and/or real-estate loans.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-56231445294710819432011-04-10T09:12:51.445-07:002011-04-10T09:12:51.445-07:00How is a "hefty balance sheet" a source ...How is a "hefty balance sheet" a source of inflation risk? Metzler should know that the supply of reserves is perfectly elastic at any given FFR. On any given day, the system could force the Fed to supply $2tr of reserves in order to keep the FFR at zero. The pre-existence of ER's is irrelevant. Even if the system experienced widespread currency withdrawals, it could also access the necessary reserves through OMO. So what is the difference between $2tr in ER's and $2tr in OMO? I'm sure I am missing something, because Metzler and a dozens of others who make the "ER's are inflationary" claim must be right.<br /><br />IMO, ER's are merely an artifact of the attempt to depress term rates. The more they accumulate, the more term rates will rise when they stop. If the Fed doesn't want term rates to rise, it must, all else equal, never stop accumulating. It is expectations of chronic deficit monetization that are inflationary, not ER's per se. There are two reasons why markets would expect the Fed to avoid term rate increases: 1) it would jeopardize a recovery and raise unemployment from already-high levels; and 2) it would risk exploding deficit projections in out-years, sparking an adverse feedback loop of higher term rates/higher deficit projections. In a nutshell, both factors are plausible in the absence of a self-sustaining (non-stimulated) recovery. This is what the risks through QE but never admits.Anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-71376925588524360812011-04-08T20:02:28.467-07:002011-04-08T20:02:28.467-07:00John Cochrane's analysis of inflation in the E...John Cochrane's analysis of inflation in the European Economic Review seems to be the most coherent.Anonymousnoreply@blogger.com