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Can Fed policy work just by being announced and not necessarily being used?

Summary:
Why Growth in the Fed’s Asset Portfolio Has Paused: That doesn’t mean the central bank has dialed back its support for markets or the economy by Nick Timiraos of The WSJ. Private invetors might not want to buy certain assets like, for instance, corporate bonds. They may be pessimistic. Yet if the Fed announces a willingness to buy them, then investors have more confidence that these assets will retain their value even if the Fed does itself does not buy many of them.Excerpts: "The Fed’s asset buying falls into three categories. The first is a classic lender of last resort function: The central bank flooded short-term funding markets—the plumbing of modern finance—with loans.""The central bank this month had no takers for short-term overnight loans called repurchase agreements, down

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Why Growth in the Fed’s Asset Portfolio Has Paused: That doesn’t mean the central bank has dialed back its support for markets or the economy by Nick Timiraos of The WSJ.

Private invetors might not want to buy certain assets like, for instance, corporate bonds. They may be pessimistic. Yet if the Fed announces a willingness to buy them, then investors have more confidence that these assets will retain their value even if the Fed does itself does not buy many of them.

Excerpts:

"The Fed’s asset buying falls into three categories. The first is a classic lender of last resort function: The central bank flooded short-term funding markets—the plumbing of modern finance—with loans."

"The central bank this month had no takers for short-term overnight loans called repurchase agreements, down from more than $440 billion in March. Arrangements where the Fed lends dollars abroad via currency “swaps” with foreign central banks declined to $122 billion last week from $449 billion in May.

Second, the Fed stepped in as a market maker of last resort by purchasing Treasurys and mortgage-backed securities when fire sales of these normally supersafe assets overwhelmed Wall Street dealers.

Third, the central bank backstopped an array of credit markets, interventions that brought officials well past the central bank’s comfort zone. The Fed is purchasing corporate bonds, loans to small businesses, and short-term debts of counties and states"

"In some cases, such as the Main Street Lending Program for small and midsize businesses, low uptake reflects complications the Fed and Treasury encountered launching the program and enticing banks and borrowers to use it. For others, lower volumes reflect the success the mere announcement of the Fed backstops have had in spurring private investors to buy assets.

“Looking at the quantity of loans the Fed is making is the wrong measure of success,” said Tiffany Wilding, an economist at Pacific Investment Management Co. If the Fed’s credit programs go to “full capacity, then it means conditions have worsened.”"

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