Schizophrenic security markets are reflecting the Federal Reserve’s dilemma. It’s torn between reducing and eventually eliminating its ongoing additions to huge excess member-bank reserves and supporting what it sees as a still fragile economy with unacceptably high unemployment.
With trillion-dollar federal deficits and gridlock in Washington, further fiscal stimulus is off the table. So monetary easing is the only game in town. And with the federal funds rate already at zero, it’s left to quantitative easing.
When the Fed buys securities, its payments add to bank reserves, which can then be lent and re-lent in the fractional reserve system. As a result, in normal times each extra dollar in reserves results in $79.50 more in M2 money. But with banks reluctant to lend and creditworthy borrowers eschewing new loans, each new dollar in reserves has boosted M2 by only $1.40 since August 2008, when massive central bank easing began.
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With trillion-dollar federal deficits and gridlock in Washington, further fiscal stimulus is off the table. So monetary easing is the only game in town. And with the federal funds rate already at zero, it’s left to quantitative easing.
When the Fed buys securities, its payments add to bank reserves, which can then be lent and re-lent in the fractional reserve system. As a result, in normal times each extra dollar in reserves results in $79.50 more in M2 money. But with banks reluctant to lend and creditworthy borrowers eschewing new loans, each new dollar in reserves has boosted M2 by only $1.40 since August 2008, when massive central bank easing began.
Full Miami News >>>
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