What’s the actual difference in months between “an extended period” and “before long?”
That’s what global financial markets are trying to figure out this morning after Federal Reserve chairman Ben Bernanke told the Financial Services Committee of the U.S. House of Representatives that the Fed may raise the discount rate “before long” as part of its plan to exit a period of extraordinary Federal Reserve intervention in the financial markets. The discount rate interest rate target is now 0% to 0.25%.
That’s a change from the Fed’s mantra, repeated for month after month after meetings of the Federal Open Market Committee that sets interest rate target, that low rates are warranted “for an extended period.”
But it’s by no means clear if the new language means the Federal Reserve will start to raise interest rates in three months or six or nine or ….
Count on the Fed to make a murky situation even murkier. How’s that possible?
Bernanke said that the Fed may temporarily, however long that might be, move away from using the discount rate, the interest rate that banks pay when they borrow funds from a Federal Reserve bank for the short term, as its interest rate target. Instead, the central bank might start paying more attention to the interest rate that it pays banks that keep money on deposit with the Federal Reserve.
That rate has taken on more importance as the Federal Reserve tries to manage the vast expansion of the money supply created by its emergency purchase of bonds and other securities from banks during the financial crisis. Banks deposited much of the cash from those sales back with the Federal Reserve. The Fed is worried that if banks suddenly withdraw that money and start turning too much of it into loans that it would lead to run-away inflation. To control the rate at which that money flows into loans, the Federal Reserve plans to raise the interest that it pays banks for their deposits.
As I understand the new system of interest rate targets that the Fed is proposing, the Fed would watch both the discount rate and the deposit interest rate and set policy by managing the spread between those rates as well as by setting the absolute levels of those rates.
All those details of how the Fed plans on managing monetary policy in the months ahead are important, no doubt, but what financial market really want to know is when the Fed will start raising U.S. interest rates.
I don’t think you can answer that question by studying the Fed’s language right now, no matter how finely you slice and dice those words.
The Fed is on hold, just like the rest of us, until it gets a clearer picture of the strength of the U.S. economic recovery. The Fed won’t move as long as it thinks raising interest rates could damage or sink the recovery. The next big indicator of strength of weakness will be first quarter GDP numbers in April.
The Fed will get to see those numbers before investors will but not tremendously earlier. Until then we all wait.
If you don’t see the date (of fed raising rate), then the Fed does not have it which means even the Fed does not know when to raise.
That isthe solution I have been watching.
The Fed will simply pay the banks more to hold their cash on deposit at the fed, than the banks can earn by loaning it.
That keeps the money out of the general economy, it holds …us… in a on going state of low inflation, and depression, and the banks get their trillion s in bailouts.
The question is then, what happens to the dollar and the market. The fuel of the market have been printed money, not sales profits. Soon the money fueling the market will run out, and the depression will hold down profits. I’d almost say we may have seen a market top.
The Fed’s other problem is the impact on the US gov’ts deficit when they raise rates, since such a large chunk of the debt is short-term and is constantly being rolled-over.
You do have to find some humor in Bernanke worrying about banks lending too much, when they’ve barely been lending at all!
I thought the problem was that the banks weren’t lending enough… now the conern is that they will suddenly lend too much?
The Fed is following the New Zealand Central Bank Experiment.
Well, since then we all can relax. We all know that the Central Banks will never get that ‘date’ right. They will be either early or late. That is the question.