Fed Exit Strategy? (An Update)

Discussion in 'Economy' started by gonegolfin, Feb 16, 2010.

  1. gonegolfin
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    gonegolfin Member

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    Last edited: Feb 16, 2010
  2. FireFly
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    FireFly Bright F**ker

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    There is no exit. The government will continue to buy up stocks, bonds, & property until it has a controlling interest in our lives.
     
  3. Neubarth
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    Neubarth At the Ballpark July 30th

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    There is no exit while the economy continues to crash. Maybe in 4 or 5 years?
     
  4. FireFly
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    FireFly Bright F**ker

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    Japan has been in the same boat for 20 years now. It seems to me the downturn really started here in the USA the second half of 1998 & we have been trying to inflate our way out of it every since. Now we are getting hit with baby boomer retirement on top of this cycle. I bet we are stuck for at least 10 more years.
     
  5. mayya555
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    mayya555 Member

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    This will lead to general economy collapse. I doubt they would be that stupid.
     
  6. ReAmericaNow
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    ReAmericaNow Member

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    End the fed?
     
  7. georgephillip
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    georgephillip Gold Member Supporting Member

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    FireFly"

    Will Government OR Wall Street continue buying stocks, bonds, and property until full control is achieved?
    Does the answer to my question qualify as a distinction without a difference?
    Big Government and Big Business are fusing in ways Mussolini would celebrate
     
  8. Paulie
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    Paulie Platinum Member

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    Government and big business have been fused for decades.
     
  9. gonegolfin
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    gonegolfin Member

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    As expected, the market overreacted to the Fed's decision to increase the discount rate Thursday. And this is just the irrelevant discount rate ... relevant only to the small banking institutions receiving a small amount of funding at the discount window. Simply noise. Imagine the market reaction when they go to move the federal funds rate (which, again, is now an impotent tool w/respect to monetary policy) ... but as I said, the only way they get the federal funds market to trade at a higher rate is to 1) raise the interest rate paid on reserves or 2) significantly drain reserves by selling assets. Option #2 is not going to happen anytime soon (there is a strong argument that it will never happen ... that we are at a new normal with respect to reserve levels). In our present situation, neither raising the federal funds rate nor raising the interest rate paid on reserves drains reserves from the banking system. These moves do not shrink the Fed balance sheet. The exit has not begun.

    The below taken from my recent article ... "Fed Exit Strategy? (An Update)"

    "The financial press has been fixated on interest rates influenced and/or set by the Fed, particularly when the Fed might begin increasing its target rate for federal funds (currently managed between 0% and 0.25%) as well as the discount rate (currently 0.50%). But focusing on these interest rates is not keeping the proverbial eye on the ball. Monetary policy targeting the federal funds rate (and discount rate) is impotent now (as discussed in the July '09 article). Massive bank reserve expansion by the Fed made sure of that."

    "Such Fed actions will, however, have a psychological impact on investors accustomed to monetary policy before September of 2008 and believe that such policy is as impactful now as it was then."
    --

    Yes, investors were fooled as they still believe such policy by the Fed will impact the markets in the same way they did before September 2008 (when monetary policy took an unprecedented path).

    Market overreaction is covered here ...

    "Markets Misread Fed's Rate Move as Central Bank Stumbles"
    http://finance.yahoo.com/news/Market...&asset=&ccode=

    "Fed Seeks to Calm Investors After Surprise Discount Rate Rise"
    http://moneynews.com/Headline/Fed-Ca...2/19/id/350287

    Brian
     
    Last edited: Feb 19, 2010
  10. Paulie
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    Paulie Platinum Member

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    Brian, I thought that the fed funds rate increases BECAUSE the Fed sells assets?

    Institutions purchase the assets from the Fed with their reserves, which causes the rate to rise because there is now less available money to lend, which causes the cost of borrowing to go up due to the now decreased supply of money?

    Am I wrong?

    And if this is the case, then why would raising the federal funds rate not drain reserves, like you are saying?
     
    Last edited: Feb 20, 2010

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