The Six Trillion Dollar Chairman

AsThe Wall Street Journal,The New York Times, and several other news outlets reported recently, although it has managed to avoid setting off anothertaper tantrum like that of 2013, the Fed is having a bad case of unwind jitters, thanks to unanticipated tightening in the market for fed funds.That tightening has manifested itself in a considerable narrowing, since the Fed began unwinding in late October 2017, of the gap between the Fed ’s IOER rate and the “effective federal funds” (EFF) rate — meaning the actual rate banks have had to pay other banks, or GSEs with Fed accounts, for unsecured, overnight funds.In effect the narrowing IOER-EFF gap means that the Fed ’s recent IOER rate hikes have ended up being more potent than was expected. As a step toward addressing the problem, the FOMC at its last meeting decided to redefine its funds rate target range upper limit. Now, instead of being equal to the going IOER rate, the upper limit is defined as the IOER rate plus 5 basis points. By itself the new definition is the sheerest of window dressings. But because the Fed, which had been contemplating raising its IOER rate to 200 basis points, could now raise it to just 195 basis points, whilst still sticking to its original rate move, as defined by the up per and lower bounds of its rate target range, the change marked a slight retreat from the Fed’s original tightening plans.That the Fed risked over-tightening if it adhered to its original normalization plans is someth...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs