Fed and Central Bank

[Tone]

Xbox, I think you are right also.

I’m a complete novice and I’ve been trying to wrap my around what the Fed did today. I’ve got a great deal of money (relatively I’m sure ;)) tied into CDs while I wait to jump back into the housing market, and I don’t want my dollars to become worthless (which I fear is happening).

If I understand correctly, the Fed is just acting as the bank of last resort. No one in the upper echelons of finance knows how much risk is involved with bonds and hedge funds; how much toxic junk is embedded in which particular funds and who will be the bag holder on these funds. There is fear and as a result, the banks don’t trust each other’s credit, so everything is locking up. The Fed is stepping in to take on some of the risk by purchasing some debt, taking on risk, to get things moving. IF I understand correctly.

But the main question I have is this: Where is the Fed getting its money? Is it money in reserve or are they just cranking up the presses? If they’re cranking up the presses then the dollar just lost some value. But Bernake said his main concern is inflation (if you can believe anything the power brokers say).
Does anyone know if this will kick up inflation?

[KIBU]

Interesting question, Tone. I have the same questions. I believe pumping money into the banks will have significantly less of an effect on inflation than any lowering of interest rate. Up to certain level, this is a good compromise Bernake has to save wallstreet without creating significant inflation problem.

[KIBU]

Interesting question, Tone. I have the same questions. I believe pumping money into the banks will have significantly less of an effect on inflation than any lowering of interest rate. Up to certain level, this is a good compromise Bernake has to save wallstreet without creating significant inflation problem.

[KIBU]

Interesting question, Tone. I have the same questions. I believe pumping money into the banks will have significantly less of an effect on inflation than any lowering of interest rate. Up to certain level, this is a good compromise Bernake has to save wallstreet without creating significant inflation problem.

[stansd]

I was once offered a job by the Fed…very glad I didn’t take it, but walking into a vault full of cash was cool.

It’s been awhile since i studied this…Presses aside, the fed does have significant holdings of U.S. treasury securities. If it wants to “mop up” liquidity, it sells them, thus taking cash out of the market.

I assume that creating liquidity is just the opposite, and effectively, the fed can “crank up the presses” by buying treasuries. This would only lead to inflation if the dollars stayed out there-presumably the repos the fed has offered lately will be closed out and the excess liquidity created will be put back into the fed accounts (effectively destorying the cash earlier printed if you will).

I assume someone else here can give a better explanation than that, but that’s my recollection of how it works.

Stan

[stansd]

I was once offered a job by the Fed…very glad I didn’t take it, but walking into a vault full of cash was cool.

It’s been awhile since i studied this…Presses aside, the fed does have significant holdings of U.S. treasury securities. If it wants to “mop up” liquidity, it sells them, thus taking cash out of the market.

I assume that creating liquidity is just the opposite, and effectively, the fed can “crank up the presses” by buying treasuries. This would only lead to inflation if the dollars stayed out there-presumably the repos the fed has offered lately will be closed out and the excess liquidity created will be put back into the fed accounts (effectively destorying the cash earlier printed if you will).

I assume someone else here can give a better explanation than that, but that’s my recollection of how it works.

Stan

[stansd]

I was once offered a job by the Fed…very glad I didn’t take it, but walking into a vault full of cash was cool.

It’s been awhile since i studied this…Presses aside, the fed does have significant holdings of U.S. treasury securities. If it wants to “mop up” liquidity, it sells them, thus taking cash out of the market.

I assume that creating liquidity is just the opposite, and effectively, the fed can “crank up the presses” by buying treasuries. This would only lead to inflation if the dollars stayed out there-presumably the repos the fed has offered lately will be closed out and the excess liquidity created will be put back into the fed accounts (effectively destorying the cash earlier printed if you will).

I assume someone else here can give a better explanation than that, but that’s my recollection of how it works.

Stan

[HereWeGo]

They can certainly buy or sell permanently if they so desire, but that was not the case today. It was apparently somewhat unprecedented for the Fed to buy MBS instead of Treasuries, though.

[HereWeGo]

They can certainly buy or sell permanently if they so desire, but that was not the case today. It was apparently somewhat unprecedented for the Fed to buy MBS instead of Treasuries, though.

[HereWeGo]

They can certainly buy or sell permanently if they so desire, but that was not the case today. It was apparently somewhat unprecedented for the Fed to buy MBS instead of Treasuries, though.

[one_muggle]

Tone: Does anyone know if this will kick up inflation?

If you read the economist’s view: http://www.econlib.org/library/Enc/Inflation.html

You will find the answer to you question is NO.
Nobody does know ;^)

Seriously, the most instructive quote, to me, is:
Another popular game is to sift out the more volatile items in the basket of goods and services—often energy and food—and focus on the remainder as a truer “underlying” or “core” rate of inflation. This exercise, though it succeeds in producing a less volatile index, is dubious. The least volatile components are not necessarily the most informative. Some of them appear to be unresponsive to economic forces because of pitfalls in measurement or stickiness in their speed of adjustment to market forces. The price of rental housing, for example, is fixed month-to-month by contract. At the other end of the scale, some of the most volatile items—such as precious metals—are highly informative, to the extent that their movements anticipate a broad range of sectors where price changes have not yet been perceived.

Silver:
[img_assist|nid=4238|title=Silver Price (source Monex.com)|desc=Looked at silver since it seems to be not as sexy as gold–hence more accurate…?|link=node|align=left|width=466|height=353]

No surprise, there is a definite trend upwards around 2003, but it is not anywhere near scary as the housing plots–only up around 100 percent or am I missing a multiplier somewhere?

-one muggle

[one_muggle]

Tone: Does anyone know if this will kick up inflation?

If you read the economist’s view: http://www.econlib.org/library/Enc/Inflation.html

You will find the answer to you question is NO.
Nobody does know ;^)

Seriously, the most instructive quote, to me, is:
Another popular game is to sift out the more volatile items in the basket of goods and services—often energy and food—and focus on the remainder as a truer “underlying” or “core” rate of inflation. This exercise, though it succeeds in producing a less volatile index, is dubious. The least volatile components are not necessarily the most informative. Some of them appear to be unresponsive to economic forces because of pitfalls in measurement or stickiness in their speed of adjustment to market forces. The price of rental housing, for example, is fixed month-to-month by contract. At the other end of the scale, some of the most volatile items—such as precious metals—are highly informative, to the extent that their movements anticipate a broad range of sectors where price changes have not yet been perceived.

Silver:
[img_assist|nid=4238|title=Silver Price (source Monex.com)|desc=Looked at silver since it seems to be not as sexy as gold–hence more accurate…?|link=node|align=left|width=466|height=353]

No surprise, there is a definite trend upwards around 2003, but it is not anywhere near scary as the housing plots–only up around 100 percent or am I missing a multiplier somewhere?

-one muggle

[one_muggle]

Tone: Does anyone know if this will kick up inflation?

If you read the economist’s view: http://www.econlib.org/library/Enc/Inflation.html

You will find the answer to you question is NO.
Nobody does know ;^)

Seriously, the most instructive quote, to me, is:
Another popular game is to sift out the more volatile items in the basket of goods and services—often energy and food—and focus on the remainder as a truer “underlying” or “core” rate of inflation. This exercise, though it succeeds in producing a less volatile index, is dubious. The least volatile components are not necessarily the most informative. Some of them appear to be unresponsive to economic forces because of pitfalls in measurement or stickiness in their speed of adjustment to market forces. The price of rental housing, for example, is fixed month-to-month by contract. At the other end of the scale, some of the most volatile items—such as precious metals—are highly informative, to the extent that their movements anticipate a broad range of sectors where price changes have not yet been perceived.

Silver:
[img_assist|nid=4238|title=Silver Price (source Monex.com)|desc=Looked at silver since it seems to be not as sexy as gold–hence more accurate…?|link=node|align=left|width=466|height=353]

No surprise, there is a definite trend upwards around 2003, but it is not anywhere near scary as the housing plots–only up around 100 percent or am I missing a multiplier somewhere?

-one muggle

[bsrsharma]

Where is the Fed getting its money?

Fed IS THE Money Factory. Its primary purpose is to create and control money supply by advancing short term loans to its customers – usually big banks and financial institutions. After the end of the Gold standard days, (that is where the word RESERVE comes from – Gold Reserves used to act as a restraint on money supply. The paper money being a proxy for Gold) US $ is fiat currency i.e. Fed can decide to create as much $ as it WANTS. This is an awesome and dangerous task and that is why Fed is usually very conservative in its policies (trying to fight inflation over other goals).

if this will kick up inflation?

If they inject, say, $100B into  a $15T economy, that is less than 1%. And that is supposed to be very short term (3 days). Hence, it can't be used to drive up demand for anything (i.e. consumption). However, if they increase the money supply much more, say more than a couple of hundred billion and keep loaning out regularly (i.e. net effect is longer time), that may cause inflation. But if Fed wants to do this, a much more convenient route is to simply lower their funds rate/discount rate. That lowers the cost of borrowing and increases money supply. Obviously, lower interest rate causes foreigners to sell off $ assets causing devaluation. That in turn causes inflation on imported goods & services. That is like exchanging one kind of pain (credit crunch – may cause recession or low growth – may increase unemployment) to another (inflation – essentially an universal tax – makes every one a little poorer)

[bsrsharma]

Where is the Fed getting its money?

Fed IS THE Money Factory. Its primary purpose is to create and control money supply by advancing short term loans to its customers – usually big banks and financial institutions. After the end of the Gold standard days, (that is where the word RESERVE comes from – Gold Reserves used to act as a restraint on money supply. The paper money being a proxy for Gold) US $ is fiat currency i.e. Fed can decide to create as much $ as it WANTS. This is an awesome and dangerous task and that is why Fed is usually very conservative in its policies (trying to fight inflation over other goals).

if this will kick up inflation?

If they inject, say, $100B into  a $15T economy, that is less than 1%. And that is supposed to be very short term (3 days). Hence, it can't be used to drive up demand for anything (i.e. consumption). However, if they increase the money supply much more, say more than a couple of hundred billion and keep loaning out regularly (i.e. net effect is longer time), that may cause inflation. But if Fed wants to do this, a much more convenient route is to simply lower their funds rate/discount rate. That lowers the cost of borrowing and increases money supply. Obviously, lower interest rate causes foreigners to sell off $ assets causing devaluation. That in turn causes inflation on imported goods & services. That is like exchanging one kind of pain (credit crunch – may cause recession or low growth – may increase unemployment) to another (inflation – essentially an universal tax – makes every one a little poorer)

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