Fed and Central Bank

[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)

[hipmatt]

Fox news says that the fed may is rumored to give an emergency rate cut on monday. Do you think this could happen?

[hipmatt]

Fox news says that the fed may is rumored to give an emergency rate cut on monday. Do you think this could happen?

[hipmatt]

Fox news says that the fed may is rumored to give an emergency rate cut on monday. Do you think this could happen?

[LA_Renter]

My understanding is that the primary reason the Fed stepped in late last week was because, given the amount of bad paper out there, the banks no longer trust each other and are pricing in a risk of bankruptcy when they loan each other money, so the overnight funds rate shot up to 6% where the Fed has it targeted to 5.25%. After the FED injected liquidity the overnight rate came back down to in between 5 and 5.25. They targeted MBS because that is the source of the problem. As we go into Monday if the Asian markets act unsettled and that spreads to Europe and the overnight rates jumps back above 5.25% many people speculate the FED will forgo any additional liquidity injections and call an emergency meeting. The consensus is that if the FED lowers it will more than likely be 50 basis points with another 25 to 50 basis points in Sept. IMO if you see that happen in the face of a structurally weak dollar that means the situation is very grave. Here is a quote from Doug Noland concerning the severe state of the credit markets on a post I made last week

“I apologize for appearing overly dramatic. But this evening I have nagging feelings that for me recall the disturbing emotions following the terrible 9/11 tragedy. I know the world has changed and changed for the worse – yet I recognize that I don’t know how and to what extent”

Interesting that Europe, Japan, and the US all injected liquidity at the same time this week, the last time that happened was after 9/11. IMO everybody should be paying very very close attention to this.

[LA_Renter]

My understanding is that the primary reason the Fed stepped in late last week was because, given the amount of bad paper out there, the banks no longer trust each other and are pricing in a risk of bankruptcy when they loan each other money, so the overnight funds rate shot up to 6% where the Fed has it targeted to 5.25%. After the FED injected liquidity the overnight rate came back down to in between 5 and 5.25. They targeted MBS because that is the source of the problem. As we go into Monday if the Asian markets act unsettled and that spreads to Europe and the overnight rates jumps back above 5.25% many people speculate the FED will forgo any additional liquidity injections and call an emergency meeting. The consensus is that if the FED lowers it will more than likely be 50 basis points with another 25 to 50 basis points in Sept. IMO if you see that happen in the face of a structurally weak dollar that means the situation is very grave. Here is a quote from Doug Noland concerning the severe state of the credit markets on a post I made last week

“I apologize for appearing overly dramatic. But this evening I have nagging feelings that for me recall the disturbing emotions following the terrible 9/11 tragedy. I know the world has changed and changed for the worse – yet I recognize that I don’t know how and to what extent”

Interesting that Europe, Japan, and the US all injected liquidity at the same time this week, the last time that happened was after 9/11. IMO everybody should be paying very very close attention to this.

[LA_Renter]

My understanding is that the primary reason the Fed stepped in late last week was because, given the amount of bad paper out there, the banks no longer trust each other and are pricing in a risk of bankruptcy when they loan each other money, so the overnight funds rate shot up to 6% where the Fed has it targeted to 5.25%. After the FED injected liquidity the overnight rate came back down to in between 5 and 5.25. They targeted MBS because that is the source of the problem. As we go into Monday if the Asian markets act unsettled and that spreads to Europe and the overnight rates jumps back above 5.25% many people speculate the FED will forgo any additional liquidity injections and call an emergency meeting. The consensus is that if the FED lowers it will more than likely be 50 basis points with another 25 to 50 basis points in Sept. IMO if you see that happen in the face of a structurally weak dollar that means the situation is very grave. Here is a quote from Doug Noland concerning the severe state of the credit markets on a post I made last week

“I apologize for appearing overly dramatic. But this evening I have nagging feelings that for me recall the disturbing emotions following the terrible 9/11 tragedy. I know the world has changed and changed for the worse – yet I recognize that I don’t know how and to what extent”

Interesting that Europe, Japan, and the US all injected liquidity at the same time this week, the last time that happened was after 9/11. IMO everybody should be paying very very close attention to this.

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