The Fed Thinks About Paying Interest on Banks' Required Reserve Deposits

Steve Randy Waldmann writes:

Interfluidity :: Stock of Treasury securities at the Fed: As of April 30, the Fed's uncommitted stock of Treasuries was $382B, just under half of its December 5 stock. The Fed recently announced a $50B expansion of the TAF program, and a widening of acceptable collateral for its TSLF program. Assuming the Fed sterilizes the extra TAF funding (very likely) and that the $200B pledged to TSLF is now fully exploited (likely), the Fed's stock of uncommitted Treasuries will soon be $275.5B. Just over 64% of the Fed's stock of Treasury's will have been exhausted since the Fed began its unconventional lending programs in December.

The Fed wants to swap out Treasuries for other securities in order to reduce the risk premium--to raise the (temporary) market supply of Treasuries and reduce the supply of other securities until the crisis passes and MBSs and other securities recover their value. (If they never recover their value, then we have much bigger things to worry about.)

The Fed may also want to raise the general level of interest rates in order to fight inflation--which requires that it sell its Treasuries for safe bank reserves rather than temporarily swap them for risky MBSs.

The Fed is clearly thinking that it may run out of Treasuries with which it can accomplish these two missions. Hence it is coming up with an alternative way to raise the general level of interest rates--that is, paying interest on banks' required reserve deposits at the Fed.

Comments

[Matt]

The Fed is looking for investors?

[a]

could the fed (via fed govt) tax the people that created the draw-down in uncommitted stock and put the money into uncommitted stock?

[Blissex]

«raise the (temporary) market supply of Treasuries and reduce the supply of other securities until the crisis passes and MBSs and other securities recover their value. (If they never recover their value, then we have much bigger things to worry about.)» So you are still hinting that the problem is a liquidity problem, not a solvency problem? That $500,000 mortgages on $250,000 houses are a liquidity problem? The Fed's problem is either to get those $250,000 houses to become $600,000 houses (see 2% nominal interest rates, it worked before!) or to swap the $500,000 mortgages for $500,000 cash and take the hit on the mortgages (that is being done too by the Fed and other blood donors). The problem is not subprime, even if that is where it started, it is that extra low interest rates got banks to lend for asset purchases at wildly inflated asset prices. "Fed*mart: always low interest rates - always!" "Fed*mart: always increasing asset prices - always!"