Federal Reserve to boost auctions and pay interest on central bank reserves

October 7, 2008 by · Leave a Comment
Filed under: Economic News 

Well this is not surprise.  The Fed has been hinting at this type of action for sometime.  I know they are trying to shore up the global banking system but this does have a strong wiff of inflationary consequences down the road.  My question is once they get serious about inflation because consumer purchasing power is being so greatly reduced, what will they be forced to do?  From all the books I have read about past financial crisis which ended with major inflation (most do by the way), they will need to raise interest rates much much higher than today to atleast match the rate of inflation to quell it down.  My final question is when the U.S. economy’s GDP (Gross Domestic Product) is 70% based on consumption, how is that going to affect us when we have this high interest environment?  Not too good is where I am placing my bet.

Press Release:

 

The Federal Reserve on Monday announced a series of steps to funnel massive amounts of liquidity through clogged credit markets, including boosting the sizes of cash auctions and offering banks interest on reserves.

 

“The Federal Reserve is substantially increasing the size of the Term Auction Facility (TAF) auctions,” the central bank said in a statement.

Specifically, the Fed will boost its 28-day and 84-day TAF auctions to $150 billion each.

The Fed will also begin paying interest on reserves held by the central bank with required reserves receiving a larger payment than excess balances.

Required reserves will be paid interest at a rate of 0.10 percentage point below the federal funds rate. Excess balances held by the Federal Reserve will be paid 0.75 percentage point below the funds rate – although the Fed said that it might yet tinker with that formula.

“Together, these actions should encourage term lending across a range of financial markets in a manner that eases pressures and promotes the ability of firms and households to obtain credit,” the Fed said in a statement.

Source: Reuters

 

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