Awash In Liquidity, Part 2: The Long-Term Consequences Of Falling Interest Rates | The Economy | Minyanville's Wall Street: ".... There are going to be unintended effects that we can't yet discern, but there are some issues that we already know about. ... over the last five years, the Fed has destroyed the tools it has used for the last 100 years to carry out monetary policy. Reserves in the banking system are now 34 times the level that is "required." So, raising reserve requirements doesn't appear to be viable. Selling assets from its balance sheet (open market operations) to reduce reserves would require an undoing of about $2.6 trillion before bank reserves would become an effective tool to control bank lending or the growth of the money supply. And, the Fed as the "lender of last resort" simply doesn't make sense in a world awash in liquidity.... So, how does the Fed unwind all of this? How does it actually raise interest rates when the appropriate time comes? Today, it doesn't appear that the Fed actually knows exactly what it is going to do, nor can it model, with any precision, what the impacts will be of some new tools with which it is currently experimenting.... a zero rate policy benefits the wealthy, and hurts the middle class.The reality is that there are no real plans to reverse the bloated balance sheet. According to NY Fed chief Dudley (in a May 20 speech), the discussion inside the Fed now excludes any concept of selling assets from its portfolio. Such an admission means that the Fed has realized that it has destroyed its traditional tools, and only has those experimental ones. Prepare for volatility and unintended consequences."
see also: first installment of this two-part series Awash in Liquidity, Part I: Why Interest Rates Are Falling
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