Federal Reserve Notes of March 19, 2014

The Federal Reserve Bank (Fed) has kept interest rates very low for over 3 years now with the intent of keeping them low until the economy has a true recovery. Thus to date, it has been a largely jobless recovery. The economy cannot have a true sustained JOB creating economy until banks begin to lend these huge reserves. Banks will NOT lend at these extremely low rates.
Today, Fed Chairwoman Yellen completely reversed policy by stating that the jobless number is not the primary driver of what will be considered an economic recovery. They intend to raise rates and begin steady tapering of operation twist. This will increase the money supply and provide a stimulus for potential real inflation. Inflation will cause a contraction and potential increase in unemployment.
There are four major reasons why the Fed has culpability in the very slow recovery as a direct result of their planned policies:
The FED is paying banks interest on their reserves. This action, coupled with low rates, discourages lending,
Feds encouraged/allowed too Big to Fail to become policy,
Fed led the way in over regulation of the banks via Dodd/Frank which demands much higher reserve requirements and places onerous regulations on lending,
The Fed drove rates so low as to place banks into the classic Liquidity Trap -rates on lending/bonds are too low and there is an expectation of rates rising in the future. This discourages bond buyers from investing in bonds. Savings are held and therefore no lending occurs.
The Fed ordered banks to raise reserves to much higher levels than in the past and discouraged lending via Dodd/Frank and other regs that place enormous demands/requirements on borrowers. These large reserves are not inflationary until they are lent. Lending will not occur until rates rise.

One Response to “Federal Reserve Notes of March 19, 2014”

  1. admin says:

    The Fed will not be easing until after the election

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