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Here Is Why The Fed Will NOT Cut IOER, In Bernanke And Goldman's Own Words

Tyler Durden's picture




 

As more and more button pushers suddenly realize there is a plotline behind the latest liftathon in ES, which is that the Fed may cut IOER rates to negative, here is what Goldman, and the Chairman himself, said on this topic 10 months ago. And yes: it will not happen.

Interest Rate Policy: A Dry Well

A final easing option often listed by Fed officials is a cut in the interest on excess reserves (IOER) rate—the rate that banks earn on deposits held at the Fed above  levels mandated by regulation. The IOER rate is to zero (or perhaps even a negative value).

We see little merit in this option, and continue to believe that the Fed is unlikely to use it. First, the benefits are likely to be very small. While the IOER rate is 0.25%, the effective federal funds rate is only 0.08% (Exhibit 5). Thus, the maximum impact from cutting the IOER rate to zero is just 8bp.

Second, cutting the IOER rate down to zero could be harmful to market institutions. Chairman Bernanke made this argument himself in Q&A at the July 2010 Humphrey-Hawkins testimony:

“The rationale for not going all the way to zero has been that we want the short-term money markets like the Federal funds market to continue to function in a reasonable way, because if rates go to zero, there will be no incentive for buying and selling Federal funds overnight money in the banking system. And if that market shuts down, people don’t operate in that market, it will be more difficult to manage short-term interest rates when the Federal Reserve begins to tighten policy at some point in the future.”

We expect that Fed officials would hold the same view about cutting the IOER rate today. Finally, as we argued in a recent article, calls for cutting the IOER rate are partly motivated by the premise that banks are holding excess reserves because of an unwillingness to lend. In fact, the level of reserves is controlled entirely by the size and composition of the Fed’s balance sheet, and says nothing about banks’ incentives or their willingness to lend. Cutting the IOER could theoretically stimulate activity by easing financial conditions and boosting loan demand, but it would not affect the quantity of reserves in the banking system.

 

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Mon, 07/16/2012 - 11:21 | 2620287 slaughterer
slaughterer's picture

"...it will be more difficult to manage short-term interest rates when the Federal Reserve begins to tighten policy at some point in the future." 

Don't you get it? 

The Federal Reserve is NEVER going to tighten policy.

Hence => no risk NIOER

Mon, 07/16/2012 - 11:24 | 2620306 resurger
resurger's picture

yes!

Mon, 07/16/2012 - 11:26 | 2620310 fuu
fuu's picture

Maybe in the year 2525.

Mon, 07/16/2012 - 11:32 | 2620326 Cognitive Dissonance
Cognitive Dissonance's picture

If man is still alive, if woman can survive they may find.......

http://www.youtube.com/watch?v=yesyhQkYrQM&feature=related

Mon, 07/16/2012 - 11:43 | 2620367 fuu
fuu's picture

Ain't gonna need to tell the truth, tell no lie

Everything you think, do and say

Is in the pill you took today

Mon, 07/16/2012 - 12:12 | 2620474 resurger
resurger's picture

nice link

Mon, 07/16/2012 - 11:37 | 2620352 jtmo3
jtmo3's picture

"when the Federal Reserve begins to tighten policy at some point in the future."

 

Yep. Now that is funny, I don't care who you are!

Mon, 07/16/2012 - 11:38 | 2620355 LMAOLORI
Mon, 07/16/2012 - 12:24 | 2620537 lasvegaspersona
lasvegaspersona's picture

"always and everywhere"

Mon, 07/16/2012 - 11:29 | 2620289 Cognitive Dissonance
Cognitive Dissonance's picture

“The rationale for not going all the way to zero has been that we want the short-term money markets like the Federal funds market to continue to function in a reasonable way, because if rates go to zero, there will be no incentive for buying and selling Federal funds overnight money in the banking system. And if that market shuts down, people don’t operate in that market, it will be more difficult to manage short-term interest rates when the Federal Reserve begins to tighten policy at some point in the future.”

Translation - The ends justifies the means. ANY MEANS!

Besides you can't make me, you can't make me, you can't make me.

Mon, 07/16/2012 - 11:41 | 2620359 SWRichmond
SWRichmond's picture

All of this simply proves that the markets are bigger than anyone can manage.  It is simply not possible for one man, or a board of wise men, to manage the economy.  Any attempt results in distortions, which make more manipulations necessary...the ultimate problem-reaction-solution cycle.

Enlightened self interest, tempered by risk, is what is needed.  Billions of individuals acting in this manner constitute markets.  Without risk, the distortions grow like cancer.  We call this "TBTF."

Jesse's Cafe has a video up right now on the Terror; it is excellent viewing.  Here's where the board of wise men is leading us: they will never admit they are the problem, everything around them is just not manipulated enough, Citizen.

Mon, 07/16/2012 - 11:21 | 2620294 Stoploss
Stoploss's picture

it will be more difficult to manage short-term interest rates when the Federal Reserve begins to tighten policy at some point in the future.”

 

It's been ten years.................................................

Mon, 07/16/2012 - 12:42 | 2620608 ArkansasAngie
ArkansasAngie's picture

Then I should go ahead and buy 10 yr T's at 2.5?

Horse manure.

Imaginary numbers and electronic ones and zeros are about as productive as ... what?  Negative interest rates?

Mon, 07/16/2012 - 11:23 | 2620303 resurger
resurger's picture

NIR will put the final nail in the Shadow Banks coffin 100% , unless you want people to take out their deposits and buy gold of course ...

"Fortune favors the Gold"

oh yeah!

Mon, 07/16/2012 - 11:23 | 2620304 Bam_Man
Bam_Man's picture

"when the Federal Reserve begins to tighten policy at some point in the future.”

Of course it is entirely plausible that in the past ten months the Fed (and the bond market) has come to realize that it will be impossible to EVER tighten monetary policy. So the negative interest on excess reserves policy would not be "off the table".

Mon, 07/16/2012 - 11:25 | 2620308 FL_Conservative
FL_Conservative's picture

Sure, Tyler, bring LOGIC into the equation!  Like this market knows anything about logic, principles or fundamentals.

Mon, 07/16/2012 - 11:26 | 2620311 buzzsaw99
buzzsaw99's picture

it will be more difficult to manage short-term interest rates when the Federal Reserve begins to tighten policy at some point in the future.”

More fed lies. They will never tighten in a meaningful way ever ever never never ever nevermore.

Mon, 07/16/2012 - 11:27 | 2620313 SheepDog-One
SheepDog-One's picture

OK so no QE, no -25% interest rate cut, and likely 'tightening' instead of 'easing', but Can't we haz 'the bounce' in stawks anyway?

Mon, 07/16/2012 - 11:29 | 2620318 Everybodys All ...
Everybodys All American's picture

I think nioer would begin the bank run of all bank runs.

Mon, 07/16/2012 - 11:29 | 2620320 Snakeeyes
Snakeeyes's picture

How about M2 Money Velocity at lowest levels since WWII? And the distoritions created already by having the Fed Funds Rate at 0.25%?

http://confoundedinterest.wordpress.com/2012/07/16/good-new-for-residential-mortgage-rates-retail-sales-fall-again-goldman-cuts-q2-gdp-to-1-1/

Mon, 07/16/2012 - 13:38 | 2620868 Assetman
Assetman's picture

In fact, the level of reserves is controlled entirely by the size and composition of the Fed’s balance sheet, and says nothing about banks’ incentives or their willingness to lend. Cutting the IOER could theoretically stimulate activity by easing financial conditions and boosting loan demand, but it would not affect the quantity of reserves in the banking system.

Snakeeyes appears to be on the right track...

The Fed is doing very little to incentivize banks to increase loan demand, which would help improve M2 money velocity and increase economic activity.

The reality is that while smaller banks are increasing their loan activity-- the TBTF banks (with maybe the exception of Wells Fargo)-- are not.

There are plently of reserves in the banking system... one would assume.  The Fed seems content in bolstering TBTF balance sheets over reviving money velocity, as it's not inducing banks to do anything but make money on zero cost funds.

What I think is interesting is that no one has really proposed pegging the IOER rate at the Fed Funds level.... rather than going all the way to zero, or negative.  It might not change the behaviors of the largest banks that much... but at the margin, it might induce a little greater loan actvitiy.

 

Mon, 07/16/2012 - 11:32 | 2620323 ebworthen
ebworthen's picture

"Excess Reserves"?

Who has excess reserves? 

The FED?

Why not loan them to me at .08% then I can loan to J.P. Morgue at 14%; surely, they can afford it.

What's that?  I'm not part of the FED Bankster Gangster Club?

How do I get in on this stealing money from working people to create "excess reserves" that I can "lend" to my banking buddies who then make 4%-29% on it "lending" it back to the working people? 

What a juicy racket!  Do you really need a PhD or an MBA for such simple stealing?

Mon, 07/16/2012 - 11:36 | 2620346 Nobody For President
Nobody For President's picture

Like Carlin said, "It's a small club and we ain't in it."

Mon, 07/16/2012 - 11:53 | 2620405 LMAOLORI
LMAOLORI's picture

 

This is the real reason the Fed is recapitalizing it's member banks at our expense. OUTRAGE OF THE DAY: Do You Realize That The Government Is Still Paying Banks Not To Lend...?

While individuals, businesses and governments suffer from a credit crisis created on Wall Street, the banks responsible for the crisis are tapping into nearly-interest-free credit lines and using the money to speculate or to make commercial loans at much higher rates. By forming their own banks, states too can tap into very low interest rates, and can buffer themselves from another Lehman-style credit collapse.

Keeping interest rates low is considered the first line of defense for central banks bent on easing the credit crisis and getting banks to lend again. The Federal Reserve’s target for the federal funds rate -- the overnight interest rate that banks charge each other – has been kept at a rock-bottom 0% to 0.25% ever since December 2008. A growing number of economists now think it could stay there well into 2011 or even 2012, prompted by fears that a spreading debt crisis in Europe could hurt a budding U.S. recovery.

Dirk van Dijk, writing for the investor website Zacks.com, explains what a good deal this is for the banks:

“Keeping short-term rates low . . . is particularly helpful to the big banks like Bank of America (BAC) and JPMorgan (JPM)Their raw material is short-term money, which is effectively free right now. They can borrow at 0.25% or less, and then turn around and invest those funds in, say, a 5-year T-note at 2.50%, locking in an almost risk-free profit of 2.25%. On big enough sums of money, this can be very profitable, and will help to recapitalize the banking system (provided they don’t drain capital by paying it out in dividends or frittering it away in outrageous bonuses to their top executives).”

more http://www.webofdebt.com/articles/banks_near.php

Mon, 07/16/2012 - 13:22 | 2620817 ebworthen
ebworthen's picture

Correct, and they are completely unconcerned about recapitalizing the middle class, employment, or inflation.

Audit the FED, End the FED, kill the corrupt beast of Jekyll Island.

Mon, 07/16/2012 - 11:32 | 2620329 Budd aka Sidewinder
Budd aka Sidewinder's picture

If the Fed goes negative on IOER, then the banks will be forced to lend at an ever greater interest rate premium to make up for the added risk of not leaving their $$ at the Fed and paying a small charge.

Either way small business owners and the middle class get buttfucked again.

Mon, 07/16/2012 - 11:36 | 2620350 vxpatel
vxpatel's picture

LIEMORE

 

'Stressed' Bank of England official stabbed self to death A Bank of England manager stabbed himself to death due to the over-whelming pressure he was under at work, an inquest has heard.

 

 

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9376436/Stressed-Bank-of-England-official-stabbed-self-to-death.html

Mon, 07/16/2012 - 11:58 | 2620427 Gunga
Gunga's picture

He should have taken his boss with him.

Mon, 07/16/2012 - 11:42 | 2620358 orangedrinkandchips
orangedrinkandchips's picture

Everybody really depends on the overnight trade....period. Big companies as well as the obvious banks.

 

Ben has cripled the STIF markets already....IF he goes in for the kill...it will be a big blow.....(probably up 25% on the SP since Brian Sack (o' shit) anticipates it and puts the never ending bid in the market to make it look like real demand even though people keep fleeing mutual funds!!!! oooohh-kay!)

LT bonds are NOT buying it.....

I know, I worked and got laid off because of the crippled-effect on STIFs.....

 

thanks Ben...suck my dick!

Mon, 07/16/2012 - 11:49 | 2620390 Lucius Corneliu...
Lucius Cornelius Sulla's picture

Why put your money in a bank if most banks are a) technically insolvent (per FASB rules prior to 2008) and b) not paying rent on deposits.

Mon, 07/16/2012 - 12:00 | 2620433 bonddude
bonddude's picture

Coffee can + money/metal + shovel + back yard = better than giving it to JPM.

Mon, 07/16/2012 - 12:22 | 2620521 akak
akak's picture

And it's as safe as .... no, MUCH safer than "money in the bank"!

So let's see: banks not only do NOT pay any interest on the money I give them to hold for me, they actually CHARGE me for the privilege, PLUS they (not so-)nickel-and-dime me in additional fees for every possible reason, and subject my money to significant risk due to a run on the bank, not to mention the risk of a very real (and inevitable) nation-wide banking system failure.  So WHAT again is the advantage of giving them my money?

Mon, 07/16/2012 - 12:10 | 2620467 khakuda
khakuda's picture

Nominal negative deposit/cash rates tells people to withdraw their funds from money market/savings/deposit accounts and put it in the mattress.  Think about the idiocy of that move in a fractional reserve banking system.  The Fed even letting this rumor stand without refuting it is lunacy.

Mon, 07/16/2012 - 12:18 | 2620505 Hype Alert
Hype Alert's picture

Looks like the market is giving this one back. 

NEXT!

Mon, 07/16/2012 - 12:33 | 2620532 Quinvarius
Quinvarius's picture

The best laid plans of mice and men.  Cutting to zero sounds like a bad idea--As bad as giving failed banks free money.  Yet, there will always be a good reason to do it in a pinch.  The trend is in place.  Something will force it to happen.

And lets be realistic.  The whole argument from Bernanke is that it costs the Fed a tool in the manipulation of the economy.  The banks should be setting rates such as this in transactions with another.  There is nothing the Fed is doing here that the free market between banks should not take over.  The Fed funds market should not be a linchpin in the economy--because it isn't a linchpin a functioning economy.  It hurts the economy in the long term.

Mon, 07/16/2012 - 12:26 | 2620544 A_MacLaren
A_MacLaren's picture

Ah, yes, Interest On Excess Reserves...

How the Fuck You Main St Fed siphons money from real economy to gives to its Criminal Freinds on Wall St.

The Fed "earns" interest on its debt holding, of Trashuries, MBS, etc., collecting interest from Taxpayers and Mortgaged Debt Slaves.

The Fed then pays the graft* to the Wall St. Criminals, its beneficiaries/bosses and "shareholders" in the financial sector, the extracted income and wealth it has taken from the productive, real sector.

 

*Graft definition: http://www.thefreedictionary.com/graft

graft 2(grft)

n.
1. Unscrupulous use of one's position to derive profit or advantages; extortion. 2. Money or an advantage gained or yielded by unscrupulous means. tr. & intr.v.graft·ed, graft·ing, grafts
To gain by or practice unscrupulous use of one's position. [Origin unknown.]
Origin - probably a bankster attempting to confuse the masses with an orchardist's or plant husbandaryist's productive term applicable to the merging of trunk or branch material to create a hybrid plant or tree.
Mon, 07/16/2012 - 14:14 | 2621022 hooligan2009
hooligan2009's picture

Don't you just love it. The deposit rate at the ECB is ZERO !!!!!!!! borrowing rate is 0.75% but European money funds are closed for deposits, but you can have your money back at least. Someone define liquidity for me? Is that a splurge out of deposits at the ECB from banks straight into the old check account where it earns precisely the same...umm well if money earns nothing, then is it worth less or worthless?

Mon, 07/16/2012 - 14:33 | 2621028 johny2
johny2's picture

How much longer can they keep this going on? That is what I would like to know.

Mon, 07/16/2012 - 19:11 | 2622167 flow5
flow5's picture

It took a bunch of stupid mother fuckers to initiate the payment of interest on excess reserve balances in the first place. IOeR's (remunerated IBDDs) held by the member banks at their District Reserve banks are contractionary and induce dis-intermediation within the non-banks (where the size of the non-banks shrink, but the size of the commercial banking system remains the same).  .

SEE: The inverted Eurepo curve spells trouble
http://bit.ly/KtecbT

It's no happenstance that the ECB eliminated the payment of interest on excess reserve balances held at the ECB Deposit Facility by the Eurozone banks.

Bankers, confronted with a remuneration rate that is higher (vis a’ vis), other competitive financial instruments on an inverted yield curve (at the short-end) will hold a higher level of un-used excess reserves.

The payment of interest on excess reserve balances both: 1. absorbs existing bank deposits within the CB system & 2. attracts monetary savings from the shadow banks (induces dis-intermediation within the non-banks).

IOeR's result in a cessation of the circuit income & transactions velocity of funds. IOeR's lead to stagflation.

Mon, 07/16/2012 - 19:39 | 2622229 Bubbles and Busts
Bubbles and Busts's picture

Making IOER Negative Equates to Raising Taxes And Raises Potential Of New Recession (http://bubblesandbusts.blogspot.com/2012/07/making-ioer-negative-equates-to-raising.html)

Mon, 07/16/2012 - 19:43 | 2622242 canary
canary's picture

The cash held at the Fed is not free reserves.  Let's call it "market capital reserves".  Reserves required to cover unexpected derivative activity giving rise to margin calls (whether rating or market volatility); and materially greater than regulated capital reserves.  The market is demanding these reserves be held by the banks.  Regulated capital reserves have now become almost meaningless.  The banks could not lend this money if they wanted. 

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