Fed acts as middleman

Piedpiper

The Pied Piper of Hamelin.

I just read this Bloomberg article. To start with, it’s an interesting piece because people are hanging on it all sorts of Fed intentions —they’re even stating that the Fed has introduced a stealth lower target rate.

But, before I get too stranded away from reality, let me copy the relevant paragraph of what this new rate encompasses:

The Fed requires banks to keep a level of reserves at the
central bank. On those funds, the Fed will pay a higher rate
equal to the average target rate over a one or two-week period
less 0.10 percentage point. For excess reserves, the rate is the
lowest FOMC target over a period less 0.75 percentage point.    

The Fed said it would raise or lower the spread so the New
York Fed trading desk can keep the federal funds rate near policy
makers’ target “based on experience and in response to evolving
market conditions.”    

      

So, let me translate for you. If the Fed target rate is 2.0 %, the Fed will now pay a 1.9 % interest on bank reserves, and if banks want to further park their spare change at the Fed, they will only get a 1.25 % interest rate on these additional funds.

I don’t see where this could be a stealth target rate. The Fed is evidently increasing a tad the liquidity of the banks through the payment of the tiny 1.9 % interest rate payment on reserves. But, what I do see important, is that the Fed is opening a door, so banks may deposit with the Fed their extra cash, instead of hoarding it.

If banks follow the Fed’s pied piper, taking their deposits into the Fed, then the Fed —acting as the middleman— may lend these funds to other banks, to thaw the current bank seizure.

Smart thinking —I hope playing the flute works.