Wednesday, July 18, 2012

What Did the FOMC Mean By "New Tools"?

I have two problems but only one tool.
-Ben Bernanke
Testimony to the House Budget Committee
Jan. 16, 2008
-pic originally lifted from Fintag, December 12, 2007
what a long strange trip...
From Sober Look:
FOMC's new tools 
FOMC Minutes (of the Meeting of June 19–20, 2012): - Several participants commented that it would be desirable to explore the possibility of developing new tools to promote moreaccommodative financial conditions and thereby support a stronger economic recovery.
This got a great deal of speculation going. What could be the "new tools"? Here are some possibilities:
1. Sterilized securities purchases: see item #2 in this post.

2. Sterilized securities purchases involving MBS: see this post for more detail.

3. Cutting rates on banks' excess reserves to zero. This is essentially what the ECB just did, resulting in negative yields for much of the stronger Eurozone government short term paper. It certainly has the potential of pushing the short end of the US curve deep into negative territory as well. Such a move may also have some unintended consequences such as weakening of the dollar, damaging the repo markets, and negatively impacting US money market funds.