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| Science Forum Index » Economy Forum » Fed Open Market Operations |
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| William F Hummel |
 Posted: Wed Jan 04, 2006 1:43 pm |
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Open Market Operations
The Fed implements monetary policy by directly influencing short term
interest rates. It does this through its control of the interbank
lending rate, also known as the Fed funds rate. This involves
supplying just enough reserves to meet the demand at its target rate.
The Objective
The Fed supplies reserves to banks through its open market operations
(OMO) and its discount window lending. Discount lending now plays a
minor role. The principal tool is OMO in which the Fed buys or sells
government securities in the secondary market to add or drain banking
system reserves.
Normally the objective of OMO is not to effect a net change in
reserves; rather it is to counter variations in the total. These
variations are caused mainly by changes in the Treasury’s cash
balances at the Fed, checking system float, foreign central bank
transactions, and net cash flows in or out of banks. However as net
bank lending varies, the aggregate demand for reserves will vary and
require the Fed to adjust the total in order to maintain control of
the Fed funds rate.
Basic Operations
OMO is executed by the Trading Desk of the Federal Reserve Bank of New
York, on behalf of the entire Federal Reserve System. The Desk buys
securities from government securities dealers who have an established
trading relationship with the Fed. It pays for the securities by
sending funds to the dealer's account at its clearing bank, as it
takes delivery of the securities at the Fed. This action adds
reserves to the banking system. Conversely, when the Fed sells
securities to a dealer, it delivers the securities and the account of
the dealer is debited. This action drains reserves from the banking
system.
Types of Transactions
The Trading Desk most often engages in short-term repurchase
agreements (RPs) which are used in situations that call for temporary
additions to bank reserves. With RPs, the Desk buys securities from
the dealers, who agree to repurchase them at a specified date and at a
specified price. When the RPs mature, the added reserves are
automatically drained.
If there is a temporary need to drain reserves, the Trading Desk
executes reverse RPs with dealers in Treasuries. These transactions
involve a contract for immediate sale of Treasury bills to the dealer,
with a matching contract for later purchase from the dealer.
William F Hummel |
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| william_b_ryan@hotmail.co |
| Posted: Wed Jan 04, 2006 5:57 pm |
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Again, Hummel is proving the point that you can't teach an old dog new
tricks in his dotage, particularly when he is playing the role of
mouthpiece for the banking fraternity, and its theoretician in chief,
the multi-millionaire currency trader, Warren Mosler.
"The Fed implements monetary policy by directly influencing short term
interest rates. It does this through its control of the interbank
lending rate, also known as the Fed funds rate. This involves
supplying just enough reserves to meet the demand at its target rate."
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The goal is not the target rate. The theory is that the existing rate,
whatever it is, reflects demand for reserves by banks. If the Fed
desires to "cool" the economy, the theory is that you do that by
draining reserves by selling securities, which theoretically increases
the fed funds rate. If they desire to "warm" the economy, the theory
is that they can accomplish that by purchasing securities, which
theoretically has the effect of decreasing the fed funds rate. So they
set a "target" that is either lower or higher than the existing rate
and conduct their "open market" operations accordingly. The reality is
that it is an income generating mechanism for the banking industry.
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"Normally the objective of OMO is not to effect a net change in
reserves; rather it is to counter variations in the total. These
variations are caused mainly by changes in the Treasury's cash balances
at the Fed, checking system float, foreign central bank transactions,
and net cash flows in or out of banks. However as net bank lending
varies, the aggregate demand for reserves will vary and require the Fed
to adjust the total in order to maintain control of the Fed funds
rate."
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This is just pure Warren Mosler double-talk.
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"OMO is executed by the Trading Desk of the Federal Reserve Bank of New
York, on behalf of the entire Federal Reserve System. The Desk buys
securities from government securities dealers who have an established
trading relationship with the Fed."
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The securities that the Fed purchases and sells are no longer Treasury
securities, for the most part, but securities the banks themselves have
created, called "repos."
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"The Trading Desk most often engages in short-term repurchase
agreements (RPs) which are used in situations that call for temporary
additions to bank reserves."
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Called "fine tuning" in banking jargon. It is actually a form of
derivative trading, where the theoretical "underlying" securities need
not actually exist in the banks' portfolios.
The central banks, for at least the past two decades, with the United
States Federal Reserve leading the way, have therefore dispensed with
the pretense of being their governments' agents and holders of last
resort of their securities, the role they supposedly took on with the
foundation of the Bank of England three centuries earlier, when the
London merchants, who had speculatively purchased Royal tallies at
steep discount from the public, chartered their central bank.
In reality, the central banks, including their member banks, rather
than being their governments' agents, have always been in an
adversarial relation with their governments, being the holders of the
largest percentage of government debt, purchased with deposits they
themselves have created.
Now, I, for one, think the adversarial relationship is a good thing
that ultimately benefits the public in this modern age, with each being
a check and balance on the other.
I certainly do not support the amalgamated Fed-Treasury bullcrap the
Moslerist fascists are pushing, as if their vaunted financial hegemony
were already an accomplished fact.
If the fascists continue to have their way, through their lies and
deceptive propaganda, some of which we are seeing here through their
geriatric sycophant Hummel, we may soon be.
But we're not there yet by a long shot.
And to the extent I can have anything to do with it, they will never
get away with it.
See: |
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| Guest |
| Posted: Thu Jan 05, 2006 11:29 am |
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In sci.econ, The Trucker <mikcob@verizon.net> wrote:
[quote:b636c8e596]Why does the Fed not simply
offer bonds to the general public
[/quote:b636c8e596]
Google TreasuryDirect
A nation of sheep will beget a government of wolves.
--Edward R. Murrow |
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| Lantern |
| Posted: Thu Jan 05, 2006 4:52 pm |
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Just for general info....There were 39 "primary dealers" (Ref. a NY
Times article I cut out on 9/8/91.Probably less now.) Back in 1991
Milton Freidman was raising hell about the FED. "Stop this nonsense",
Miltie said. I don't think anything ever came of this. |
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| The Trucker |
| Posted: Fri Jan 06, 2006 10:11 pm |
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<EskWIRED@spamblock.panix.com> wrote in message
news:dpk349$nla$2@reader2.panix.com...
[quote:33d6887d37]In sci.econ, The Trucker <mikcob@verizon.net> wrote:
Why does the Fed not simply
offer bonds to the general public
Google TreasuryDirect
[/quote:33d6887d37]
I was speaking of the FED and not the Treasury. I was questioning
the practice of the FED dealing with "bond specialists".
--
"I know no safe depository of the ultimate powers
of society but the people themselves; and
if we think them not enlightened enough to
exercise their control with a wholesome
discretion, the remedy is not to take it from
them, but to inform their discretion by
education." - Thomas Jefferson
http://GreaterVoice.org |
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