MONETARY POLICIES


excuse aſter another to postpone the “normalization” it promised when market conditions “stabilized;” and in his presidential campaign, Donald Trump a t ta c k ed Janet Yellen personally


for


keeping rates low, putting her


career


in jeopardy. She has now gotten with the program, evidently restore


to


Fed’s waning credibility


the and


save her job. But the question is, why did the Fed promise these norma l ization measures in the first place? As then-Chairman Ben Bernanke explained its “exit strategy” in 2009:


it profitable to be more aggressive in lending out their reserves, which in turn would produce faster growth in broader money and credit measures


FX


massive “excess reserves” held by the banks (currently ringing in at $2.2 trillion) will otherwise be lent into the economy, expanding the money supply and


triggering


hyperinf lation. Which, as David Stockman puts it, shows just how clueless even the world’s most powerful central bankers can be in matters of banking and finance . . . .


Banks Don’t Lend


Reserves


Raising interest rates benefits financial institutions


but borrowing costs for


everyone else will go up and the hardest hit


will be the federal government itself


At some point, . . . as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. . . . [B]anks currently hold large amounts of excess reserves at the Federal Reserve. As the economy recovers, banks could find


and, ultimately, lead to inflation pressures.


The Fed evidently believes policy


(raise that


the central bank needs to tighten monetary


interest


rates and sell its bond holdings back into the market) because the


There need be no fear that banks will dump their


reserves Their


excess into


the market and create “inf lation p re s s u re s , ” because banks don’t lend their reserves to their


commercial borrowers. They don’t because they can’t. The only thing that can be done with money in a bank’s reserve account is to clear checks or lend reserves to another bank. Reserves never leave the reserve system, which is simply a clearing mechanism set up by the


FX TRADER MAGAZINE July - September 2017 29


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68  |  Page 69