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Tuesday September 28th, 2021
Business

Federal Reserve starts US$500bn overnight liquidity window as Powell Bubble rages

TIGHTENING: Yellen tightened policy averting a bubble twice.

ECONOMYNEXT – The US Federal Reserve said it had started a 500 billion dollar overnight standing liquidity window for domestic banks and dealers and another facility for foreign central banks as global commodity prices rose and domestic asset prices went up.

“The Federal Open Market Committee on Wednesday announced the establishment of two standing repurchase agreement (repo) facilities—a domestic standing repo facility (SRF) and a repo facility for foreign and international monetary authorities (FIMA repo facility),” the Federal Reserve said in a statement.

“These facilities will serve as backstops in money markets to support the effective implementation of monetary policy and smooth market functioning.

“Under the SRF, the Federal Reserve will conduct daily overnight repo operations against Treasury securities, agency debt securities, and agency mortgage-backed securities, with a maximum operation size of $500 billion.

“The minimum bid rate for repos under the facility will be set initially at 25 basis points, somewhat above the general level of overnight interest rates. Counterparties for this facility will include primary dealers and will be expanded over time to include additional depository institutions.”

Global commodity prices have risen sharply under Fed Chairman Jerome Powell as liquidity was injected in stimulus despite a sharp recovery in domestic credit.

He has suggested there is no link between money supply and inflation, an opinion put forward by others after the collapse of the housing and commodity bubble fired by the Fed up to 2008. Classical economists have suggested that Powell was ‘delusional’.

Under Powell the Fed slashed the interest rate given for excess reserves under earlier Fed Chief Janet Yellen, who tightened monetary policy twice.

In 2014/2015 she quantity tightened with one rate hike and in 2018 she quantity tightened with a series of rate hikes as the credit system recovered, preventing a massive asset price bubble and inflation and sending oil prices down.

Sri Lanka’s rupee collapsed on both occasions.

This was interpreted by Mercantilists and Modern Monetary Theory advocates as money can be printed without causing inflation. (Colombo/July29/2021)

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