Posts Tagged ‘European unemployment’

Notes From Underground: Allow Me To Play Fed Chair

July 12, 2016

Every once in a while I entertain the fantasy of being at the helm of the Federal Reserve. In a moment of megalomania I am proposing this solution to situation that the FED finds itself: The velocity of money is extremely low as zero interest rates have led to a massive buildup of overnight reserves at the FED. Money’s low velocity is compounded (pun intended) by the bloated balance sheet that the Fed has attained through its massive QE program. Certain voices are maintaining that the severe flattening of the yield curve is precluding domestic banks from making greater profits, which results in less lending activity. It is not only the low profits impeding bank lending but also the massive amount of high quality collateral controlled by the FED that diminishes financing activity from the shadow banking sector via the REPO market. IF THE FED WERE TO BEGIN SHRINKING ITS BALANCE SHEET BY SELLING TREASURIES OF A 10-YEAR OR LONGER DURATION, THE YIELD CURVE WOULD STEEPEN AND THE REPO MARKET WOULD SPRING TO LIFE AS MORE HIGH QUALITY COLLATERAL WOULD CIRCULATE IN THE MARKET.