Discount Rate Increase Not Big News

Discount Rate Increase Not Big News

February 20, 2010 0 Comments

Fed discount rate yesterday not a big policy event and good to do. It is part of their sweeping up exercise, trying to encourage banks to repay some of the $1 trillion (1100%) increase in bank reserves they added to banking system during crisis a year ago. You can read the Fed’s press release here. Worth noting–the quarter point increase, times today’s reserve base,  will reduce bank earnings by about $3 billion over 12 months.

It is imperative that the Fed extracts those additional l reserves this year before they show up as inflation down the road. Left as is, the reserve increase is more than enough to than double the US price level.
What they are trying to do is a little like putting a genie back in a bottle. I don’t think they can do it without knocking something over but sure hope I am wrong.
JR

John Rutledge

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