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8 Jan 2014
Flash: Fed faces huge problems ahead - Nomura
FXstreet.com (Bali) - Fed faces big problems whether it sells long-term bonds or not, according to Richard Koo, chief economist at Nomura Research Institute.
Key Quotes
"Excess reserves in US financial system now total some 20 times the amount of statutory reserves in existence. If put to use in textbook fashion, they have the potential to drive a 20-fold increase in the money supply and prices."
"Hence the Fed must find a way to wind down quantitative easing. A central bank that has implemented QE via the purchase of long-term bonds must eventually absorb those funds by selling the bonds, but that can trigger a sharp rise in long-term interest rates, in a quandary I have dubbed the quantitative easing “trap”."
"If the Fed decides not to sell its long-term bonds, it must not only pay interest on the $2.3trn in excess reserves but will also face heavy capital losses on the long-term bonds it holds."
"I suspect the primary reason why the Fed decided to embark on tapering in spite of a subdued inflationary outlook is that it finally woke up to the scale of this problem."
Key Quotes
"Excess reserves in US financial system now total some 20 times the amount of statutory reserves in existence. If put to use in textbook fashion, they have the potential to drive a 20-fold increase in the money supply and prices."
"Hence the Fed must find a way to wind down quantitative easing. A central bank that has implemented QE via the purchase of long-term bonds must eventually absorb those funds by selling the bonds, but that can trigger a sharp rise in long-term interest rates, in a quandary I have dubbed the quantitative easing “trap”."
"If the Fed decides not to sell its long-term bonds, it must not only pay interest on the $2.3trn in excess reserves but will also face heavy capital losses on the long-term bonds it holds."
"I suspect the primary reason why the Fed decided to embark on tapering in spite of a subdued inflationary outlook is that it finally woke up to the scale of this problem."