Yes. The idea that the Fed is now impotent and “out of bullets” are spreading, with one of the main supporting reasons being that the Fed funds rate is now targeted to a 0% to 0.25% range, and it can’t go lower.
Wrong. There is no law blocking the Bernanke Fed from targeting a negative Fed funds or discount rate. There is even a model of sorts from the Swiss banks in the 1970s that paid savers, especially flight money from a weakening U.S. dollar, negative interest rates. Americans who paid banks to hold their savings in Swiss francs more than made it back on the currency conversion back to the dollar.
What if the Bernanke Fed set the discount rate at -1.0%? They would agree to pay banks to borrow money. They could attach a simple condition that borrowings from the discount window could not be invested in Treasury debt, but had to be matched by an increase in a bank’s loan portfolio. If -1.0% didn’t have enough impact, the Fed could raise the ante to -2.0%, or -5.0%, or any level they wanted to.
Of course, there are many other things the Fed could do for Quantitative Easing 2.0. They could stop paying interest on bank reserves held at the Fed, targeting Velocity as well as Money in the M * V equation.
If the Obama Administration decided to restart the economy from the bottom up, a simple rebate of all personal income taxes for the last three years, with a minimum payment of $25,000 for single filers and $50,000 for joint filers, would cost about $2.7 trillion and work immediately. Bernanke can write the check for $2.7 trillion in T-bills in less than a minute. That’s not my definition of “impotent.”
The relevant Wall Street shibboleth is: “Rule #1: Don’t fight the Fed. Rule #2: Don’t forget Rule #1.”
The “out of bullets” crowd is forgetting the rules.
Disclosure: No positions
