Wednesday, October 29, 2008

Bernanke needs to "tweak" again

With much fanfare, a few weeks back Bernanke announced that the Fed would pay interest on reserves. It first was at a rate 75 basis under the Fed funds; then it was 37.5 basis under it.

It, like most of Bernanke's tweaks failed. In tonight's WSJ we have this:

Fed officials thought that managing the rate would become easier after Congress earlier this month granted the central bank new authority to pay interest on excess reserves. In theory, that should create a floor on the rate banks charge for overnight loans.

The move so far hasn't provided the floor expected, something Fed officials are studying. They have already altered the interest rate they pay on these reserves, bringing it closer to the fed funds rate, and might need to tweak their rules again.

Bernanke assumed that his policies and the paying of interest on reserves would set a floor on rates, and that he and his merry men would then worry about the economy recovering, when it wasn't even off the critical list.

Today he recognized the critical patient hasn't even stabilized.

That's why a mischaracterization of a statement by GE could take 400 points off the Dow in 10 minutes.

Despite a 50 basis point cut in the Fed funds rate to 1%.


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