Cue The Bad

When the FOMC published the minutes for its November policy meeting, they included an unusually lengthy discussion about federal funds (effective) and IOER. I have no doubt that policymakers would rather have skipped the topic altogether. Demonstrating how little they actually control matters, the plight of EFF has forced them into an almost detailed digression.

One thing they wrote with which I wholeheartedly agree:

To date, there were no clear signs that the ongoing decline in reserve balances in the banking system associated with the gradual normalization of the Federal Reserve’s balance sheet had contributed meaningfully to the upward pressure on money market rates.

In other words, there is absolutely no evidence of QT in what’s going on in US$ money markets. Shrinking their balance sheet isn’t to blame simply because, and they don’t realize this part, expanding their balance sheet was equally irrelevant. The claim cited above is based upon observations from the Open Market Desk as well as surveys among the Primary Dealer banks.

Thus, Federal Reserve officials remain convinced this is a Treasury matter. They’re still talking about T-bills for what is a spreading tightening. I don’t mean tightening wherein quotation marks are necessary, the kind being offered by the FOMC’s “rate hikes.” This is a very different sort of tightening, the real thing where liquidity constraint is becoming a very real problem worldwide.

Balance sheet capacity hoarded for a fourth time in eleven years.

This is why the attempt at reassurance in the minutes; only, a lot of what is meant to be comforting actually displays enormous arrogance in addition to ignorance. Here’s one example:

Information from bank contacts as well as a survey of banks indicated that, in an environment in which money market interest rates were very close to the interest rate paid on excess reserve balances, banks would likely be comfortable operating with much lower levels of reserve balances than at present but would wish to maintain substantially higher levels of balances than before the crisis.

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