Daal
Registered: Oct 2002
Posts: 8999 |
03-16-12 11:08 AM
There is also another impact that I believe can be quite significant
When you are a bank you have the option to keep your cash at 25bps with the Fed or to reach for yield out the treasury curve. If you do buy treasuries USUALLY this will increase the money supply(M2), because the person who will get your cash(electronic or not) will be a non-bank(Since non-banks own most of them), that non-bank will have a bank account that will be credited(monetary base turns into M2)
Normal QE should affect this process by making longer dated treasuries yield a less initially, thus making a bit less attractive to engage in this yield reaching process(I'm aware that USTs tend to sell off after a rally when people start to become more optimistic and rates endup higher)
Sterilized QE by driving short rates up increase the attractiveness of the short end compared to the long end(flattening the curve), this leads to less of the yield reaching and more of just keeping cash idle to earn those rates(So its a double whammy compared to normal QE). Therefore they could hurt M2 growth(Maybe thats what the Fed wants)
If you think about it, if you have $1B deposited with the Fed you are more likely to go and reach for yield in a steeper curve than you are in a flatter curve. Under efficient markets it would make no difference as to which choice you make but I believe human tendencies are not always efficient
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