What is Blinder, Alex?
Today, on the WSJ Op-Ed page Former Fed Vice-Chair, Princeton Economics Professor and author, Alan S. Blinder did his part in growing the trial balloon of "offsetting" a reduction in LSAP activity with a cut in the IOER. (Before I go any further, I will state that I am but a lowly interest rate player from the Pits of the Merc and these views - accurate or flawed as they may be - are not of Mr. Blinder's pedigree. And now...)
The concept was suggested 2 QE renditions ago by myself and many others when the Balance Sheet was much smaller and IOER was being converged upon by other short rates. The idea was rejected by most as a dangerous move for Money Market Funds, although I remain skeptical of the problem. Mr. Blinder is known to be a like minded thinker to Janet Yellen and I view the Op-Ed as a fleshing out of the Minutes. The argument - essentially a "high powered money" ploy, omits any discussion of the DEMAND side. The rag tag team of David Schawel, Guillermo Roditi, Vince Foster and myself have attempted to highlight the D-side for some time now. (Happily, the recent Fed data finally show some pulse !) The Banks don't want the reserves so attempting convert them doesn't happen easily. Put more simply, lend to who? and for what? Large amounts of corporate issuance has led to little capital investment already. (see Vince's prior post on confusing money with capital.)
The US does not need to convert a CB liability (excess reserves) into an asset (penalty charge). Mr Blinder would have us believe that 6+B in Fed handout to banks could easily morph into a 6+B payment to the Fed. Then transfer the jake to the Treasury Dept. and voila, a 12.5B, wait for it Risk Santelli, "taxpayer benefit." Why not just charge them 5% and balance the budget ! Simple, the system doesn't work that way. Spoiler alert, in the words of our departing Chairman, "We electronically mark up the balances on the accounts."
I believe the FAFRRRF and IOER are plenty robust to floor the coming era of higher rates, ceilings being far more important. The Death Star has crept slowly from a few billion at 1bp to nearly 40 billion at 8(?). So, cutting IOER is really just a way to speed up the convergence of ALL Fed short rates around the middle of the ZIRP window. Why not attempt to make the hand off from LSAPs to rates guidance at 25 and preserve 12bp for an unseen event? The Death Star has 94 MMF counter-parties. Most importantly - 6 GSEs (Fan, Fred and 4 HLBs), the major contributors to FF slippage. If Blinder's budgetary ploy were legit, then letting the 6 open Fed accounts would be much easier and more productive. There was no political will for it 2008 nor now. Bottom line, the heavy focus on the floor for rates is just another level of the Jedi Mind Trick marketing campaign to keep everyone calm and confident as the LSAP era ends. While others concentrate on the floor, we will remain concerned with the sky.