I suspect that the consequences were probably unintended, but we cannot be sure.

There are over 9000 banks in the US,all eligible to participate in the TAF auctions. 93 of them bid in the first TAF auction. Participation declined to 66 bidders in the last one. The stop out rate at the last auction on February 11 was 3.01%.

By contrast only the Fed’s 20 primary dealers can participate in the repo auctions. They are not banks. They are securities dealers, although most are affiliated with banks, either as a subsidiary or parent company. Only half of them are US banks. The rest are foreign. At the Feb. 11 operation the stop out rate on Treasury collateral was 2.85 and Agency collateral 3.08.

The Fed now has exactly the opposite problem than they it through January and has begun pumping in liquidity in response. This is among the latest developments I have been analyzing in the daily Fed Report in the Professional Edition. Russ Winter and I also discussed it in the 11 minute free preview to the Radio Free Wall Street podcast of February 15.

•Demand for credit has waned as everyone, including the banks, is scrambling for liquidity, not more credit.

•Monetary policy has an enormous lag time, especially in a system overburdened with debt therefor the negative growth in Fed credit, and the sharp slow-down in its YOY. Balance sheet growth must be partly attributed to the lagged effect of the previously in force tight policy.

•The yield curve remains inverted at the very short end thus, in order to achieve the target FF rate, the Fed may actually occasionally still be forced to drain money on autopilot. Fed policy implementation revolves almost entirely around the FF rate target, excluding the new TAF for a moment. In other words, it will add or drain money entirely based on achieving the rate target.

So what this means ultimately, is that at the current target rate of the FF, not enough credit demand can be spurred to make the monetary base grow. Therefor it’s a slam dunk that the FF rate has further to fall and in all likelihood it will end this current journey at the big fat ZERO boundary. By the way, the main reason why most banks now prefer the TAF to Repos is that it’s cheaper. The Fed allows them to pay only the prospective FF rate as indicated by the futures markets on the TAF borrowings. Also, the range of collateral accepted for TAF borrowings is much wider, so they actually ‘park’ toxic paper that is officially still rated AAA there.

Like you, for me the jury is still out on the dollar basing idea.

When these flows out of CP stop, which they will soon, it may not be long before investors realize that the money market fund emperor has no clothes. There a many big funds holding SIV paper and we have yet to see any big writeoffs in the MMF area. The losses are there. They just aren’t telling us about it.

About the dollar, I try to stay away from intermarket analysis and possible cause and effect relationships, and stick to technical analysis of the Dollar Index chart. Causal relationships are always next to impossible to figure out, and definitely impossible to prove.

The conventional wisdom about any particular causal relationship, is often turned on its head. In the early years of the BoJ zero interest rate policy and aggressive monetary expansion, wasn’t the yen strong?

So, I just don’t know. At this point, the dollar chart has what could be an interesting long term base, but it still has to prove itself on the upside. I’m agnostic at this point.

Please forgive my ignorance on this subject ( I want to avoid a beating ala Kokapelli!) , but is it possible that the Fed has chosen this course of action because it was constrained by other events? Could it be that the Fed is more panicked by the detrioration of the dollar than they let on. And therefore, saw draining reserves to meet TAFy pulls and discount window demand preferable to outright monetizing of the loan collateral they were taking in? Yes stocks have sufferred , but the dollar descent has been halted.

All things considered not such a bad result so far?

Which then leads me to consider; will we see another dollar decline commence when the SOMA begins “normalizing”?

Sorry to offend your sensibilities.

They are appointed and run under rules set forth by Congress but they are not a department of the government, only an entity, do not have a seat on the Cabinet and are run more like a GSE. They do have private aspects, as per their own statement and no one in Congress, except possibility Ron Paul, has the knowledge base to even know what they are doing, much less do effective oversight and he isn’t a fan.

From the federal reserve itself
“The Federal Reserve System is not “owned” by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects……
As the nation’s central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as “independent within the government………
After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury.”
Until I went to their page and read this last statement I never realized that what they did was a zero sum game. So we borrow from ourselves and then give back the interest earned after expenses?
Do you know if this actually happens?
Thanks Lee for making me check out my own beliefs. You could be a little less harsh about it. We aren’t all as knowledgeable as you or as smart.
But still if the quality of the asset wanting to be used as collateral for loans is below par and sinking, that could why the fed is not able to fund the banks and why the actual money supply is shrinking couldn’t it? They can’t lend on paper that is of inadequate/questionable quality.

“The fed is privately owned and is not interested in a losing position. People seem to think they are part of the government and they aren’t,”

is utter bullcrap.

The Board of Governors is most certainly a government Agency, with governors appointed by the President and confirmed by the Senate. The Fed gets its operating authority and mandate from Congressional legislation which can be changed at any time.

Any member of the Federal Reserve System must by law own a fixed share of stock in its district bank with a dividend as set by Federal law, and all operating surpluses are returned to the US Treasury.

You want to post lunatic garbage on this site, fine, I’ll allow it once. That’s it.

I would suggest that the fed is lowering the money supply simply because there really isn’t that much in the way of good quality equity to back any loans they might want to make to the banks and isn’t in the business of giving money away as money is power.

How the money supply really gets ramped up is thru the federal government deficit spending and thru the fractional reserve banking system. IF there are fewer loans being made to the public due to credit concerns and lowering equity values, then the only other source is the federal government who last year actually spent less than previous years.

That is one of the reasons for the increased deficit projections in 2008 and going forward as the government needs to inflate the monetary system to counter balance the deflationary effect of personal and soon corporate insolvency.

I think that they will do to little to late.

I want to emphasize that it would not be wise to automatically assume that the Fed will continue with this pattern. There are seasonal historical patterns which strongly suggest, and even require, the Fed to aggressively add reserves going into tax season. We need to stay focused on today, rather than the past 6 months. That’s over and done with.